What is a Qualified Sick Leave Plan?

A Section 105 qualified sick-pay plan (QSPP).  A QSPP enables a business to continue some portion of an employee’s wages during a disability. It is the company’s official plan to continue wages for certain ill and injured employees.

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 because they are sick or injured. 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. The ability to deduct their wages can make a big difference during income tax time.

Pursuant to Internal Revenue Code sections 105 and 162, a business cannot deduct wages paid to a disabled employee.  Section 106 requires that wages be paid only to employees who render services and under the code, a disabled employee is deemed to be a former employee.

Without such a plan, the wages paid are not tax deductible, creating phantom income to the employer. Thus, every $1 you pay out costs $1.65 ($1.81 for S-corporation owners, partners and sole proprietors) because the IRS views it as an “ad hoc” payment that is not tax deductible.

Can I Claim sick pay?

Which of your employees is eligible for a QSPP is up to you as the employer. The employer identifies 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 provisions may vary as to percentage of salary to be paid, the duration of the payments (by age or number of years) and whether payments will supplement a long term disability program established by the employer.

How is a QSPP Funded?

An employer may self-fund the program or transfer the risk to another entity, an insurance company.  The employer can offer a disability program in conjunction with the QSPP which is employee funded through payroll deductibles, creating exposure only for the percentage of salary stipulated in the plan resolution.    If the employer is picking up the tab, the premiums are tax deductible. The plan can be amended at will—–provided that the employer does so prior to the disability of the covered worker.

However, funding a qualified plan is best accomplished through the use of disability income insurance. This not only allows you to expense the costs, but a “return of premium” provision can bring your net cost to almost nothing. A QSPP funded with disability income insurance shifts the burden of providing a disabled employee’s wages from the company to the insurance carrier. Instead of drawing from cash flow or reserves to pay the wages, the business commits itself to known and consistent disability insurance premium payments. A funded plan also improves the business’ balance sheet because of certain accounting benefits. Depending upon the design of the plan, premiums may be employer-paid, which is typical, or can be bon used to the employee.

How do you form a Sick Pay Plan?

There are really only two steps in creating a sick pay plan. The first step is to draft a formal, written plan document using a disability income proposal, and the second step is to let participating employees know the plan exists. If your firm has fewer than 100 employees, you might be exempt from ERISA reporting requirements.

A qualified sick pay plan is a great way to improve employee loyalty and help you reward and retain key employees. A QSPP provides a valuable option. The cost of setting up the plan documents is extremely low relative to the tax consequences of going without. And disability payments made to the employee under the auspices of this program are free from federal taxation.

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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Eric Gros-Dubois

Eric P. Gros-Dubois founded EPGD Business Law in 2013 and is the current head of the firm’s corporate, estate planning, and tax practice, and manages the firm’s Washington D.C. office. With a JD and MBA, and a specialization in finance, Eric is able to step back and view the legal world through a commercial lens while also acting as a trusted business advisor for his clients. He does his best to be solutions oriented, and tries to think like a business owner, not just a lawyer.


*The following comments are not intended to be treated as legal advice. The answer to your question is limited to the basic facts presented. Additional details may heavily alter our assessment and change the answer provided. For a more thorough review of your question please contact our office for a consultation.



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