Transcript Presentation: Sick Pay Plans & Worksite Disability Insurance

Sick Pay Plans & Worksite
Disability Insurance
By: Charles L. Westmoreland
CLU,ChFC,RHU,REBC,MSFS
Boot Camp
Payroll Deduction Disability
Insurance
The Needs of Small & Medium
Sized Employers
• Employee Benefit Expertise
• Big Company Benefits @Budget Prices
• Knowledge Givers
• They need you!
Why Worksite ?
• Decline in personal insurance coverage
• Rising cost of benefits
• Competition for employees
• Pressure on insurance companies to lower
distribution costs
• Advantages for the employee
The Worksite Market
$3 Billion and Growing
Mr. or Ms Employer
• Who would pay you or your key
employees in the event of a disability?
• Have you informed the employees of your
decision?
Employees
• Who will pay you if you are sick or hurt
and can not work?
Sources of Disability Benefits
• Company sponsored
• State sponsored
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sick days or paid time
off
Workers
Compensation
Social Security
Employer sponsored
disability plans
Privately owned
disability plans
•
disability plans
Pension plans
Accident coverage
Specified Disease
&Critical illness plans
Long Term Care
Coverage
Worksite DI Market
• 90% of firms with less than 100 workers
have no disability coverage for employees!
• Most small to medium sized employers do
not have a properly formalized sick pay
plan!
Sick Pay Plans (Short Term
Disability)
• Sick Pay Plans -----refers to uninsured
continuation of salary or wages for a few
days or weeks
• Short Term Disability----- disability
insurance coverage with a short
elimination period (example 7 or 14 days)
and benefits of less than 6 months
Sick Pay Plans
• The underlying principle of a sick pay plan
is simple. An employer can deduct wages
as an ordinary business expense; however
Ad Hoc payments to a disabled employee
can not be deducted as wages.
Sick Pay Plans
• Section 104,105,106 and 162 of the IRS
regulations and Title 1of ERISA serve as
the framework for formalized Salary
Continuation or Sick Pay Plans.
IRC Section 104
• Proceeds received from disability or
income replacement insurance plans are
not included in a persons’ gross taxable
income.
• The exclusion from gross income assumes
that the coverage is purchased with after
tax dollars !
IRC Section 105
• In order for a sick pay plan to be tax
deductible it must be in place prior to a
disability.
• Employers do not have to give equal
benefits to all employees.
• Requires the employee to include in gross
income the proceeds received from
employer purchased plans.
IRC Section 106(a)
• Employer paid disability insurance
premiums for individual or group policies
are not included in an employees taxable
income.
• Disability income benefits are tax exempt
to the employee as long as the employee
is paying the full premium.
IRC Section 162 (Executive
Bonus)
• An employer can deduct a “reasonable
allowance” for wages and other
compensation for services actually
rendered.
ERISA (Title 1)
• The document must provide sufficient
information in order that employees can
determine their rights and benefits under
the plan.
• A claims procedure must be established
and maintained.
ERISA (Title 1)
• The plan must be in writing.(A board
resolution)
• The plan and benefits must be
communicated to the employees covered.
• There must be a plan administrator.
• Fiduciary rules apply to the plan.
Welfare Benefit Plan
A disability wage continuation
plan almost always constitutes an
employer welfare plan.
DISABILTY INSURANCE
Disability insurance is the simplest
way to satisfy ERISA and IRS
requirements
Formalized Sick Pay Plan
• The Plan must be in writing and describe
who is covered and what are the plan
benefits.
• It must be communicated to the covered
employees.
• The benefits available should be put in
writing in some form of business memo or
letter.
Sample 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 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 Plans
• One or more employees can be covered.
• Different plans can be used to cover
different classes of employees.
• The plan does not have to be funded.
Formal or Informal Funding
• Formal (Insurance)
• Disability insurance
• Informal(Employer)
• Most employers are
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satisfies most of the
requirements of a sick
pay plan.
Premiums are
deductible in the
current tax year
not equipped to be in
the disability
insurance business.
F.A.S.B. # 112(future
benefits are a liability)
F.A.S.B. #112
• Employers must use accrual accounting rules for
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benefits provided to employees when they are
terminated prior to retirement.
Sick Pay Plans are included.
Future disability benefits must be estimated and
the present value established. This value is
deducted from earnings in the reporting period
when the disability occurs.
Exposure
Transfer the risk of paying claims to the
insurance company.
Timing
• It will take too long to accumulate
sufficient reserves to meet obligations.
Cash Flow
• Claims payments may cause a business
serious cash flow problems.
Expertise
• The insurance company is experienced at
paying claims.
Employer Paid Disability
Insurance
• Employers can deduct disability insurance
premiums used for the benefit of
employees as a business expense
• Disability benefits paid to employees are
considered to be wages and are subject
taxes
• Employers are liable for payroll taxes
(matching FICA for six months)
Employee Paid Disability
• Employee receives disability insurance
proceeds income tax free
• Employers do not have to pay payroll
taxes on the claim payments received by
employees
• Employee does not have to pay FICA
taxes on benefits received
Disability Insurance & Cafeteria
Plans
• Disability insurance purchased under a
125 plan by an employee is considered to
be an employer paid benefit by the tax
people, therefore benefits received are
considered taxable.
