Slide 1

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
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your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 2

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 3

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 4

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
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Each company
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please
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New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 5

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 6

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 7

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
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please
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New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 8

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
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Company of New York
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NOTE: Forvary
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andincompany
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arepolicy
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insurance
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policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
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upon application.
and limitations
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and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 9

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
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not provide for
basic
its own
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financial
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medical or
Standard
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Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 10

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 11

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 12

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
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Each company
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your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 13

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 14

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 15

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
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Each company
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please
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New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 16

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 17

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 18

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
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name forisStanCorp
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(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 19

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
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insurance
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Statebusiness
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ofstates
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Standard
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discontinued.
all people Some
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policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
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upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 20

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
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Group,
its own
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condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
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Company
insurance
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businessOre.
in all
in states
all states
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except
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York.
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Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
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The
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Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
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business
Plains,
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Product
state of
features
New York.
and availability
NOTE: Forvary
policies
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issued
andincompany
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and
This
arepolicy
solelywould
the responsibility
provide disability
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insurance
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company
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Standard
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The expected
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benefitCompany
ratio is atofleast
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Yorkforisindividual
licensed to
coverage
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in franchise
only the state
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These
is the
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have
exclusions
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and
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andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 21

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 22

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 23

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
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Each company
name forisStanCorp
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your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 24

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 25

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 26

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
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Each company
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please
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New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 27

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 28

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 29

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
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condition. Insurance
Standard Insurance
products are
Company
offered is
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may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
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For costs and
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800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 30

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
offered is
bylicensed
Standard
toInsurance
solicit
Company
insurance
of Portland,
businessOre.
in all
in states
all states
except
except
NewNew
York.
York,
Thewhere
Standard
insurance
Life Insurance
productsCompany
are offered
of by
New
The
York
Standard
is licensed
Life Insurance
to solicit insurance
Company of New York
of White
business
Plains,
in only
N.Y. the
Product
state of
features
New York.
and availability
NOTE: Forvary
policies
by state
issued
andincompany
New York:
and
This
arepolicy
solelywould
the responsibility
provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
hospital,
financial
basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
New York
insurance
Statebusiness
Department
in all
ofstates
Financial
except New
York.
Services.
The Standard
The expected
Life Insurance
benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
of NewThis
York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 31

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
Insurance Company of Portland, Ore. in all states except New York, where insurance products are offered by The Standard Life Insurance
Company of New York of White Plains, N.Y. Product features and availability vary by state and company and are solely the responsibility of
The each
Standard
subsidiary.
is a marketing
Each company
name forisStanCorp
solely responsible
Financial for
Group,
its own
Inc.financial
and subsidiaries.
condition. Insurance
Standard Insurance
products are
Company
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all states
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Thewhere
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Life Insurance
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are offered
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Standard
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Life Insurance
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Company of New York
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business
Plains,
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Product
state of
features
New York.
and availability
NOTE: Forvary
policies
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issued
andincompany
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and
This
arepolicy
solelywould
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provide disability
of each
income
subsidiary.
insurance
Each
only.
company
It
is solely
doesresponsible
not provide for
basic
its own
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basiccondition.
medical or
Standard
major medical
Insurance
insurance
Company
as defined
is licensed
by the
to solicit
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insurance
Statebusiness
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ofstates
Financial
except New
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Services.
The Standard
The expected
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benefitCompany
ratio is atofleast
New55%
Yorkforisindividual
licensed to
coverage
solicit insurance
and at least
business
60% for
in franchise
only the state
coverage.
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York.ratio
These
is the
policies
portion
have
exclusions
of future
and
premiums
limitations
which
andThe
terms
Standard
under which
expects
thetopolicies
return may
as benefits,
be continued
when averaged
in force orover
discontinued.
all people Some
with the
policy
applicable
provisions
policy.
and available riders
may vary by state. Optional riders are subject to underwriting and reinsurance availability. Additional optional riders may increase premiums. A medical
exam
The
may
policy
be required
has exclusions
upon application.
and limitations
For complete
and termscost
under
andwhich
coverage
the policy
details,
may
please
be continued
contact your
or discontinued.
insurance representative
For costs and
orcomplete
The Standard at
800.247.6888
details of coverage,
(800.378.6057
please
in contact
New York.)
your insurance representative or The Standard.

