Disability Coverage
John F . Nichols MSM , CLU
How Is a QSPP Implemented ?
A QSPP requires two components : a plan resolution and plan letters to employees .
A plan resolution is drafted and executed by the company ’ s board . This resolution defines the classes of employees , how benefits will be paid and how long they will be paid .
Plan letters communicate the information to the employees . They can be class-specific .
How Can Benefits Under a QSPP Be Funded ?
This is an important consideration . A QSPP can be fully self-funded , fully insured or a combination . If a plan is fully self-funded , the company can be burdened with all of the responsibility of determining who cannot work and how long they can ’ t work and of paying benefits from company accounts during a time when , depending on the person who cannot work , the company may need the funds the most . Additionally , the FASB 112 Accounting Rule makes a company become an insurance company by requiring it to carry the present value of future claims as a liability on the balance sheet if it chooses to self-fund a salary continuation program . Two implications of FASB 112 are :
• Companies with self-funded disability programs must set aside all the money upfront
• This requirement can significantly reduce profits while increasing liabilities
Under a QSPP plan with disability income insurance , the insurance company determines when your employees cannot work , the insurance company determines how long they cannot work and the company pays smaller , regular payments for the benefit during a time when all employees are actively at work . A fully insured plan not only takes much of the liability away from the employer , but it also allows the company to predict future plan costs . Disability income insurance premiums are level for the life of the policies . Three tax shelters of an insured salary continuation program are :
• Premiums paid are deductible as a fringe benefit expense ( IRC Section 162 ( a )).
• Employer premiums are not included in employee ’ s taxable income . ( IRC Section 106 ).
• A special tax credit may be available for employees that are permanently and totally disabled ( IRC Section 22 ( b )).
In working with the son of the owners of a medium-sized technology security firm , I learned that Mom and Dad would take care of the son if anything were ever to happen . As a financial adviser , what do we do now ? A conversation about the company benefits and what the parent / owners wanted to have happen with their family and their employees created an opportunity . By educating the clients on sick pay plans , we were able to provide better recommendations to the owner ( parents ) for the benefit of the son and the other employees while keeping the firm in legal compliance .
Divorce Settlements
Most if not all settlements include division of assets and liabilities owned by the parties . Additionally , when appropriate , especially if there are children involved , there is an alimony agreement . What happens to the continuing alimony payment if the payer becomes sick or hurt and unable to earn the income to make the support payment ?
With the divorce rate at 50 % or higher for U . S . marriages , there is an opportunity to protect a spouse and provide the children a source of income used for living and educational expenses . The solution is to place a disability insurance policy on the payer , with the spouse as beneficiary .
Occupational Diversity
Students , coaches , umpires , golf professionals , chefs , race car drivers , comedians and musicians , to name just a few , are thought to have a hard time obtaining disability income insurance . They are not hard to
TODAY ’ S PRACTICE : CHANGING THE BUSINESS OF MEDICINE 66