qualified sick pay plan presentation
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Qualfied Sick Pay PresentationTRANSCRIPT
Qualified Sick Pay Plans (QSPP)
Qualified Sick Pay Plans (QSPP)
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What is a QSPP?What is a QSPP?
¨ A legal, formal sick pay plan
¨ It is not insurance.
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What is a QSPP?What is a QSPP?
¨ A QSPP defines:– Who – How much and– Under what conditions
a person will receive money during a period of disability.
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Why Establish a QSPP?
Why Establish a QSPP?
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Chism vs. Commissioner 1963Chism 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.
Why establish a QSPP?Why establish a QSPP?
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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.
Why establish a QSPP?Why establish a QSPP?
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¨ You need a plan document. Without one, payments are ad hoc.
Why establish a QSPP?Why establish a QSPP?
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Ad Hoc vs. Plan PaymentAd Hoc vs. Plan Payment
Ad Hoc Payment¨ > $25 gift¨ Not a business
expense¨ Taxable to Executive
Plan Payment¨ Legal Obligation¨ Business Expenses¨ Taxable to
Executive
Why establish a QSPP?Why establish a QSPP?
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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.
Why establish a QSPP?Why establish a QSPP?
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¨ 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.
Why establish a QSPP?Why establish a QSPP?
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What are the advantages of a QSPP?
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
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Funding the PlanFunding the Plan
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– A company can choose to:
1. Establish cash reserves
2. Use current cash flow
3. Buy insurance
Funding the PlanFunding the Plan
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Financial Issues of Self-funding a QSPPFinancial 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 PlanFunding the Plan
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Annual Employer Cost For One Disabled Employee**Annual Employer Cost For One Disabled Employee**
Revenue $100,000
Income Tax * - 32,000
Net Profit 68,000
Sick Pay - 30,000
Retained Earnings
$38,000
Funding the PlanFunding the Plan
No Plan Self-Funded QSPP Insured QSPPRevenue $100,000
Premium - 1,000
Pre-Tax 99,000
Income Tax* - 31,680
Retained Earnings
$67,320 plus
DI Benefits
$30,000
Revenue $100,000
Sick Pay - 30,000
Pre-Tax 70,000
Income Tax* - 22,400
Retained Earnings
$47,600
• Assumes a 32% Corporate tax rate.
** 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
Best Solution is to Buy Insurance
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A company can either:A company can either:¨ Self-fund the QSPP
¨ Fund the QSPP through an insurance policy
Buy InsuranceBuy Insurance
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Financial Accounting Standard 112Financial 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 InsuranceBuy Insurance
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Which would an employer rather do?Which would an employer rather do?
¨ Take on the responsibility him/herself
- OR -
¨ Shift the burden to an insurance company
Buy InsuranceBuy Insurance
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¨ Decision is made to buy insurance.– What is next?
Buy InsuranceBuy Insurance
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Government Requirements for QSPP (IRS Code 105)
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.
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ERISA IssuesERISA Issues
¨ Concerns regarding employee benefit rights
¨ Limitation to amount for which employee can sue
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What kind to buy?What kind to buy?
¨ Group LTD
¨ Individual DI
¨ Combination – Group LTD and IDI
Buy InsuranceBuy Insurance
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Group LTDGroup LTD
¨ Many companies already have LTD
¨ Limitations to LTD
Buy InsuranceBuy Insurance
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Limitations to LTDLimitations 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)
Group LTD (continued)Group LTD (continued)
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Supplement with Individual DISupplement with Individual DI¨ Key advantages:
– Excellent contract provisions
– Non-can contracts
– Insured owns the policy
– Customer design, extremely flexibility
– Portable
– Best of both worlds
Buy InsuranceBuy Insurance
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A. Van [email protected]