Imagine if a key employee were to become seriously sick or disabled. Maybe it’s your top salesperson or an employee who has been with you since the beginning. In addition to the potential impact to your business, the financial impact to that employee’s family and loved ones could be devastating. In a scenario like this, you might choose to continue paying that employee’s salary while they recover.
However, doing so is not quite as simple as you may think. The IRS will not consider the salary you pay while your employee is ill or injured to be a “wage,” since they are not actually working. This means you can’t deduct the wages from your company’s taxes or claim them as a business expense.
But there is a solution. By planning ahead with a Qualified Sick Pay Plan (QSPP), your business can be bettered prepared — and reduce the risk of unforeseen tax consequences — if something unexpected were to happen to an employee.
What is a QSPP?
A QSPP is an agreement that sets company policy before a disability occurs. It establishes who should be included, how much salary they will be paid, when payments start, and how long the payments will last. The plan must be instituted prior to a covered employee becoming disabled, and that employee must be aware of the terms of the plan. Additionally, the agreement must be in writing and the board of directors or partnership must have a resolution to adopt the plan.
This legal document, recognized by the IRS, allows your business to provide income to select employees even if they’re out of work for years. With a QSPP in place, you can pay the employee’s salary and deduct their wages from the company’s taxes just as you would for a regular full-time employee.
Who is eligible for a QSPP?
Which of your employees is eligible for a QSPP is up to you as the employer. One benefit of a QSPP is that you don't have to treat every employee equally. You can create a plan that offers coverage for executives or managers, but not for lower-ranking employees.
So take the time now to identify the people in your company who you’d want to receive a full salary during their disability. A QSPP is a particularly good option for family businesses because it allows the owner to protect children or other non-owner family members who work for the business if they become disabled. The ability to deduct their wages can make a big difference come income tax time.
How do you fund a QSPP?
Your business can self-fund a QSPP as discussed above, or do so through disability income (DI) insurance policies purchased to cover the employees listed in the agreement. Funding a QSPP with DI insurance helps you avoid having to pay all of their wages out of your assets, so you can keep more profits in the company. It also allows you to transfer risk to an insurer, such as MassMutual, so a portion of incomes are paid at no further cost to your business. While the benefits paid to your employee under the insurance policy are not deductible as wages, the premiums your company pays for the policy can generally be deducted as a business expense.
A QSPP funded by DI can also be a powerful and enticing benefit for your employees, which can help your company attract and retain top talent.
Get a QSPP, ASAP
No business model can predict disability. No quarterly projections can anticipate illness. But your business can be better prepared for an employee’s disability by setting up a QSPP sooner rather than later. Talk to an attorney about drafting the necessary documents and consider speaking to a financial advisor or consultant about your funding options.
Whether you offer DI insurance or not, plan ahead by identifying your key employees and protecting their incomes with a QSPP. It can not only help your employees in the long run — it can also be a prudent choice for your company.
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