10844PPT (Rev 11/13) SI/SNY


Slide 32

Standard Insurance Company | The Standard Life Insurance Company of New
Standard Insurance Company is licensed to issue insurance in all states except New York.
The Standard Life Insurance Company of New York is only licensed to issue insurance in the state of New York..

About Salary Continuation Plans
Presentation For Employers
10844PPT
(RevDisability
11/13) SI/SNY
Individual
Insurance

Topics
• Tough Decision: Do you continue to
pay key employees who are unable to
work while they recover from a
disability?
• Discontinue compensation
• Continue compensation
• Ad hoc payments
• Salary continuation plans
• Self-funded plans
• Insured plans
• Who pays?

10844PPT (Rev 11/13) SI/SNY

Topics (cont’d)
• Chism Ice Cream Company vs. IRS
• Considerations
• Relevant Laws
• Getting Started with a Salary
Continuation Plan
• Sample Board of Directors
Resolution
• Sample Salary Continuation Plan
Resolution

10844PPT (Rev 11/13) SI/SNY

Tough Decision
Just over one in four of today’s twenty
year-olds will become disabled before
reaching age 67.*
If one of your key employees was unable
to work for an extended period of time,
would you continue to pay compensation
to that employee?
*Social Security Basic Facts, July 26, 2013

10844PPT (Rev 11/13) SI/SNY

Discontinue
Compensation
If you choose to discontinue your key
employee’s compensation,
• How do you communicate your
decision?
• What impact will your decision
have on employee morale?
• What is the net effect on your
business?

10844PPT (Rev 11/13) SI/SNY

Continue Compensation
If you choose to continue your
employee’s compensation

• How soon will payments start?
• How much will payments be?
• Who defines disability?

• Who do you pay?
• Will you provide purely ad hoc
(discretionary) payments?

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
• Ad hoc payments are those made by employers to sick or injured
employees on a discretionary basis and not according to any
pre-existing plan.
• Ad hoc payments can create serious income tax issues.
• If the IRS determines that payments to a disabled employee
are ad hoc payments, any employer deductions for these
payments will almost certainly be denied.
• If the disabled employee is also a stockholder in
the employer’s business, the payments may be
recharacterized as dividends, with dramatic results.

10844PPT (Rev 11/13) SI/SNY

Ad Hoc Payments
Consider the case of Chism Ice Cream
Company vs. Commissioner*

A long line of Federal Court decisions
support the IRS position on ad hoc
payments. The underlying message of
these rulings is clear:
If you intend to deduct payments made to
a disabled employee, you must have a
salary continuation plan in place before
the payments begin.
*TC Memo 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963)

10844PPT (Rev 11/13) SI/SNY

Salary Continuation Plan
You can avoid the problems associated
with ad hoc payments and resolve all of
the issues with a salary continuation plan,
if the plan is
• in writing,
• in place “before the fact”,

• communicated to employees, and
• authorized in writing by a company
resolution or other documentation.

10844PPT (Rev 11/13) SI/SNY

Funding Your Plan
How would you fund your plan?
Would it be self-funded or insured?

10844PPT (Rev 11/13) SI/SNY

Self-Funded Plan
To fund your own plan, consider
• Liability
• Timing
• Budgeting (FAS 112*)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
*Financial Accounting Standards Board Statement No. 112 (FAS 112)
requires employers who provide self-funded benefits, including salary
continuation benefits to disabled employees, to recognize
and account for those benefits.

10844PPT (Rev 11/13) SI/SNY

Insured Plan
The same considerations exist with a
insured plan as with a self-funded plan.
• Timing
• Budgeting (FAS 112)
• Reporting Rules
• Definition of Disability
• Fiduciary Responsibility
• Claim and Rehabilitation
.Administration
When you fund the plan with an individual
disability insurance contract, all of the
above considerations are addressed.

*Financial Accounting Standards Board

10844PPT (Rev 11/13) SI/SNY

Who Pays?
Who pays the premiums? Consider the impact of taxation.

