Qualified Sick Pay Plan Key in Benefits Package

In any business, some employees contribute more to the bottom line than others, and most business owners want to encourage performance with special treatment for the standout employee.

Within limits, you can do this with salary and perks such as stock options and vacation time, among other rewards. You can even do it with sick pay if you’re careful--and if you have a qualified sick pay plan.

If, on the other hand, you don’t have a qualified sick pay plan and you single out an ailing employee for treatment not accorded to other people on your payroll, you leave yourself open to a world of trouble at the hands of the Internal Revenue Service, not to mention the unhappy employee claiming discrimination.

What is a qualified sick pay plan? As its name implies, it is a written statement telling your employees how long you will keep them on salary in the event of illness or injury. In plain English, you put in writing what you will and will not do to help your employees keep body and soul together in the event that illness or injury takes them away from the job.

Often overlooked by the business owner, the qualified sick pay plan is a crucial element in any employee benefits package, and the beauty of the idea is that it allows you to discriminate among your employees, making sure that some people get more than others when trouble strikes.

When coordinated with health and disability insurance, a qualified sick pay plan sets forth a kind of time line for the ailing employee, specifying:

* To what extent your group health insurance pays for medical costs.

* How long you will keep the employee on salary.

* At what point your disability insurance kicks in.

And as this implies, you fashion your qualified sick pay plan in light of your group health and disability insurance, according to Jerome S. Simon, a partner in the Encino insurance brokerage Simon, Altman & Kabaker Insurance Services Inc.

“Say you own an incorporated family business,” Simon says, “with maybe yourself and two of your children as principal shareholders and officers of the corporation, along with a senior management team and a number of rank-and-file employees.

“Your plan can put you and your family members in one class of employees, your managers in another, and everybody else in a third with respect to sick pay. Members of the top class--you and your family members--get a full year’s salary in the event of a disabling illness or injury. Members of your management team get six months, and everybody else gets two weeks--or nothing at all.”

In effect, a qualified sick pay plan accomplishes what employers want to do by instinct anyway--help the valuable employee when illness or injury strikes. And the details can vary widely so long as you don’t offer different benefits to different employees in the same class, Simon says.

Looked at from another standpoint, however, the qualified sick pay plan doesn’t just do good things for the right people on your payroll. It also keeps you out of trouble.

“Say you have an ace salesperson who gets laid up for two months with a skiing injury,” Simon says. “If you don’t have a plan and you pay the salesperson a salary for two months--and then your worker-bee bookkeeper gets laid up because of a car accident and you pay his or her salary for two weeks--you’ve set yourself up for a discrimination lawsuit.”

You may also incur the wrath of the Internal Revenue Service. In the absence of a qualified sick pay plan, the IRS may consider any money paid to a shareholder a dividend taxable on both the corporate and the personal level, Simon says. With a plan in place, on the other hand, the IRS considers the money salary and hence a deductible expense taxable only to the recipient.

In short, the qualified sick pay plan does good things for employer and employees alike, Simon says, and it makes discrimination legal to boot.

Best of all, it doesn’t cost much to set up a qualified sick pay plan, Simon says. You probably need legal advice in doing so, but many health and disability insurers supply their agents with sample plans, allowing your lawyer to shape a plan to fit your specific needs at nominal cost.

“You don’t have to buy disability insurance to set up a qualified sick pay plan,” he adds, “but it’s a good idea. And you can coordinate sick pay with disability insurance, state disability insurance benefits and workers’ comp benefits.”

Columnist Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.