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Qualified Sick Pay Plan: An Overview and Call to Action for Businesses

Consider this: A key employee or your business partner has just had a heart attack. His doctor says that he will be out of work for six months. In the meantime, his family is counting on his salary to pay the bills.

What are you going to do? Are you going to make payments to him while he is out of work? Can you continue to take a tax deduction for those payments? Can your company afford to make those payments while that key employee is out of work and, therefore, not generating revenue for your company? Tough questions…. Keep reading to learn about what a Qualified Sick Pay Plan (QSPP) can do for your company.

First, here is a sobering statistic: Between ages 35 and 65, seven out of ten people will become disabled for three months or longer. (Senate Finance Committee, 1998) In fact, the risk of disability is greater than the risk of death between ages 20 and 65. Freak accidents are NOT usually the cause; back injuries, cancer, heart disease and other illnesses cause the most long-term absences from work. No company (yours included) is immune from having a key employee go out on disability, and you should really consider planning for that.

Next, let’s talk taxes. When an employer pays an employee “wages,” the employer can deduct from its taxable income those wages paid (along with the FICA contributions on them). This is a good thing. Many firms do not realize, however, that the IRS often disallows this deduction when an employer pays a disabled employee. This includes payments to the owner, family members, and key employees. Having a Qualified Sick Pay Plan in place before an employee goes out on disability should preserve your company’s tax deduction for payments made.

So, establishing a Qualified Sick Pay Plan can solve your tax problem, but a company should also address the funding and administration of the plan. Should the company “self-insure” and retain the risk of having to pay disability benefits out of company assets, or should the company obtain an insurance policy to transfer that risk? Like most things, each method has its pros and cons. For example, if you obtain insurance, you have to pay premiums even when no one is out on disability, BUT the insurance company (not you) assumes the risk for claims. On the other hand, if you self-insure, you decide eligibility for and the amount of benefits paid to the disabled employee, but your company is now a “man down” and, presumably, making less money than when the employee was contributing to the bottom-line.

Simply put, if you are a business owner, you should consider putting a Qualified Sick Pay Plan in place right away. The plan itself is a relatively simple legal document, and the legal fees for doing so are quite small in comparison to the financial consequences of having no plan at all. Your lawyer can also advise you on whether to self-insure or obtain an insurance policy to transfer the risk.

Do not put this off. At least discuss putting in place a Qualified Sick Pay Plan with your lawyer, financial planner, or insurance agent today, and get this simple document in place right away. The odds are that you will be happy you did.

Consider this: A key employee or your business partner has just had a heart attack. His doctor says that he will be out of work for six months. In the meantime, his family is counting on his salary to pay the bills.

What are you going to do? Are you going to make payments to him while he is out of work? Can you continue to take a tax deduction for those payments? Can your company afford to make those payments while that key employee is out of work and, therefore, not generating revenue for your company? Tough questions…. Keep reading to learn about what a Qualified Sick Pay Plan (QSPP) can do for your company.

First, here is a sobering statistic: Between ages 35 and 65, seven out of ten people will become disabled for three months or longer. (Senate Finance Committee, 1998) In fact, the risk of disability is greater than the risk of death between ages 20 and 65. Freak accidents are NOT usually the cause; back injuries, cancer, heart disease and other illnesses cause the most long-term absences from work. No company (yours included) is immune from having a key employee go out on disability, and you should really consider planning for that.

Next, let’s talk taxes. When an employer pays an employee “wages,” the employer can deduct from its taxable income those wages paid (along with the FICA contributions on them). This is a good thing. Many firms do not realize, however, that the IRS often disallows this deduction when an employer pays a disabled employee. This includes payments to the owner, family members, and key employees. Having a Qualified Sick Pay Plan in place before an employee goes out on disability should preserve your company’s tax deduction for payments made.

So, establishing a Qualified Sick Pay Plan can solve your tax problem, but a company should also address the funding and administration of the plan. Should the company “self-insure” and retain the risk of having to pay disability benefits out of company assets, or should the company obtain an insurance policy to transfer that risk? Like most things, each method has its pros and cons. For example, if you obtain insurance, you have to pay premiums even when no one is out on disability, BUT the insurance company (not you) assumes the risk for claims. On the other hand, if you self-insure, you decide eligibility for and the amount of benefits paid to the disabled employee, but your company is now a “man down” and, presumably, making less money than when the employee was contributing to the bottom-line.

Simply put, if you are a business owner, you should consider putting a Qualified Sick Pay Plan in place right away. The plan itself is a relatively simple legal document, and the legal fees for doing so are quite small in comparison to the financial consequences of having no plan at all. Your lawyer can also advise you on whether to self-insure or obtain an insurance policy to transfer the risk.

Do not put this off. At least discuss putting in place a Qualified Sick Pay Plan with your lawyer, financial planner, or insurance agent today, and get this simple document in place right away. The odds are that you will be happy you did.

Case results depend upon a variety of factors unique to each case. Case results do not guarantee or predict a similar result in any future cases. Also, nothing in this website creates an attorney/client relationship, and you should not leave anything of a confidential nature on this website.

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