“Ignorance of the Law is no excuse!”
The IRS rules are quite clear. If you think that they can routinely pay deductible wages to a disabled employee – even a stockholder/employee – you need to be better informed about the law!
The rules are quite clear. The tax courts have ruled that unless a business has adopted a Qualified Sick Pay Plan prior to an employee’s disability, any “wages” paid to (and FICA contributions made on behalf of) a disabled stockholder/ employee or other key employee is not a business expense and are not tax-deductible (IRC 105; IRC 162).
Why have a plan? The odds are overwhelming that one of your key employees will become disabled before age 65. Think about how that could disrupt your business. And, if the business or practice is going to pay them – or a disabled employee – anyway, doesn’t it make sense to ensure the tax deduction by establishing a plan?
ALL BUSINESSES EMPLOYING ONE OR MORE PERSONS
When one of your key persons becomes disabled you will probably want to continue at least part of his or her wages for some limited period of time.
Did you know that the law says you cannot deduct such wages as a tax-deductible business expense unless you establish a Qualified Sick Pay Plan (pursuant to Section 105 of the Internal Revenue Code) before the key person becomes disabled?
A Qualified Sick Pay Plan does not require the purchase of any insurance.
Here is a two-minute explanation Section 105 Qualified Sick Pay Plans.
Click the “+” to reveal the answer!
Only when the person is an Employee.
When the person is currently performing services – or – when the person is receiving benefits under the terms of a Qualified Sick Pay Plan (pursuant to Section 105 of the Internal Revenue Code).
It is a simple agreement provided by a business to continue some portion of an employee’s wages during a disability.
Any Corporation, Professional Corporation, Partnership or Sole Proprietorship.
Yes, and such plan payments are tax-deductible by the business as a expense (under Section 162 of the Internal Revenue Code).
Before the employee becomes disabled.
Yes, and the employee must be aware of it's terms (as required by the Employee Retirement Income Security Act of 1974).
No, it consists of adopting a simple plan resolution and then providing the employee with a simple plan letter.
Such a person would be considered an ex-employee.
No, because wages can only be paid to employees.
The money has been described by the Federal Tax Court as Ad Hoc Payments.
No, the court has held them not to be a business expense, and therefore, has lost the deduction.
It will become obvious when the ex-employee applies for their Social Security Disability benefits, or when an audit is conducted by the Internal Revenue Service.
Your generosity to a sick or injured key employee is limited by your resources. You will be forced to make subjective decisions as to how much and for how long you can pay this employee. Your company will have to make payments at the least desirable time while the key employee is disabled and no longer working to produce profits for your company. Will it be easy to tell a valued employee? I’m sorry, but this is the last paycheck we can afford to give you while you’re disabled. Imagine the longer an important key employee has been with your company, how much more difficult it becomes for the business / owner to deliver the final salary check. Your company will be in the insurance business with an unfunded liability. When this happens the company faces failure in the insurance business.
THE KEY ADVANTAGES OF AN INSURED SOLUTION:
The money to provide the income to a disabled employee becomes available when needed, without draining company surplus and thereby freeing funds for hiring and training a replacement.
The problem of defining disability and claims handling is shifted to a third party.
Plan structure and benefit amounts are sound business decisions, rather than emotionally motivated.
Without disability insurance to cover a salary wage continuation plan, the business faces a potentially devastating financial liability – one that is impossible to budget for or predict.
RESOLUTION OF BOARD OF DIRECTORS
A special meeting of the board of directors of __________________________________________
was held at ______________________ on _________________ , 20_____ , 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
Qualified 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 Qualified 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
WHEREAS a method for accomplishing this purpose is provided for under Sections
105, 106 and 162 of the Internal Revenue Code of 1954; the Employee Retirement
Income Security Act of 1974; 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 Qualified 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 a part hereof as
if fully set out herein, and covering the following key employees:
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 Qualified 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.
______________ _________________________________
Dated Secretary
THIS IS ONLY A SAMPLE
SEEK THE LEGAL ADVICE
FROM YOUR ATTORNEY
PLAN LETTER
(Corporation)
(name of employee)
In consideration of your valuable services to the company, the board of directors has
approved a Qualified Sick Pay Plan for you in the event you are disabled as a result of
sickness or injury.
Your Qualified Sick Pay Plan provides that:
1. During the first (number of months) of disability, you will receive your regular wages
from either your employer or the insurance company.
2. If your disability lasts longer than (number of months), you will then receive
the proceeds of policy #_________ with the (insurance company )
which is enclosed with this letter for your safekeeping.
3. Premiums for the policy will be paid by this company while you are employed by it
and while the plan is in effect.
4. This company shall be responsible for and have full discretion with regard to the
operation and management of the plan and any of its assets, except that the
insurance company shall have a responsibility with regard to those aspects of
the plan which are governed by the terms of the insurance contract. In accepting
the foregoing responsibility, this company shall serve as plan fiduciary and
administrator as required by the Employee Retirement Income Security Act of
1974 as amended.
5. If a request for benefits under item 1 is denied, this– company will provide you with
written notice stating the reasons for denial and an explanation of the procedure by
which such denial may be reviewed. Upon request for such review, you or your
representative will be permitted to review pertinent plan documents and submit
issues and comments in writing.
6. If a request for benefits under the insurance contract is denied, you or your
representative must contact the insurance company for details and review of such
denial.
7. This plan may be amended by a duly authorized vote of the board of directors, and
any such amendment shall be effective immediately.
Sincerely yours,
THIS IS ONLY A SAMPLE
SEEK THE LEGAL ADVICE
FROM YOUR ATTORNEY
