Entrepreneurialism is alive and well, with thousands of upstarts steadily becoming startups. The pattern is familiar: marketable idea, business plan, attracting funding and then… time to open shop. Just getting there is daunting, and soon other concerns begin: recruiting, retaining talent in a competitive marketplace.
Entrepreneurs seeking growth must consider the need for a Qualified Sick Pay Plan, a formal plan for dealing with employee disability. While operating without an ERISA compliant plan seems innocuous, not having one is a lingering liability for all business owners; especially closely held businesses that want to keep key employees on limited payroll during times of inactivity. Done right, it’s a sound investment and an excellent way to build employee morale. Done wrong, there are pitfalls.
The good news is that knowing how to treat disabled or sick employees without creating taxation, accounting and discrimination liabilities is surprisingly inexpensive…given the proper preventative advice. However, many companies don’t learn about this critical need until it’s too late.
Consider a simple case study: Proxy Mosaic, LLC…
…a small company where key employee Lauren became an integral part of their growth as rainmaker. That ended five years into her career when diagnosed with bipolar depression. Unable to work full time, Proxy opted to give her a $2,000/mo salary while she recovered (45% of her previous salary). Eventually able to assume a back office support role –she returned and, paired with Peter, made a dynamic team breaking all records. Although not much of a salesman, Peter quickly saw his income skyrocket, largely thanks to Lauren.
All that ended with Peter’s biking accident, so severe he could no longer visit clients. Seen then as expendable in the Lauren/Peter team - Proxy’s owners agreed to continue $1,000/mo of compensation – far less than Lauren’s as a pay percentage. He subsequently sued for gender discrimination because of that difference.
More problems arose through an IRA audit; the agent told Proxy the monies Lauren received while disabled weren’t deductible, with no QSSP agreement in place. Accordingly, Proxy owed back taxes and was assessed a 20% underpayment penalty. Equally distressing, nosy office neighbors saw the IRS and started spreading rumors they were being “investigated”, leading people to think Proxy was committing tax fraud. Coupled with Peter’s allegations of gender discrimination, this was a blow to Proxy’s reputation.
A Qualified Sick Pay Plan (QSPP) Proxy Mosaic could have easily, affordably prevented this with proactive rather than reactive planning. Companies simply need a formal documented plan (QSPP) to deal with employees’ disability, allowing the business owner to decide which employees will be covered and whether to transfer the risk to a commercial insurance carrier.
While a QSPP plan can be a self-insured legal agreement, most are funded contracts backed by individual disability income insurance policies offered to different employee tiers with two basic tailored approaches:
Option 1: “Traditional” QSPP (Employee Owned DI Policies) Your business pays the premiums for the DI policies, deductible as business expense and employees are not taxed on premium payments. The employee is both policy owner and beneficiary. If disabled, any benefits received under the policy are taxable as income.
Option 2: “Contributory Plans” (Employee Owned DI Policies) In the previous QSPP variation, the employer subsidized the DI premium 100%. In a “contributory” QSPP, the DI premium cost is split with employees (80/20, etc). Employees pay their portion with an after-tax payroll reduction, or by check directly to the insurance company.
The employee is taxed on the monies contributed to pay the premium. The business may deduct their portion (the employee isn’t taxed on your premium contribution). Benefits from the policy are received tax free to the extent the employee contributes to the premium.
Summary Not having a QSPP in place creates a myriad of liabilities. If your business is committed to doing right by your employees, such as Lauren, find a benefits consulting firm to add these simple documents—whether funded or unfunded--to your business records.
Registered Representative of Park Avenue Securities LLC (PAS). Securities products offered through PAS, member FINRA, SIPC. Associated Benefit Consultants is not an affiliate or subsidiary of PAS
Nicholas A. Domino, Plan Compliance Specialist, Associated Benefit Consultants, LLC www.associatedbenefitconsultants.com