below minimum wage for disability

mushroomHR

We are contemplating changing our short term disability payments to an "advice to pay" system. This way by paying short term disability to our employees through our own payroll system we can still make their payroll deductions such as insurance premiums, child support, garnishments, etc.

Would there be any problems if these deductions take the paycheck for an employee below minimum wage? The employee would not be working so I don't know if that would have an impact as far as their pay goes. I know if they were working you cannot take their rate below minimum wage but what if they aren't performing any work but collecting disability? Some of our employees don't collect very much for disability as it's a percentage of their pay and with all the deductions, this could happen.

Thanks.

SMace

My idea of minimum wage is payment for actual work. I don't believe the laws apply to benefits. When they complain that they are not even making minimum wage, your response could be, you're lucky we are paying you anything at all. I would paraphrase that a little more diplomatically, however.

Don D

I'm trying to figure out why you'd want to do this. It would increase the employer's payroll taxes, increase your payroll staff's administrative burden, have significant tax consequences for the employee and probably some other downsides I can't think of right off.

mushroomHR

We were paying the employer's payroll taxes anyway. We were only using the insurance company for administrative purposes. This is not a fully funded short term disability arrangement. It will be easier for us if we go on an advice to pay and issue the check through our payroll system and it will be less of a burden administratively. The problem we've been having is collecting the employee's share of their health insurance premiums while they're on disability. They always seem to forget to pay on time and I have to constantly remind them they owe us money. By us issuing the disability check we can take the premium directly from their check. It will also be easier for our payroll department when it comes to child support, misc. garnishments and the employee's voluntary weekly insurance premiums.

The company currently doing the administration of our disability and issuing checks will not make any withholdings other than taxes and court ordered child support.

What do you think the significant tax consequences would be for the employees Don? I'm not very knowledgable when it comes to payroll so I don't know what the consequences could be. Thanks for all of your input.

SMace

There is no difference in payroll taxes the way you are proposing. You are either paying someone to write checks out of your account or your doing it yourself. We are doing exactly what you are taling about. We used to pay our TPA to write disability checks. They provided zero investigation as to whether the claims were valid. We now use JP and they investigate the claims and we pay then through our payroll system. It has actually helped us weed out some claims and keep a better handle on deductions. We take out all normal deductions except 401k and adjust garnishments as necessary. No matter who issues the check the tax consequences are the same as far as I know. Keep in mind that this is a self-funded plan.

We've been doing this for almost a year and the system has been working well.

PS Don't worry about minimum wage but make sure you garnish correctly.

Don D

Our Controller advises that payments under a 'short term disability' program are considered insurance rather than wages and therefore don't have the deductions that wages do. They also come through a third party with whom we contract to handle the disability program which is self funded. They do terribly meticulous investigations also.

The tax consequence to the employee that I spoke of would be that under the insurance payment, there are not the deductions; whereas, if it were run through payroll, there would be numerous deductions.

Our short term pays 66.66% of normal weekly wage, as does WC in our state. Although the short term program is not in any way controlled by or through the state.

SMace

We do not take taxes out of their check. We do take deductions, such as insurance payments, 401k loan payments (unless they state otherwise- if their payoff is less than 5 years they can skip payments), garnishments, etc. What I meant when I talked about payroll taxes is FICA. We pay FICA any way you slice it.

They are going to have to pay the deductions one way or another. We just help them by taking it out of their check.

Don D

I'm no tax expert but don't see that FICA should come out of insurance proceeds, which is what std is, typically. But, surely your accounting people have long ago cleared this.

SMace

Maybe Marc or another accounting person can weigh in. I'm pretty sure FICA is taken out. Could be wrong. Your right Don, I let acct. deal with that stuff. They go through a several week audit every year, so I'm confident they do what is right. Don't have time to check. I'll let it die unless someone else weighs in.

Mushroom, I think you'll find that you made a good choice.

mushroomHR

The decision is made. We will be issuing the checks through our payroll system rather than having the insurance company issue the payments. They will still administrate the claim, tell us if it OK to pay and for how long. We will issue the check and take all deductions. This will make it much easier for us to collect the premiums the employees owe plus their child support and garnishments.

E Wart

We have been doing this for years. It isn't really an insurance policy for a benefit where employees are paid (by the company) for 60% of their base wages (no ot or bonus) if out. First day if injury 8th day if illness. (This is very similar to a funded policy.) Since this is considered "compensation" everything is taken out. However, when your W/C auditor comes, make sure you have a different code to show this STD because they (at least in GA, TN, CO, NC, CA, CT, TX) do not consider this disability pay in their W/C premium calculations. (But must be able to show it is separate.)

E Wart

marc

The tax treatment for disability payments through an insurance policy depends on a number of factors. In our shop, we require the deductions to be taken out of the EEs after tax paycheck. That means the payments are not taxable when an EE receives the benefit. If one were to take the payroll deductions out as part of a pre-tax cafeteria plan, then the payments would be full taxable. Make sense?