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Qualified Sick Pay Plans (pursuant to Section 105 of the Internal Revenue Code)

Two Minutes on Section 105 Qualified Sick Pay Plans

1.  
   • Q. When Can money paid to a person be called Wages?
   • A. Only when the person is an Employee.
2. • Q. When is a person considered to be an Employee?
   • A. When the person is currently performing services — or — when the person s receiving benefits under the terms of a Qualified Sick Pay Plan (pursuant to Section 105 of the Internal Revenue Code).
3. • Q. What is a Qualified Sick Pay Plan?
   • A. It is a simple agreement providing for a Firm to continue some portion of an Employee's wages during a disability.
4. • Q. What kind of Firms may adopt a Plan?
   • A. Any Corporation, Professional Corporation, Partnership or Sole Proprietorship.
5. • 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).
6. • Q. When must a Plan be adopted by the Firm?
   • A. Before the Employee becomes disabled.
7. • Q. Must the Plan be in writing?
   • A. Yes, and the Employee must be aware of its terms (as required by ERISA).
8. • 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.
9. • Q. What would be the status of a disabled person who is not covered by a Plan before the disability begins?
   • A. Such a person would be considered to be an Ex-Employee.
10. • Q. If money is paid to a disabled Ex-Employee, can it be called Wages?
    • A. No, because Wages can only be paid to Employees.
11. • 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.
12. • Q. Are Ad-Hoc Payments tax-deductible to the Firm?
    • A. No, the Federal Tax Court has held them not to be a Business Expense and the Firm has lost the deduction.
13. • Q. Suppose a Firm does not have a Qualified Sick Pay Plan and then a Key-Person becomes disabled and the Firm decides to continue to pay some income to the Key-Person. But 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 the Social Security Disability Benefit, or when the IRS conducts an audit the subterfuge will be obvious.

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Paul SuPrise, CLU, LTCP
770 Nuangola Road • Mountain Top, PA 18707-9507
570-868-6871 • Fax 570-868-6872
paul@sickpayplans.com