Qualified sick pay plan presentation

Qualified Sick Pay Plans (QSPP)

Qualified Sick Pay Plans (QSPP)

advice4retirement.com Member of FINRA, SIPCadvice4retirement.com Member of FINRA, SIPC

What is a QSPP?What is a QSPP?

¨ A legal, formal sick pay plan

¨ It is not insurance.

advice4retirement.com Member of FINRA, SIPCadvice4retirement.com Member of FINRA, SIPC

What is a QSPP?What is a QSPP?

¨ A QSPP defines:– Who – How much and– Under what conditions

a person will receive money during a period of disability.

advice4retirement.comMember of FINRA, SIPCadvice4retirement.com

Member of FINRA, SIPC

Why Establish a QSPP?

Why Establish a QSPP?



Chism vs. Commissioner 1963Chism vs. Commissioner 1963¨ When an employee is disabled he/she no

longer is an employee.¨ Wages can only be paid to employees.¨ Any money paid that is greater than $25 is a

gift.¨ A QSPP must be in place before an employee

is disabled. If there isn’t a QSPP in place, it is considered ad hoc and as a result is not tax deductible.

Why establish a QSPP?Why establish a QSPP?



1. Under a QSPP, payments made to an employee who is hurt or sick are tax deductible.

- Ad hoc payments are not tax deductible.

2. Under a QSPP, employers can be selective as to who can and can’t be covered.




¨ You need a plan document. Without one, payments are ad hoc.




Ad Hoc vs. Plan PaymentAd Hoc vs. Plan Payment

Ad Hoc Payment¨ > $25 gift¨ Not a business

expense¨ Taxable to Executive

Plan Payment¨ Legal Obligation¨ Business Expenses¨ Taxable to

Executive




1. Under a QSPP, payments made to an employee who is hurt or sick are tax deductible.

- Ad hoc payments are not tax deductible.

2. Under a QSPP, employers can be selective as to who can and can’t be covered.




¨ The plan can be set up for a particular class of employees, allowing the employer flexibility in covering those employees he/she wants.

¨ Benefits can vary by class, allowing the employer flexibility in the amount of benefit to be provided to each class.




What are the advantages of a QSPP?

What are the advantages of a QSPP?

1. Allows tax-deductible payments to the disabled employee, which is good for the employer

2. Requires payments to the disabled employee, which is good for the employee



Funding the PlanFunding the Plan



– A company can choose to:

1. Establish cash reserves

2. Use current cash flow

3. Buy insurance




Financial Issues of Self-funding a QSPPFinancial Issues of Self-funding a QSPP

¨ A company may not have the cash immediately

¨ Current cash flow goes toward paying employees plus replacement for the disabled employee.

– What happens when revenue is down?






Annual Employer Cost For One Disabled Employee**Annual Employer Cost For One Disabled Employee**

Revenue $100,000

Income Tax * - 32,000

Net Profit 68,000

Sick Pay - 30,000

Retained Earnings

$38,000


No Plan Self-Funded QSPP Insured QSPPRevenue $100,000

Premium - 1,000

Pre-Tax 99,000

Income Tax* - 31,680

Retained Earnings

$67,320 plus

DI Benefits

$30,000

Revenue $100,000

Sick Pay - 30,000

Pre-Tax 70,000

Income Tax* - 22,400

Retained Earnings

$47,600

• Assumes a 32% Corporate tax rate.

** Approximate annual cost of insuring on a 35-year old employee with $30,000 annual benefit to age 65.

Best Solution is to Buy Insurance

Best Solution is to Buy Insurance



A company can either:A company can either:¨ Self-fund the QSPP

¨ Fund the QSPP through an insurance policy

Buy InsuranceBuy Insurance



Financial Accounting Standard 112Financial Accounting Standard 112

¨ With a self-funded plan:– Payments for employee sick pay must come from

company cash funds.– In addition, the company must estimate the future

cost of sick pay payments and record these as a business liability in the year the disabling accident or sickness occurs.

– The employer must make the claims decisions.




Which would an employer rather do?Which would an employer rather do?

¨ Take on the responsibility him/herself

- OR -

¨ Shift the burden to an insurance company




¨ Decision is made to buy insurance.– What is next?




Government Requirements for QSPP (IRS Code 105)

Government Requirements for QSPP (IRS Code 105)

¨ The plan should be in writing, although a board resolution may suffice.

¨ The plan must be in effect before a disability occurs.

¨ The plan must be communicated to participating employees.

¨ The plan must be set up solely for employees.¨ The benefits cannot be excessive.



ERISA IssuesERISA Issues

¨ Concerns regarding employee benefit rights

¨ Limitation to amount for which employee can sue



What kind to buy?What kind to buy?

¨ Group LTD

¨ Individual DI

¨ Combination – Group LTD and IDI




Group LTDGroup LTD

¨ Many companies already have LTD

¨ Limitations to LTD




Limitations to LTDLimitations to LTD¨ Typically protects only 60 percent of income¨ Are often employer paid, resulting in taxable benefits¨ Often have a cap on benefits, such as $5,000/month¨ Typically cancelable by the insurance company or by

the employer¨ May have contractual limitations¨ Designed for a group of individuals and does not allow

each individual to tailor his/her coverage¨ Often does not cover certain types of income (i.e.,

bonuses)

Group LTD (continued)Group LTD (continued)



Supplement with Individual DISupplement with Individual DI¨ Key advantages:

– Excellent contract provisions

– Non-can contracts

– Insured owns the policy

– Customer design, extremely flexibility

– Portable

– Best of both worlds






A. Van [email protected]

Economy & Finance

Qualified sick pay plan presentation