Question: A company is changing its current sick pay plan from a third-party insured plan to a self-insured plan. Are benefit payments under a self-insured plan subject to the supplemental wage withholding rules?
Answer: Payments under a self-insured sick pay plan are regular pay if paid at the same rate as the employee’s regular wages. If the benefit is paid at a different rate, then the payments are supplemental wages.
Regular wage payments are amounts paid by an employer for a payroll period at a regular hourly rate or a predetermined fixed amount. Payment methods that fall under “regular hourly rate” include amounts paid for the current payroll period at a regular hourly, daily, or similar periodic rate, such as a piece rate or stint system, but does not include overtime premium. Regular wages also include a predetermined fixed determinable amount for the current payroll period such as a salary.
Wages that vary from pay period to pay period, such as commissions, reported tips, overtime pay, and bonuses, are generally considered supplemental wages. However, the regulation provides options for the employer to treat tips or overtime pay as regular wages.
Supplemental wages are all other wages paid by an employer that do not qualify as regular hourly rates or predetermined fixed amounts. This includes payments made without regard to the employee’s payroll period.
Examples include commissions, bonuses, back pay, expense reimbursements reportable as wages, noncash fringe benefits and other forms of compensation including sick pay paid by a third-party agent of the employer.
Amounts described as supplemental wages remain supplemental wages regardless of whether the employer has paid the employee any regular wages during the calendar year of payment or any prior calendar year.
Notably, if employees receive remunerations that are not subject to income tax withholding, the sums will be considered neither regular wages nor supplemental wages. Examples of taxable amounts include the taxable portion of employer provided group term life insurance and personal use of an employer-provided vehicle. Nontaxable amounts include expense reimbursements under an accountable plan.
Payments of sick pay by a third party that is not an agent of the employer (e.g., insured plan) are not considered wages paid by the employer and so are not subject to federal income tax withholding unless the employee requests that tax be withheld. To request withholding the employee must provide Form-W-4S, Request for Federal Income Tax Withholding From Sick Pay, to the third-party provider. The request is for a specific amount to be withheld from each payment.
Sick pay, in general, is an amount paid under a plan arising from an employee’s temporary absence from work due to injury, sickness, or disability. It can be short- or long-term and may be referred to as either sick pay or disability pay. Sick pay does not include disability retirement payments, workers’ compensation including payments in the nature of workers’ compensation, medical expense payments, or payments unrelated to absence from work such as a payment for loss of a member of the body.
A payment or part of a payment that is attributable to employee after-tax contributions to the plan or a payment made to the employee’s estate or survivor after the employee’s death are not subject to federal income tax withholding.
Sick pay paid by a third party that is an agent of the employer is deemed to be an employer payment. Payments by either the employer or the third-party agent are subject to the same withholding and reporting rules as regular pay. If the sick pay is paid at the same rate as the employee’s regular pay, it is regular pay. However, if the sick pay is paid at a different rate than the employee’s regular rate for the pay period, the sick pay is supplemental pay.
This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.
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