Measuring Premium Contribution
• IRS regulations state the time period to be
used to measure the percentage of
employer & employee premium
contribution.
• Generally the time period for group
disability is 3 years prior to the disability.
• New letter ruling
Section 162 Plan
(Executive Bonus Plan)
• In order to avoid taxation of employer
paid disability benefits to an employee the
employer can simply bonus the amount of
premium to the employee .
• This avoids the back-end tax trap for the
employee and employer and removes the
employer form the” W-2 Business”.
Q & A on Section 105 Qualified
Sick Pay Plans
What is a Qualified Sick Pay
Plan?
• It is a simple agreement providing for a
firm to continue some portion of an
employee’s wages during a disability.
What type of firm or business
entity may adopt a Sick Pay
Plan?
• Any corporation(C or S),professional
corporation,partnership,or sole
proprietorship.
When is a person considered to
be an employee?
• When the person is currently performing
services or when the person is receiving
benefits under the terms of a Qualified or
Formalized Sick Pay Plan.
Is the money paid to a
disabled employee under a
sick pay plan classified as
wages?
• Yes, and such plan payments are tax
deductible by the firm as a business
expense.
When must a plan be adopted
by a firm?
• Before the employee becomes disabled!
Is formalizing a sick pay plan a
complex procedure?
• No,it simply requires adopting a plan
resolution and providing the employee
with a simple plan letter.
Must the plan be in writing?
• Yes, and the employees must be made
aware of the terms. (Title 1 of ERISA)
• There must be more than a statement
that coverage exists.
What’s the status of a
disabled person not covered
by the plan before the
disability begins?
The person would be considered
an ex-employee.
If money is paid to an exemployee,can it be called
wages?
• No,because wages can only be paid to
employees.
What term would be applied
to money paid to a disabled
ex-employee?
• The money has been described by the
Federal Tax Court as AD HOC
Payments.
Are Ad Hoc Payments tax
deductible to employers?
• No, the court has held them not to be a
business expense!
When can money paid to a
person be called wages?
• Only when the person is an employee.
How does eligibility enter into the
qualifications of a Plan?
• There must be a bona-fide employer-
employee relationship.
• The plan cannot be for an owner or
stockholder who does not actively work in
or participate in the business.
Do benefits have to be equal
among employees?
• No , the employer can discriminate among
employees!
On what basis can the employer
determine who receives what
benefits?
• Employment Class
• Salary Level
• Length of Service
What is the one caveat to the
discrimination rules?
• A plan cannot exclude an employee from
coverage just because he or she is not an
owner or stockholder if the employee
meets all the other requirements for
coverage.
They Can’t Catch ME!
• A firm doesn’t have a
plan, a key employee
becomes disabled and
the firm continues to
pay them. The firm
deducts the payments
as wages.What is the
red flag to the IRS?
• When the Ex-
Employee applies for
Social Security
Disability,or when an
audit is conducted by
the IRS, the
subterfuge will be
obvious.
Communicating To Employees
• Speak in the vernacular
• Explain how new coverage fits with the
existing benefits
Who Pays You When You Are
Sick Or Hurt ?
Company Sick Pay Plan?
Most sick pay plans are limited to
a few days or weeks.
Vacation Days
Workers Compensation
( The Plan that Employees
Remember !)
Social Security
( The Forgotten LTD Plan !)
Social Security benefits are
difficult to qualify for and usually
do not begin for at least six
months.
“Total & Permanent Disability”
(The Social Security definition)
• A condition under which the individual is
“unable to engage in any substantial
gainful activity by reason of any
determinable physical or mental
impairment which can be expected to
result in death or which has lasted for a
continuous period of not less than 12
months”
• The strictest definition of disability that is
commonly used for any purpose.
Disability Insurance
Pay Check Protection
Programming Disability Benefits
• Workers
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Compensation
Social Security
State Disability Plans
Pension Plans
Medical
Plans(Supplemental
Accident Coverage)
Specified Disease
Coverage
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Sick Pay Plans
STD
LTD
Accident Coverage
Long Term Care
Critical Illness
What type of Platform for the
coverage ?
• Individual
• Franchise
• Group
• Blended
What elimination period to use?
• The shorter the better for blue collar
groups!
• Avoid elimination periods of less than 7
days for both accident or sickness!
• Avoid overlaps of coverage and other
employee benefits.
What benefit period to use?
• The one that is best for the employer and
the employees.
• Fill the gaps and avoid overlaps of
coverage if at all possible.
• Remember how benefits and premiums
are taxed.
Obstacles or Opportunity?
• ADA &FMLA
• Economic Conditions
• Rising Employee Benefit Cost
• Monday Morning Workers Compensation
Claims