By Robert Riesmeyer

Football season is the perfect reminder of a great strategy axiom: The best defense is a good offense.
It is as true in business as it is in football. Smart business owners know that when you offer a benefit package to employees that includes a unique benefit such as a Qualified Sick Pay Plan (QSPP), you'll not only be demonstrating that the company values them for more than just labor, you'll be putting into place a key offensive play that also protects the interests of the business.

Contingency Plan
 A QSPP is a formal agreement that allows a business to continue salary payments to employees, including shareholder-employees, during a period of disability that results in an absence from work. Why would a business want to continue salary payments, and how does this protect the business? Once again, football can illustrate.

In football, it is an inherent risk that players-who are essentially employees-run the risk of suffering a temporary or career-ending injury. When these professional athletes go down, they don't have to worry about the expenses of daily living, because their incomes are protected by a contract.

But many small business owners fail to plan for this same type of probability. What if you had an employee who became too sick or injured to work? What if that employee were a family member? Would you continue to make salary payments?

Most business owners do feel a moral obligation to continue making some form of salary payment. This is especially true when the employee is a shareholder-employee, a family member, or a key employee who has dedicated their service to the success of the company. But if the company does continue to make payments, and does not have a QSPP in place prior to the payments being made, it may find itself playing defense against the IRS.

The Internal Revenue Code prohibits the deduction of salary continuation payments to employees and owner-employees if the business has not established a formal QSPP. Instead, these payments are classified by the IRS as ad hoc and are not considered valid business deductions. The result? What started out as trying to do a good deed ends in the business risking paying hefty taxes on those distributions.

The Setup
Establishing a formal QSPP is not complicated, and your company benefits representative can assist you in tailoring a plan to fit your company's needs. Any form of business organization can establish a QSPP, but because they are not considered employees of the business, sole proprietors, partners, LLC members and stockholders of a subchapter S corporation with more than 2 percent interest are not eligible to participate in a QSPP. Within limits, eligibility for participation in a QSPP can be restricted to certain classes of employees, allowing the company to implement different plans for different classes of employees. A class of employees may contain as few as one employee.

There are essentially two parts to setting up a QSPP. The first is addressing design and administration issues such as:

• Who will be covered?
• How much will be paid?
• When will benefits begin?
• How long will benefits continue?
• How will it be determined when and if a covered employee is disabled?
• Who will approve claims and administer benefits on behalf of the plan?
• How will the benefits payable under the plan be funded?

Administration
The second part is determining whether the QSPP will be self-funded and self-administered, or funded and administered through disability insurance.

In a self-funded plan, the business pays the employee directly from current revenues or sets up a trust that accumulates funds for future payments. The business is responsible for determining validity of claims, proper tax withholding and reporting, and must adhere to other accounting rules. One drawback is the possible financial strain that comes with self-funding the plan if more than one covered employee becomes ill or disabled at the same time.

The second option allows the business to transfer the financial risk and administrative duties to an insurance company. The benefits to using disability insurance includes the ability for the company to deduct the premium payments-exempting employees from paying taxes on the premiums-and transference of administration, claims service and tax reporting to the insurance company.

The bottom line is that offering a QSPP can protect the company and offer current and potential employees a unique benefit that demonstrates the company cares for their health and well-being.

Robert Riesmeyer is the owner of Employee Benefits by Design, a Missouri-based benefits company. You can contact him at (816) 616-6909 or .