Qualified sick pay plan presentation

Qualified Sick
Pay Plans (QSPP)

advice4retirement.com
Member of FINRA, SIPC

What is a QSPP?

A legal, formal sick pay plan
It is not insurance.


What is a QSPP?

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

a person will receive money during a period of
disability.


Why Establish
a QSPP?


Why establish a QSPP?

Chism vs. Commissioner 1963
When an employee is disabled he/she no
longer is an employee.
Wages can only be paid to employees.
Any money paid that is greater than $25 is a
gift.
A QSPP must be in place before an employee
is disabled. If there isn’t a QSPP in place, it is
considered ad hoc and as a result is not tax
deductible.


1. Under a QSPP, payments made to an
employee who is hurt or sick are tax
deductible.
- Ad hoc payments are not tax deductible.
2. Under a QSPP, employers can be
selective as to who can and can’t be
covered.



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



Ad Hoc vs. Plan Payment
Ad Hoc Payment Plan Payment
> $25 gift Legal Obligation
Not a business Business Expenses
expense Taxable to
Taxable to Executive Executive



The plan can be set up for a particular
class of employees, allowing the
employer flexibility in covering those
employees he/she wants.
Benefits can vary by class, allowing the
employer flexibility in the amount of
benefit to be provided to each class.


What are the advantages
of a QSPP?
1. Allows tax-deductible payments to the
disabled employee, which is good for the
employer
2. Requires payments to the disabled
employee, which is good for the employee


Funding the Plan


Funding the Plan

– A company can choose to:
1. Establish cash reserves
2. Use current cash flow
3. Buy insurance


Funding the Plan

Financial Issues of Self-funding a QSPP
A company may not have the cash
immediately
Current cash flow goes toward paying
employees plus replacement for the
disabled employee.
– What happens when revenue is down?


Funding the Plan
Annual Employer Cost For One Disabled Employee**

No Plan Self-Funded QSPP Insured QSPP
Revenue $100,000 Revenue $100,000 Revenue $100,000
Income Tax * - 32,000 Sick Pay - 30,000 Premium - 1,000
Net Profit 68,000 Pre-Tax 70,000 Pre-Tax 99,000
Sick Pay - 30,000 Income Tax* - 22,400 Income Tax* - 31,680

Retained Earnings Retained Earnings Retained Earnings
$38,000 $47,600 $67,320 plus
DI Benefits
•Assumes a 32% Corporate tax rate. $30,000
** Approximate annual cost of insuring on a 35-year old employee
with $30,000 annual benefit to age 65.


Best Solution is to Buy
Insurance


Buy Insurance

A company can either:
Self-fund the QSPP
Fund the QSPP through an insurance
policy


Buy Insurance
Financial Accounting Standard 112
With a self-funded plan:
– Payments for employee sick pay must come from
company cash funds.
– In addition, the company must estimate the future
cost of sick pay payments and record these as a
business liability in the year the disabling accident
or sickness occurs.
– The employer must make the claims decisions.


Buy Insurance

Which would an employer rather do?

Take on the responsibility him/herself
- OR -
Shift the burden to an insurance company


Buy Insurance

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


Government Requirements
for QSPP (IRS Code 105)
The plan should be in writing, although a board
resolution may suffice.
The plan must be in effect before a disability
occurs.
The plan must be communicated to
participating employees.
The plan must be set up solely for employees.
The benefits cannot be excessive.


ERISA Issues
Concerns regarding employee benefit rights
Limitation to amount for which employee can
sue


Buy Insurance

What kind to buy?

Group LTD
Individual DI
Combination – Group LTD and IDI


Buy Insurance

Group LTD

Many companies already have LTD
Limitations to LTD


Group LTD (continued)

Limitations to LTD
Typically protects only 60 percent of income
Are often employer paid, resulting in taxable benefits
Often have a cap on benefits, such as $5,000/month
Typically cancelable by the insurance company or by
the employer
May have contractual limitations
Designed for a group of individuals and does not allow
each individual to tailor his/her coverage
Often does not cover certain types of income
(i.e., bonuses)


Buy Insurance

Supplement with Individual DI
Key advantages:
– Excellent contract provisions
– Non-can contracts
– Insured owns the policy
– Customer design, extremely flexibility
– Portable
– Best of both worlds

A. Van Richards
van@advice4retirement.com
www.advice4retirement.com


Qualified sick pay plan presentation

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