GOVERMENTAL DISABILITY GOVERMENTAL DISABILITY PROGRAMSPROGRAMS

Sources of Disability Sources of Disability BenefitsBenefits• Company sponsored Company sponsored

sick days or paid time sick days or paid time offoff

• Workers Workers CompensationCompensation

• Social SecuritySocial Security

• Employer sponsored Employer sponsored disability plansdisability plans

• Privately owned Privately owned disability plansdisability plans

• State sponsored State sponsored disability plansdisability plans

• Pension plansPension plans

• Accident coverageAccident coverage

• Specified Disease Specified Disease &Critical illness &Critical illness plansplans

• Long Term Care Long Term Care CoverageCoverage

Why the Need?Why the Need?

• 90% of firms with less than 100 90% of firms with less than 100 workers have no disability coverage workers have no disability coverage for employees!for employees!

• Most small to medium sized Most small to medium sized employers do not have a properly employers do not have a properly formalized sick pay plan!formalized sick pay plan!

Sick Pay Plans (Short Term Sick Pay Plans (Short Term Disability)Disability)

• Sick Pay Plans -----refers to uninsured Sick Pay Plans -----refers to uninsured continuation of salary or wages for a continuation of salary or wages for a few days or weeksfew days or weeks

• Short Term Disability----- disability Short Term Disability----- disability insurance coverage with a short insurance coverage with a short elimination period (example 7 or 14 elimination period (example 7 or 14 days) and benefits of less than 6 days) and benefits of less than 6 monthsmonths

Sick Pay PlansSick Pay Plans

• The underlying principle of a sick pay The underlying principle of a sick pay plan is simple. An employer can plan is simple. An employer can deduct wages as an ordinary deduct wages as an ordinary business expense; however Ad Hoc business expense; however Ad Hoc payments to a disabled employee payments to a disabled employee can not be deducted as wages.can not be deducted as wages.

Sick Pay Plans Sick Pay Plans

• Section 104,105,106 and 162 of the Section 104,105,106 and 162 of the IRS regulations and Title 1of ERISA IRS regulations and Title 1of ERISA serve as the framework for serve as the framework for formalized Salary Continuation or formalized Salary Continuation or Sick Pay Plans.Sick Pay Plans.

IRC Section 104IRC Section 104

• Proceeds received from disability or Proceeds received from disability or income replacement insurance plans income replacement insurance plans are not included in a persons’ gross are not included in a persons’ gross taxable income. taxable income.

• The exclusion from gross income The exclusion from gross income assumes that the coverage is assumes that the coverage is purchased with after tax dollars !purchased with after tax dollars !

IRC Section 105IRC Section 105

• In order for a sick pay plan to be tax In order for a sick pay plan to be tax deductible it must be in place prior to deductible it must be in place prior to a disability.a disability.

• Employers do not have to give equal Employers do not have to give equal benefits to all employees.benefits to all employees.

• Requires the employee to include in Requires the employee to include in gross income the proceeds received gross income the proceeds received from employer purchased plans.from employer purchased plans.

IRC Section 106(a)IRC Section 106(a)

• Employer paid disability insurance Employer paid disability insurance premiums for individual or group premiums for individual or group policies are not included in an policies are not included in an employees taxable income.employees taxable income.

• Disability income benefits are tax Disability income benefits are tax exempt to the employee as long as exempt to the employee as long as the employee is paying the full the employee is paying the full premium.premium.

ERISA (Title 1)ERISA (Title 1)

• The document must provide The document must provide sufficient information in order that sufficient information in order that employees can determine their rights employees can determine their rights and benefits under the plan.and benefits under the plan.

• A claims procedure must be A claims procedure must be established and maintained.established and maintained.

ERISA (Title 1)ERISA (Title 1)

• The plan must be in writing.(A board The plan must be in writing.(A board resolution)resolution)

• The plan and benefits must be The plan and benefits must be communicated to the employees communicated to the employees covered.covered.

• There must be a plan administrator.There must be a plan administrator.

• Fiduciary rules apply to the plan.Fiduciary rules apply to the plan.

Formalized Sick Pay PlanFormalized Sick Pay Plan

• The Plan must be in writing and The Plan must be in writing and describe who is covered and what describe who is covered and what are the plan benefits.are the plan benefits.

• It must be communicated to the It must be communicated to the covered employees. covered employees.

• The benefits available should be put The benefits available should be put in writing in some form of business in writing in some form of business memo or letter.memo or letter.