If premiums are paid by:

Benefits received are:

• Employer

…taxable to employee

• Employee

…tax free to employee

• 162 bonus

…tax free to employee

• Split premium

…partially tax free

• Split benefit duration

…partially tax free

10844PPT (Rev 11/13) SI/SNY

Chism Ice Cream Company v.
Commission of Internal Revenue
Chism Ice Cream Company v. Commissioner Chism v. CIR, T.C.
Memo. 1962-6, aff’d 322 F.2d 956 (9th Cir. 1963) is just one of many
federal tax court rulings that show ad hoc payments do not work.
E.W. Chism founded Chism Ice Cream Company in 1905 and was
the driving force behind the business throughout his life.
Mr. Chism became the primary shareholder of the company when it
was incorporated in 1933, and served as president of the company
until his death in 1956.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
Mr. Chism was seriously incapacitated in 1952 and was no
longer able to run the day to day operations of the company.
Despite his incapacity, the company continued to pay Mr. Chism
either the same or increased amounts of salary.
Because Chism Ice Cream Company had an informal policy of
paying employees while they recovered from illnesses and
injuries, the company’s management assumed there was a sickpay plan in place.
The company continued to deduct the payments to Mr. Chism
as a legitimate business expense, and these payments were
treated by the company as “salary” on its books and in its
corporate income tax returns.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The IRS did not agree. Rather, the service denied the deductions
claimed by the company for salary paid to Mr. Chism.
The company took the case to the Tax Court, which held in favor of
the IRS. The Tax Court ruled that no sick-pay plan had ever been
put in place, no employees had been notified or advised of the
existence of any such plan, nor did they have the right to demand
benefits under such a plan.
In other words, a portion of the “salary” paid to Mr. Chism
represented excessive compensation for services rendered, which
is not deductible by the company.

10844PPT (Rev 11/13) SI/SNY

Chism (cont’d)
The end result?
Instead of deductible salary, the company
had paid Mr. Chism non-deductible
excessive compensation and dividends
from 1952 to 1956.
As a result of these non-deductible
payments, the IRS collected a combined
total of $45,000 in back taxes, penalties
and interest.

10844PPT (Rev 11/13) SI/SNY

Case Considerations
Chism Ice Cream v. Commissioner, T.C.
Memo 1962-6, affirmed 322 F. 2d 956
(9th Cir. 1963)
USCA 1963 income continued during
disability was considered dividends
instead of salary and not deductible
because there was no evidence of a
formal plan and nothing had been
communicated to the employees.

10844PPT (Rev 11/13) SI/SNY

Case Considerations (cont’d)
Larkin v. Commissioner, 48 T.C. 629, affirmed 394 F.2d 494
(1st Cir. 1968)

The court held that payments were not deductible to the employer as
payments under a sick-pay plan. The court found that no plan had
been communicated to employees and the ad hoc payments made by
the company benefited shareholders rather than employees.
Occhipinti v. Commissioner, T.C. Memo 1969-191.
The court denied any tax exclusion for payments to an employee
under a company accident or health plan. The court found that there
was a complete absence of evidence of a plan, formal or informal,
maintained by the company for paying its employees during an illness.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws
IRC, section 105 - Describes rules for
taxation of amounts received by an
employee under accident and health
plans.
IRC, section 106 - Provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.
IRC, section 162 - Describes ordinary
and necessary business expenses, which
may include bonus payments used to
fund an accident and sickness plan.

10844PPT (Rev 11/13) SI/SNY

Relevant Laws (cont’d)
Employee Retirement Security Act of
1974 (ERISA) - Written plan must adhere
to plan document requirements, reporting
and disclosure rules, and fiduciary
standards.
Financial Accounting Standards Board
Statement No.112 (FAS 112) - Requires
self-funded accident and sickness plans
to recognize and account for salary
continuation benefits.

10844PPT (Rev 11/13) SI/SNY

How to Get Started
• Obtain census information
• Make decisions about who to
insure, for how much, and when to
start and stop benefits
• Consider premium and benefits tax
considerations

• See sample resolution and sample
plan to attorney on following slides

10844PPT (Rev 11/13) SI/SNY

Sample Resolution Of Board of Directors
A special meeting of the Board of Directors of _______was held at
________on ________at ______ o’clock. The following directors,
constituting a quorum, were present:____________
The president of the corporation acted as chairman of the meeting, and the
secretary of the corporation acted as secretary of the meeting.
The chairman stated that the purpose of the meeting was to consider the
adoption of Sick Pay Plans for certain key employees. After due discussion
and upon motion made, seconded and approved, the following resolution
was duly adopted:
WHEREAS it is the desire of the corporation to establish Sick Pay Plans for
certain key employees by providing any such employee with an income
during disability due to sickness or injury, and thereby providing any such
employee with an added incentive to continue his or her services to the
corporation, and

