Wessex

Compensation from STD Payments

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Company has a QACA safe harbor 401(k) plan with matching contributions made on a payroll basis.  The company is considering entering into an arrangement with an insurance company to have it make short-term disability payments to the company's employees.  The arrangement is NOT insurance.  The insurance company will determine whether employees are disabled and, if so, make payments directly to the employees using the insurance company's EIN, and withholding taxes, garnishments, etc., and issuing W-2s to the employees.  Loan repayments and 401(k) deferrals will not be withheld.  The employer company will then reimburse the insurance company for the payments made.

I am familiar with ASO agreements to administer short-term disability payments, but not direct payments by the insurance company that are not insurance.  No one I know professionally has heard of this type of arrangement and each thinks the payments are compensation from the employer company.  The insurance company says they've been doing this for years for many clients and the payments are not compensation from the employer.

Are these payments compensation from the employer company (and not the insurance company)?  These non-insurance payments are being made on account of service with the employer company. 

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This is insurance; it is employer provided via self-insurance. The insurance company is providing ASO (administrative services only) type of services.  Again, what you describe IS INSURANCE paid for by the employer.  That means it IS taxable compensation FROM THE EMPLOYER.  

Regardless of what EIN it is reported under on the W-2 issued, it is compensation from the employer (clearly, they are not EMPLOYEES of the insurance company!) and should be reflected in their benefits unless there is something that says amounts paid in that manner are excluded.

And you should stop calling them non-insurance payments.  They are EXACTLY what insurance payments are, they are just self-insured.

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