Disability Benefits Paid Per Employment Agreement

[Guest Fourohonekay]

What is a "Qualified Sick Pay Plan" and why might a company need one in order to properly deduct disability benefits payable to an employee per his/her employment agreement (the payment comes directly from the employer, not from insurance)? Some websites indicate that a company must have a QSPP in order to deduct this type of disability pay.

Code s. 162 seems to permit the deduction of accident or sickness payments (i.e., disability pay) as a business expense as long as it's reasonable.

Am I missing something? Thanks for your thoughts.

[GBurns]

If you do not have a plan, How do you set the rules and guidelines etc.?

While the Treas Regs do not require that it be in writing, ERISa (if applicable) and state law requires it. But then again so does normal business sense and prudence. How would you argue and settle with an employee whose memory of the promise of benefits differs from yours?

Section 162 requires MUCH more than just reasonable, it requires and places much more emphasis on being ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business.

That is why a single outlet local store would not survive an audit if they tried to deduct the cost of a twin engine Cessna. The plane is cheap and reasonably priced but it would be had to find it ordinary and necessary etc. The same for the Drywall guy trying to deduct a Mercedes as a company car.

[Guest Fourohonekay]

GBurns: Thanks for the comments. The question, though, is whether or not a Qualified Sick Pay Plan is required in order to pay disability payments to an employee per his/her employment contract. I'm not sure what in ERISA would require the promise of wage continuation upon disability made to one employee via an employment contract to be included in a plan document. It's not a plan. It's wage continuation for one employee.

To answer your question, though, and as I mentioned above, the terms of the payment are contained in the contract. As long as these payments are otherwise reasonable under IRC 162, why would a QSPP be required?

Thanks for anyone's thoughts.

[GBurns]

Whether reasonable or not it is more important to be ordinary and necessary as per section 162. Reasonable is not even secondary in this issue.

I will send you some cites etc on the subject of why you do need a QSPP but I do not have ready access to my archives for a few days. You might want to contact your local Unum office (not agent or broker), they used to have some excellent material addressing this issue.

You do raise a good point as to whether or not the QSPP could or would be satisfied by being included in the employmant agreement. I do not see why not but then again I never had to research the issue. I do know that some formal agreement in writing is needed, but as I said let me get to my archives.