Many companies do not realize that the IRS can disallow the deduction of wages paid to a disabled employee because such payments are not a necessary business expense unless those wages are paid in accordance with the terms of a Qualified Sick Pay Plan (under Section 105 of the Internal Revenue Code).

Qualified Sick Pay Plans enable companies to continue to pay wages to a disabled employee and still be able to deduct those wages as a business expense, and also entitle both the company and the disabled employee to exemption from FICA taxes after six months of disability (Publication 15, Circular E, Employer's Tax Guide).

If the plan is funded with Disability Insurance, then the company may deduct the premium paid for the policy as a business expense (under Section 162) and the amount of the premium is not taxable as earned income to the employee (under Section 106).

So what makes one plan "qualified" and the other "not qualified?"  It's the "paper trail," the documentation that such a plan actually exists.  And the plan may or may not have disability insurance attached to it.

Want to see the documentation?  Send an e-mail to russ@benefitslab.com