A Section 105 Qualified Sick Pay Plan (QSPP) is a plan that enables a firm to make tax-deductible payments to disabled employees covered under the plan. A QSPP does not require filing with the IRS. It is the responsibility of each employer to implement a plan. Certain design and administration issues must be addressed to develop an effective QSPP. Who will be covered, how it will be funded, who decides when benefit payments stop, how much and for how long will the benefits be paid, and who will administer the plan and pay claims?
Ask the IRS “no plan, no deduction” ??, so even if, for example, a 100% share holder of a close corporation goes on disability and decides to pay himself his full salary and was audited, the IRS could consider that unreasonable wages and the company would lose the deductibility of the wages.
The best resolve is to have a disability income insurance contract which answers most of the pertinent questions and helps reduce the liability an employer may face. Adopting a QSPP doesn’t require that an insurance contract be purchased, but there are several advantages; mainly the premiums may be tax deductible, after 6 months the proceeds are exempt from FICA, premiums won’t be taxable to the employee. If you do establish a QSPP though, it would become subject to ERISA and should be included in a Summary Plan Description (SPD).
