Contents   * Search Website    * Products   * Retirement Plans   * Services   * Carrier Links   * Newsletters   * Contact Us Customers Only   * HNI E-Mail   NEW $1 billion Medicare Gap pumps up insurance costs Special Features * Glossary of Terms * Can You Afford to   Retire? Hot Topics * Family Business -    What to Pass Along to    the Next Generation * Qualified Sick Pay    Plans * Carving Your Way to    Success - Group Term    Life

Hot Topic Qualified Sick Pay Plans ALL FIRMS 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.  Two Minutes on Section 105 Qualified Sick Pay Plans

Q: When can money paid to a person be called wages?
A: Only when the person is an employee.

Q: When is a person considered to be an employee?
A: When the person is currently performing services - or - when the person is receiving benefit under the terms of a Qualified Sick Pay Plan (pursuant to Section 105 of the Internal Revenue Code).

Q: What is a Qualified Sick Pay Plan?
A: It is a simple agreement providing a firm to continue some portion of an employee’s wages during a disability.

Q: What kind of firms may adopt a plan?
A: Any corporation, professional corporation, partnership or sole proprietorship.

Q: Is the money paid to a disabled employee under a plan classified as wages?
A: Yes, and such plan payments are tax-deductible by the firm as a business expense (under Section 162 of the Internal Revenue Code).

Q: When must a plan be adopted by the firm?
A: Before the employee becomes disabled.

Q: Must the plan be in writing?
A: Yes, the employee must be aware of its terms (as required by the Employee Retirement Income Security Act of 1974).

Q: Is the necessary documentation required for a plan a complex arrangement?
A: No, it consists of adopting a simple plan Resolution and then providing the employee with a simple plan letter.

Q: What would be the status of a disabled person who is not covered by a plan before disability begins?
A: Such a person would be considered an ex-employee.

Q: If money is paid to an ex-employee can it be called wages?
A: No, because wages can only be paid to employees.

Q: What term would be applied to money paid to a disabled ex-employee?
A: The money has been described by the Federal Tax Court as Ad Hoc payments.

Q: Are Ad Hoc payments tax-deductible to the firm?
A: No, the court has held them not to be a business expense, and the firm has lost the deduction.

Q: Suppose a firm does not have a plan the then a key person becomes disabled and the firm decides to continue to pay some income to the key person. Now let’s suppose the firm fails to disclose that it is actually paying "wages" to a disabled ex-employee - how is this likely to come to the attention of the Internal Revenue Service?
A: When the ex-employee applies for Social Security Disability Benefits, or when an audit is conducted by the Internal Revenue Service, the subterfuge will be obvious.