Two Minutes on Section 105 Qualified Sick Pay Plans

Q:  When can money paid to a person be called Wages?
A:  Only when the person is an Employee.

Q:  When is a person considered to be an employee?
A:  When the person is currently performing services --- or --- when the person is receiving benefits under the terms of a Qualified Sick Pay Plan (under Section 105 of the Internal Revenue Code).

Q:  What is a Qualified Sick Pay Plan?
A:  It is a simple agreement providing for a Firm to continue some portion of an Employee's wages during a disability.

Q:  What kind of Firms may adopt a plan?
A:  Any Corporation, Professional Corporation, Partnership or Sole Proprietor

Q:  Is the money paid to a disabled Employee under a Plan classified as Wages?
A:  Yes, and such Plan Payments are tax-deductible by the Firm as a Business Expense (under Section 162 of the Internal Revenue Code).

Q:  When must a Plan be adopted by the Firm?
A:  Before the employee becomes disabled.

Q:  Must the Plan be in writing?
A:  Yes, and the Employee must be aware of its terms (as required by ERISA).

Q:  Is the necessary documentation required for a Plan a complex arrangement?
A:  No, it consists of adopting a simple Plan Resolution and then providing the Employee with a simple Plan Letter.

Q:  What would be the status of a disabled person who is not covered by a Plan before the disability begins?
A:  Such a person would be considered to be an Ex-Employee.

Q:  If money is paid to a disabled Ex-Employee, can it be called Wages?
A:  No, because Wages can only be paid to Employees.

Q:  What term would be applied to money paid to a disabled Ex-Employee?
A:  The money has been described by the Federal Tax Court as Ad Hoc Payments, which are taxable to the key employee as ordinary income.

Q:  Are Ad Hoc Payments tax-deductible to the Firm?
A:  No, the court has held them not to be a Business Expense, and the Firm has lost the deduction.

Q:  Suppose a Firm does not have a Qualified Sick Pay Plan, and when a key person becomes disabled, the Firm decides to continue to pay some income to the key person.  Then let's suppose the Firm fails to disclose that it is paying income to a disabled Ex-Employee.  How is this likely to come to the attention of the Internal Revenue Service?
A:  When the Ex-Employee applies for the Social Security Disability Benefit, or when an audit is conducted by the Internal Revenue Service, the subterfuge will be obvious.

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