This chapter discusses sick pay and short term disability plans. After looking at when such a plan might be considered, the chapter reviews design features for sick pay as well as short term disability plans. The disability tax credit is mentioned in the tax implications section. The chapter ends with a note about ERISA requirements and two references for learning more | What is it? A plan that continues employee’s salary or wages for a limited time if the employee is ill or injured Usually lasts Copyright 2009, The National Underwriter Company When is it indicated? Realizing that employees will become ill or injured, employers typically provide sick pay for short absences from work Employer can discriminate and can choose who will be covered level of benefits (can vary among employees) terms and conditions of coverage Copyright 2009, The National Underwriter Company Design Features Two types of short-term coverage sick pay short term disability Copyright 2009, The National Underwriter Company Design Features Sick pay Uninsured continuation of salary or wages (usually 100% replacement) for a short period of time beginning first day of illness or injury Usually cover broad class of employees but can favor certain groups Usually for full-time employees Copyright 2009, The National Underwriter Company Design Features Sick pay Duration often tied to length of service Plan may allow carryover of unused benefits with a cap on accumulation Reduced benefits common with long benefit period Must design carefully to avoid abuse Copyright 2009, The National Underwriter Company Design Features Short-term disability Fills gap between end of sick pay and beginning of long term disability Plans often insured As compared with long-term plan, short-term plans have broader coverage require less service for coverage have a more generous definition of disability Copyright 2009, The National Underwriter Company Tax Implications Employer can deduct payments to employees under sick pay or short term disability premium payments under insured plan Employees may share cost for insured plan Employer paid premiums are tax-free to employee Copyright 2009, The National Underwriter Company Tax Implications Benefit payments taxable to employee proportional to premiums paid by employer Disability credit available to employees totally and permanently disabled to reduce tax burden Disability insurance payments paid by the employer are not considered wages and therefore not subject to FICA (Social Security) or FUTA (federal unemployment) Copyright 2009, The National Underwriter Company Tax Implications Disability benefits are subject to federal income tax withholding if paid directly to employer; if paid by 3rd party, withholding required only if employee requests Disability benefits attributable to employer contributions are subject to Social Security taxes for limited time at beginning of disability Copyright 2009, The National Underwriter Company ERISA Requirements Sick pay or a short-term disability income plan is a welfare benefit plan under ERISA Must have written summary plan description name of plan administrator formal written claims procedure Not subject to rules regarding eligibility vesting funding Copyright 2009, The National Underwriter Company