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
WHEREAS a method for accomplishing this purpose is provided for under
Sections 105, 106 and 162 of the Internal Revenue Code, the Employee
Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of
1976, the Social Security Amendments of 1983, and all rules, regulations
and amendments pertaining to the aforesaid Code and Acts,
BE IT RESOLVED that Sick Pay Plans for certain key employees are
hereby adopted in accordance with the aforesaid Code, Acts, rules,
regulations and amendments, subject to the terms of the forms exhibited to
the meeting, attached to these minutes, incorporated herein by this
reference and made part hereof as if fully set out herein, and covering the
following key employees:

10844PPT (Rev 11/13) SI/SNY

Sample Resolution (cont’d)
BE IT FURTHER RESOLVED that the appropriate officers of the
corporation be, and they hereby are authorized and directed to take such
steps as they deem necessary to establish said Sick Pay Plans and to
make payments from the funds of the corporation each year as may be
required thereunder.
There being no further business before the meeting, the same was, upon
motion made, seconded and carried, duly adjourned.
Date

Secretary

This is a sample document only. The legal and tax consequences of any business resolution should be reviewed
by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution
The undersigned secretary of _______ , does hereby certify that:
A special meeting of the Board of Directors of ________ , was held
at the office of the corporation at ________, on ________, ______
at ______ o’clock for the purpose of acting upon a proposal that the
corporation establish a Salary Continuation Plan for certain
employees of the firm. ___________ was Chairperson of the
meeting and ___________ acted as Secretary.
The meeting was called to order by the Chairperson and minutes
were recorded by the Secretary. A waiver of notice of the meeting,
duly executed and dated ____, ___ was presented. A quorum of
Directors was present.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The Chairperson stated that the purpose of the meeting was to
authorize and direct that the necessary steps be taken to place in
operation a Salary Continuation Plan for certain valuable employees.
Discussion followed, and thereafter, upon motion duly made and
seconded, the following resolution was adopted by unanimous vote.
RESOLVED, that the Corporation establish a Salary Continuation Plan
to pay the following benefits to the following eligible employees:
Group I Employees: [list employee names]
The Corporation will pay all employees in Group I full (100%) salary for
the initial_____ weeks/months of total disability and three-fourths (75%)
salary for the next _____ weeks/months of continuing total disability
and one-half (50%) salary for the next _____ weeks/months of
continuing total disability.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Group II Employees: [list employee names]
The Corporation will pay all employees in Group II full (100%) salary for
the initial_____ weeks/months of total disability and one-half (50%)
salary for the next _____ weeks/months of continuing total disability.
Group III Employees: [list employee names]
The Corporation will pay all employees in Group III full (100%) salary
for the initial_____ weeks/months of total disability and ____ % salary
for the next _____ weeks/months of continuing total disability.
This is a sample document only. The legal and tax consequences of any business resolution should be reviewed by the
client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
BE IT FURTHER RESOLVED, that the Corporation shall satisfy these
obligations by purchasing appropriate disability income insurance
policies from The Standard, on the lives of all eligible employees who
are insurable at rates not exceeding ___ % of
standard premiums. If an eligible employee is not so insurable, the
Corporation shall create a sinking fund for future use by periodically
contributing an amount equal to ____% of standard premiums on that
employee. Corporate officers are authorized and instructed to pay
the premium on all policies as they become due.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
Also, any insured employee shall be notified that he or she has the
option of having all, or part, of the cost of any such policies on
his or her life treated as additional compensation. Should this option not
be selected by the employee, it shall be made clear that all
premium payments will be made as part of this plan and not treated as
additional compensation. Benefits paid to the employee in this
case will be taxable.
For purposes of this plan, the definition of total disability shall be as
defined in the above policies.

10844PPT (Rev 11/13) SI/SNY

Sample Salary Continuation Plan
Resolution (cont’d)
The funds necessary to pay benefits under this plan shall come from
disability income insurance contracts and the general assets of
the Corporation, as necessary. Each insured employee shall be the
Owner and Loss Payee of all insurance contracts purchased under
this plan.

Dated

Secretary

On this date I have read and understand the above plan and the
benefits provided for me.
Dated

Employee

This is a sample document only. The legal and tax consequences of any business resolution
should be reviewed by the client’s legal and tax counsel.

10844PPT (Rev 11/13) SI/SNY

The Standard is a marketing name for StanCorp Financial Group, Inc. and subsidiaries. Insurance products are offered by Standard
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10844PPT (Rev 11/13) SI/SNY