What is Third Party Sick Pay?
Third party sick pay is an insurance disability benefit (payment) that provides benefits to employees in place of lost wages due to absences caused by an illness or non work related injury. These payments are made to covered employees under a plan that is set up for participating employers. These payments typically are a percent of the employee’s gross pay and commonly referred to as short-term disability.
Who issues Third Party Sick Pay?
Typically, Third Party Administrators (TPAs), such as an insurance company, issue sick pay in place of lost wages. In rare cases, some companies may choose to manage this function internally.
Taxing of Third Party Sick Pay Payments:
- If the employer pays the entire insurance premium, then the sick pay payments received are 100% taxable to the employee.
- If the employer pays a portion of the premium and the employee pays the balance with after tax dollars, then the sick pay payments are taxable in the same proportion as the percentage of the premium paid by the employer.
- If the employer pays nothing and the employee pays the entire premium with pre-tax dollars, then the sick pay payments received are 100% taxable to the employee.
- If the employer pays nothing and the employee pays the entire premium with after tax dollars, then the sick pay payments received are not taxable to the employee.
Who is Responsible for Reporting and Taxing Third Party Sick Pay?
The employer that the employee worked for prior to going out on disability is responsible for reporting the third party sick payments and paying any associated taxes. The TPA will notify the employer of:
- The name and social security number of the recipient(s) receiving sick pay.
- The amount of gross wages (sick pay) paid by the plan.
The employer is responsible for:
- Reporting third party sick pay
- Matching the Social Security and Medicare tax withheld,
- Paying any Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA) that may be due if the employee is below the taxable wage base
Since it is the employers’ responsibility to ensure that the TPA has taxed the sick pay payments correctly from a withholding perspective, it is recommended that employers closely monitor the processing of these payments to avoid having retroactive corrections at year-end.
If you have questions or would like to learn more about Third Party Sick Pay, please contact us anytime or give us a call at 781-272-4900.
Genesis HR Solutions is the premier PEO provider for Massachusetts based businesses.
