No Good Deed Goes Unpunished.

Building a successful business takes hard work and dedication, but the work doesn’t stop there. To ensure the continued success of your business and the well-being of your employees, it’s essential to plan ahead.

Imagine for a moment the impact on your business if a key employee were to become disabled due to illness or injury. Many well-intentioned and caring business owners have provided salaries to certain employees loyal to the business.

Unfortunately, these good deeds not only go unpunished: They underestimate the financial risks and the effects they can have on their firms’ bottom line.

This is where a Qualified Sick Pay Plan (QSPP) comes in.

A QSPP establishes a clear policy for handling disabilities in the workplace before they occur. It outlines who gets paid, how much, and for how long. Here’s an eye-opener: If you don’t have a QSPP in place when a disability strikes, the amounts paid to disabled employees are not tax-deductible business expenses. They are considered “ad hoc” payments.

Case in point:

In the landmark case of 1963, Chism Ice Cream Company vs. Commissioner,(E.W. Chism Estate v. Comm’r, 322 F. 2d 956 (9th Cir.1963), the Court found that the Chism Ice Cream Company did not have a sick-pay plan in effect before its president, E. W. Chism became disabled, and had not provided any formal, written communication to employees.

Therefore, “sick pay” payments made to Chism were not tax-deductible business expenses but rather paid corporate dividends.

This crucial decision by the Tax Court serves as a clear example of the importance for corporations to establish a Qualified Sick Pay Plan arrangement. In this particular instance, the Court concurred with the IRS that the company did not have a sick-pay plan in effect and ruled against the Chism Ice Cream Company.

The company, which only had an informal sick pay plan in place, was denied a tax deduction for the salary paid to Chism due to the following reasons:

  1. The plan was not pre-established:
  2. The specifics of who received what, when it started, and the duration, were

not effectively communicated to the employees.

  1. The plan details were not documented in writing.

Consequently, the corporation had to bear the burden of paying 5 years’ worth of additional corporate income tax, along with interest and late payment penalties.

By funding a QSPP, with Disability Income Insurance, an employer transfers the risk to the insurance company. The carrier handles eligibility, claims processing, and provides insured benefits. Business owners benefit from a fixed premium expense that they can budget for and deduct as a business expense. It not only protects the employees but safeguards the business as well.

Without a QSPP, paying disabled employees becomes an unplanned expense, adding strain to the business when it can least afford it. With a QSPP funded with disability income insurance, the insurance company covers the employees’ wages and manages all claims, keeping the business afloat during critical times.

Creating a QSPP also eliminates the need for subjective judgment about the validity of an employee’s disability, minimizing potential liability for the employer. Plus, the plan can be tailored to include additional benefits, like monthly benefit riders, partial disability coverage, student loan protection, social insurance substitute riders and other benefits.

Where it deals with ownership of the policy, employers have options. If the business owns it, premium payments aren’t tax-deductible, but benefits received by the business are tax-free, and payments to disabled employees are tax-deductible. If the employee owns the policy but the business pays for it, tax implications depend on how the premiums are treated.

Implementing a QSPP with disability income insurance is a crucial step in protecting a business and its greatest asset: Its employees. However, the plan must be in place before an employee becomes disabled to enjoy favorable tax treatment. Employers must consult with their tax and legal advisors as well as an experienced Disability Insurance professional, to design a plan best suited for the business’s specific needs.

Actions taken now by planning ahead will ensure savvy business owners that their hard-earned success continues, providing a safeguard for their business and peace of mind even in the face of unexpected challenges. Proper planning can assure that a good deed will be rewarded and not punished.

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