Salary Continuation Plans For Business Owners

A business owner may be confronted with a major problem if either they or one of their key people ever become disabled. Most company group disability plans only replace 60% of the covered person’s salary (and usually up to a maximum of $5,000) and do not include bonus payments. Not only would losing 40% or more of one’s income be a crisis, but also many business owners pay themselves a salary and then supplement it with quarterly or yearly bonuses based on company profits. These supplemental payments, as well as salary above your group limits, are not included under group disability plans.
Occasionally, some business owners feel that if they were disabled, the business could just continue to pay their salary or pass on profit payments when needed. However, this poses two problems. First, few businesses can afford to pay two people for the same job. And even if they could, the IRS says that for payments to be considered salary, they must be made for providing services for the business. Otherwise, payments must be considered dividends and dividends are not tax deductible. That’s a problem!
Is there a better way? Yes! The IRS allows a business to establish a wage continuation plan for the benefit of the owner and if desired, key people whom the owner wants to include. These people can be chosen at will, and can be added or deleted, but the plan must be established before a disability occurs. The plan is initiated by creating a company resolution and future benefit payments can then be regarded as salary – not dividends.
Interested in more details…possibly a sample resolution to review? Disability is a serious matter. And having a resolution in place is an easy remedy to a serious problem.