1. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? A plan that continues employee’s salary or wages for a limited time if the employee is ill or injured Usually lasts < 6 months

2. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? Realizing that employees will become ill or injured, employers typically provide sick pay for short absences from work Employer can discriminate and can choose –who will be covered –level of benefits (can vary among employees) –terms and conditions of coverage

3. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Design Features Two types of short-term coverage –sick pay –short term disability

4. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Design Features Sick pay Uninsured continuation of salary or wages (usually 100% replacement) for a short period of time beginning first day of illness or injury Usually cover broad class of employees but can favor certain groups Usually for full-time employees

5. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Design Features Sick pay Duration often tied to length of service Plan may allow carryover of unused benefits with a cap on accumulation Reduced benefits common with long benefit period Must design carefully to avoid abuse

6. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Design Features Short-term disability Fills gap between end of sick pay and beginning of long term disability Plans often insured As compared with long-term plan, short-term plans –have broader coverage –require less service for coverage –have a more generous definition of disability

7. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Tax Implications 1.Employer can deduct –payments to employees under sick pay or short term disability –premium payments under insured plan 2.Employees may share cost for insured plan 3.Employer paid premiums are tax-free to employee

8. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Tax Implications 4.Benefit payments taxable to employee proportional to premiums paid by employer 5.Disability credit available to employees totally and permanently disabled to reduce tax burden 6.Disability insurance payments paid by the employer are not considered wages and therefore not subject to FICA (Social Security) or FUTA (federal unemployment)

9. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Tax Implications 7.Disability benefits are subject to federal income tax withholding if paid directly to employer; if paid by 3rd party, withholding required only if employee requests 8.Disability benefits attributable to employer contributions are subject to Social Security taxes for limited time at beginning of disability

10. Sick Pay (Short Term Disability) Chapter 50 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 ERISA Requirements Sick pay or a short-term disability income plan is a welfare benefit plan under ERISA Must have –written summary plan description –name of plan administrator –formal written claims procedure Not subject to rules regarding –eligibility –vesting –funding