Sample Board ResolutionSample Board Resolution

SAMPLE BOARD RESOLUTION

________________________________ then discussed the concept of establishing a formal Sick Pay Plan for certain employees of the Corporation. After due discussion and upon motion duly made, seconded and unanimously approved, the following resolution was adopted: WHEREAS, it is the desire of the Corporation to establish a Sick Pay Plan for certain employees by providing any such employee with an income during total disability and thereby providing any such employee with an added incentive to continue his services to the Corporation, and WHEREAS, the Internal Revenue Code in Sections 105 and 106 and under the Treasury Regulations pertaining thereto, and Revenue Ruling 58-90, offer an excellent method for accomplishing this purpose, BE IT RESOLVED, that a Sick Pay Plan for certain employees is hereby adopted in accordance with the aforesaid sections of the Internal Revenue Code, Treasury Regulations, and Revenue Ruling, subject to the terms of the forms exhibited in the meeting, attached to these minutes, and incorporated herein: BE IT FURTHER RESOLVED, that the appropriate officers of the Corporation be, and they hereby are, authorized and directed to execute and deliver any and all endorsements, instruments or power of attorney, and do any other things that they deem necessary in order to establish said Sick Pay Plan.

Letter of DeterminationLetter of Determination

Letter #1 SAMPLE LETTER TO EMPLOYEES STATING PAY DURING AN EXTENDED DISABILITY

Dear Employee: This letter is intended to clarify our position with regard to any extended period of illness or injury you might suffer. We have decided that it is in everyone’s best interest if salary is not continued during any extended illness or injury. Very likely, a replacement would have to be hired and the money will need to be spent there to assure a continued work flow. Sincerely,

Salary Continuation PlansSalary Continuation Plans

• One or more employees can be One or more employees can be covered.covered.

• Different plans can be used to cover Different plans can be used to cover different classes of employees.different classes of employees.

• The plan does not have to be funded.The plan does not have to be funded.

Formal or Informal FundingFormal or Informal Funding

• Formal (Insurance)Formal (Insurance)

• Disability insurance Disability insurance satisfies most of satisfies most of the requirements the requirements of a sick pay plan.of a sick pay plan.

• Premiums are Premiums are deductible in the deductible in the current tax yearcurrent tax year

• Informal(Employer)Informal(Employer)

• Most employers Most employers are not equipped are not equipped to be in the to be in the disability insurance disability insurance business.business.

• F.A.S.B. # F.A.S.B. # 112(future benefits 112(future benefits are a liability)are a liability)

F.A.S.B. #112F.A.S.B. #112

• Employers must use accrual accounting rules Employers must use accrual accounting rules for benefits provided to employees when for benefits provided to employees when they are terminated prior to retirement.they are terminated prior to retirement.

• Sick Pay Plans are included.Sick Pay Plans are included.

• Future disability benefits must be estimated Future disability benefits must be estimated and the present value established. This and the present value established. This value is deducted from earnings in the value is deducted from earnings in the reporting period when the disability occurs.reporting period when the disability occurs.

Employer Paid Disability Employer Paid Disability InsuranceInsurance• Employers can deduct disability Employers can deduct disability

insurance premiums used for the benefit insurance premiums used for the benefit of employees as a business expenseof employees as a business expense

• Disability benefits paid to employees are Disability benefits paid to employees are considered to be wages and are subject considered to be wages and are subject taxestaxes

• Employers are liable for payroll taxes Employers are liable for payroll taxes (matching FICA for six months) (matching FICA for six months)

Employee Paid DisabilityEmployee Paid Disability

• Employee receives disability Employee receives disability insurance proceeds income tax freeinsurance proceeds income tax free

• Employers do not have to pay Employers do not have to pay payroll taxes on the claim payments payroll taxes on the claim payments received by employeesreceived by employees

• Employee does not have to pay FICA Employee does not have to pay FICA taxes on benefits receivedtaxes on benefits received

Disability Insurance & Disability Insurance & Cafeteria PlansCafeteria Plans

• Disability insurance purchased under Disability insurance purchased under a 125 plan by an employee is a 125 plan by an employee is considered to be an employer paid considered to be an employer paid benefit by the tax people, therefore benefit by the tax people, therefore benefits received are considered benefits received are considered taxable.taxable.

Measuring Premium Measuring Premium ContributionContribution

• IRS regulations state the time period IRS regulations state the time period to be used to measure the to be used to measure the percentage of employer & employee percentage of employer & employee premium contribution.premium contribution.

• Generally the time period for group Generally the time period for group disability is 3 years prior to the disability is 3 years prior to the disability.disability.

• New letter rulingNew letter ruling

Section 162 Plan Section 162 Plan (Executive Bonus Plan)(Executive Bonus Plan)• In order to avoid taxation of employer In order to avoid taxation of employer

paid disability benefits to an employee paid disability benefits to an employee the employer can simply bonus the the employer can simply bonus the amount of premium to the employee .amount of premium to the employee .

• This avoids the back-end tax trap for This avoids the back-end tax trap for the employee and employer and the employee and employer and removes the employer form the” W-2 removes the employer form the” W-2 Business”. Business”.

Workers Compensation Workers Compensation ( The Plan that ( The Plan that Employees Remember !)Employees Remember !)

