SICK PAY PLAN
A sick pay plan can help provide funds and tax benefits
for a company that plans to
continue paying wages to an employee who has incurred a
disability. Disability can be a
very challenging time for an individual as medical and
rehabilitation expense rise and
income decreases due to the inability to work. A Corporation
may continue to pay salary to
the disabled employee; however, there can be negative tax
repercussions in the absence of
a properly designed sick pay plan.
If the disabled employee is also a stockholder, the IRS may
treat the salary payments
as dividends, which are not tax deductible to the corporation
if a sick pay plan were not
in existence at the time of the disability. In addition to the
salary payments not being
tax deductible to the corporation, the salary payments would
also be taxable income to the
employee.
A pre-existing sick pay plan would allow the corporation to
continue deducting the
salary payments to a disabled employee, which generally will be
taxable to the disabled
employee.
There are usually three things that are required to
establish a sick pay plan:
1) A corporate resolution.
2) A plan document.
3) The covered employees must be notified.
An individual disability insurance contract can be an
effective way to help fund the
wages of a disabled employee. After the sick pay plan has been
established, the
corporation can take out a disability insurance policy on the
covered employee. The
corporation would then pay the disability insurance policy
premiums which would be tax
deductible. The premiums, paid by the corporation, would not be
considered taxable income
to the covered employee, though any disability payments
received by a disabled employee
would generally be taxable.
In the event of a disability, the insurance company would
then provide the funds to
continue payments to the disabled employee.