Role of Worker’s CompRole of Worker’s Comp

• Six Basic PrinciplesSix Basic Principles– Provide sure, prompt and reasonable Provide sure, prompt and reasonable

income and medical benefits to work-income and medical benefits to work-accident victims, or income benefits to accident victims, or income benefits to their dependents regardless of faulttheir dependents regardless of fault

– Provide a single remedy and reduce Provide a single remedy and reduce court delays, costs, and workloads court delays, costs, and workloads arising out of personal injury litigationarising out of personal injury litigation

Role of Worker’s CompRole of Worker’s Comp

• Six Basic Principles (cont.)Six Basic Principles (cont.)– Relieve public and private charities of the Relieve public and private charities of the

financial drain of uncompensated industrial financial drain of uncompensated industrial accidentsaccidents

– Eliminate payment of fees to lawyers and Eliminate payment of fees to lawyers and witnesses involved in trials and appealswitnesses involved in trials and appeals

– Encourage maximum employer interest in Encourage maximum employer interest in safety and rehabilitationsafety and rehabilitation

– Promote the study of causes of accidents and Promote the study of causes of accidents and work to reduce preventable accidents and work to reduce preventable accidents and human sufferinghuman suffering

Breadth of CoverageBreadth of Coverage

• All 50 states, the District of Columbia and All 50 states, the District of Columbia and the territories of American Samoa, Guam, the territories of American Samoa, Guam, Puerto Rico and the U.S. Virgin IslandsPuerto Rico and the U.S. Virgin Islands

• The number of claims, duration of claims, The number of claims, duration of claims, and the cost of the claims has jumped and the cost of the claims has jumped dramatically over the last couple of yearsdramatically over the last couple of years

• Typically, the covered benefit will be far Typically, the covered benefit will be far less then what the person might expect if less then what the person might expect if disabled and covered by group short disabled and covered by group short and/or long-term disability insuranceand/or long-term disability insurance

State Cash Sickness State Cash Sickness BenefitsBenefits• Alternative to Worker’s CompensationAlternative to Worker’s Compensation• Available in 5 states; California, Hawaii, Available in 5 states; California, Hawaii,

New Jersey, New York, and Rhode IslandNew Jersey, New York, and Rhode Island• Provides cash payments during short-term Provides cash payments during short-term

periods of sickness or illness due to injury periods of sickness or illness due to injury or disease, and not by employment or disease, and not by employment situationssituations

• Purpose is to provide temporary Purpose is to provide temporary replacement of lost earnings because of a replacement of lost earnings because of a worker’s ‘off the job’ disabilityworker’s ‘off the job’ disability

State Cash Sickness State Cash Sickness BenefitsBenefits

• The elimination period for benefits is The elimination period for benefits is typically 1 weektypically 1 week

• Benefits are usually payable for up to Benefits are usually payable for up to 26 weeks.26 weeks.

• In California, benefits may In California, benefits may commence upon actual commence upon actual hospitalization and continue for up to hospitalization and continue for up to 39 weeks39 weeks

Social Security Social Security ( The ( The Forgotten LTD Plan !)Forgotten LTD Plan !)Social Security benefits are Social Security benefits are difficult to qualify for and difficult to qualify for and usually do not begin for at usually do not begin for at

least six months. least six months.

Social SecuritySocial Security

• A condition under which the individual is A condition under which the individual is “unable to engage in any substantial gainful “unable to engage in any substantial gainful activity by reason of any determinable activity by reason of any determinable physical or mental impairment which can be physical or mental impairment which can be expected to result in death or which has expected to result in death or which has lasted for a continuous period of not less lasted for a continuous period of not less than 12 months”than 12 months”

• The strictest definition of disability that is The strictest definition of disability that is commonly used for any purpose.commonly used for any purpose.

The Social Security The Social Security DefinitionDefinition• A person must not only be unable to A person must not only be unable to

his/her previous work or work his/her previous work or work commensurate with the previous commensurate with the previous work in amount of earnings and work in amount of earnings and utilization of capacities, but also be utilization of capacities, but also be unable, considering age, education, unable, considering age, education, and work experience, to engage in and work experience, to engage in any other kind of substantial work any other kind of substantial work which exists in the national economy.which exists in the national economy.

Social Security FactsSocial Security Facts

• One can claim following 6 months of One can claim following 6 months of total disabilitytotal disability

• 1:3 claims are payable1:3 claims are payable

• Typically, many payments are only Typically, many payments are only paid following lengthy appealspaid following lengthy appeals

Sources of Disability Sources of Disability BenefitsBenefits• Company sponsored Company sponsored

sick days or paid sick days or paid time offtime off

• Workers Workers CompensationCompensation

• Social SecuritySocial Security• Employer sponsored Employer sponsored

disability plansdisability plans• Privately owned Privately owned

disability plansdisability plans

• State sponsored State sponsored disability plansdisability plans

• Pension plansPension plans

• Accident coverageAccident coverage

• Specified Disease Specified Disease &Critical illness &Critical illness plansplans

• Long Term Care Long Term Care CoverageCoverage

Questions??????Questions??????