Cal. Code Regs. tit. 22 § 931.5-1

Current through Register 2024 Notice Reg. No. 24, June 14, 2024

Section 931.5-1 - Third Party Sick Pay

(a) Wages. Wages include payments made for sickness or accident disability pursuant to Section 931(a) of the code, unless the payment is made under a worker's compensation law or after the period specified in Section 933 of the code. Payments for sickness or accident disability made by a third party are considered wages for purposes of unemployment insurance and the employment training fund and are not wages for disability insurance purposes. Payments for sickness or accident disability made by a third party are not subject to California personal income tax withholding unless a request has been filed pursuant to Section 13028.6 of the code.

(b) Reporting Requirements. A third party payer who makes sick pay payments shall be treated as the employer unless the third party payer complies with the notification requirements of Section 931.5 of the code. If the third party payer does not meet the notification requirements of Section 931.5 of the code, then the third party payer must comply with the reporting requirements of subdivision (a) of Section 1088 of the code and must pay any contributions which are due for unemployment insurance and the employment training fund. See Section 13050(d) of the code for reporting requirements pursuant to Division 6 of the code.

(c) Third Party Payer. For purposes of this section a third party payer is the party who makes payments on account of sickness or accident disability and who is not the party for whom the employee performed services. The payments must be made on account of employment, as defined in Section 601 of the code, and must result from funding by an employer which was not includible in the gross income of the employee; therefore, payments made through funding by an employee for sickness and disability are excluded under this section. Contributions paid by an employee to fund the State disability insurance program pursuant to Part 2 of Division 1 of the code are a contribution by the employee, and therefore the benefits do not constitute third party sick pay. See subdivision (d) of this regulation for situations involving payments made partially by the employer and partially by the employee.

A party making a payment on account of sickness or accident disability as an agent of the employer or making such payment directly to the employer, is not a third party payer and will not be treated as the employer under subdivision (a). The determining factor, in distinguishing between a third party payer and an agent for this purpose, is whether the payer bears any risk. If the payer bears no insurance risk and is reimbursed on a cost plus fee basis, the payer is not a third party even if the payer is responsible for making determinations of the eligibility of individual employees of the employer. Without insurance risk the third party is making payments with the employer's money, and therefore the employer must report the sick pay as wages. If the payer is paid an insurance premium and is not reimbursed on a cost plus fee basis, the payer is a third party payer, but may be treated as the employer in accordance with subdivision (b).

The application of the provisions of this paragraph may be illustrated by the following examples:

EXAMPLE 1. Pursuant to an agreement with Company U, Insurance Company V makes payments on account of sickness or accident disability to U's employees. Such payments are not made under a workers' compensation law. U reimburses V for all such payments and pays V a fee for its expenses of administering the payments. V is an agent of the employer and is not a third party payer.

EXAMPLE 2. Pursuant to an agreement with Company W, Insurance Company X indemnifies W for the amount of any payments which W must make to an employee on account of sickness or accident disability. Such payments are not made under a workers' compensation law. X makes its indemnity payments directly to W. W makes the payments to its employees. X is not a third party payer.

EXAMPLE 3. Pursuant to an agreement with Company Y, Insurance Company Z makes payments on account of sickness or accident disability to Y's employees. Such payments are not made under a workers' compensation law. Z does not notify Y of the amount of such payments within the time required by law. Z is treated as the employer with respect to such payments.

(d) Determination of taxable wages. In those cases where the employer and the employee each pay a portion of the premiums or payments to a plan, the amount attributable to the employer is taxable wages and shall be determined in accordance with the following:

(1) Individual policies. If the sick pay coverage is provided under an individual policy of accident or health insurance purchased by premiums paid partly by the employer and partly by the employee, the portion of the benefit amount received which is attributable to the employer's pro rata share of the premiums for the current policy year represents taxable wages. This rule may be illustrated by the following example:

EXAMPLE. Employer A maintains a plan whereby he pays two-thirds of the annual premium cost on individual policies of sickness and accident disability insurance for his employee. The remainder of each employee's premium is paid by a payroll deduction from the wages of the employee. The annual premium for employee H is $240, of which $160 is paid by the employer. Thus, $160/$240 or two-thirds of all amounts received by H under such insurance policy are attributable to the premiums paid by the employer.

(2) Group Policies. If the sick pay coverage is provided under or is a part of a group insurance policy purchased with premiums paid by the employer and the employees, that portion of the benefit amount received by an employee which is attributable to employer's pro rata share of the net premiums for the last three policy years which are known at the beginning of the calendar year represents taxable wages. Net premiums are the total premiums less retroactive premium adjustments, such as dividends and credits. If the net premiums for coverage for a period of at least three policy years are not known at the beginning of the calendar year but are known for at least one policy year, the determination of taxable wages shall be made by using the net premiums which are known at the beginning of the calendar year. If the net premiums for coverage are not known at the beginning of the calendar year for even one policy year, the determination of taxable wages shall be made by using a reasonable estimate of the net premiums for the first policy year. These rules may be illustrated by the following examples:

EXAMPLE 1. Company X purchased a package of group insurance benefits from an insurance company. The company pays $60 per month per employee and each employee pays $30 per month for the coverage. The company designated its payment of $60 per month as applying to the cost of long-term disability insurance (payable after the employee is off work more than 6 months), life insurance, and medical insurance, all of which are included in the coverage. The $30 paid by the employee is designated as a premium for short-term sickness and disability insurance also included in the coverage. Employee B is off sick and receives sick pay of $75 per week for two weeks. The benefit is fully attributable to B's own payments and does not constitute wages.

EXAMPLE 2. Employee C received sick pay of $1,200 from an insurance company. The net premiums for the prior policy year were not known at the beginning of the calendar year because certain retroactive premium adjustments and credits are not determinable until after January 1. During the prior three policy years the net premiums were $5,000 the first year, of which the employer contributed $3,500; $6,500 the second year, of which the employer contributed $4,000; and $3,500 the third year, of which the employer contributed $2,500. C received taxable wages of $800 which was determined by using the ratio of $10,000 ($3,500 plus $4,000 plus $2,500) to $15,000 ($5,000 plus $6,500 plus $3,500). Thus, $10,000/$15,000 or two-thirds of the benefit received ($1,200) = $800.

(3) Noninsured plans. If the sick pay benefits are paid from a noninsured plan (such as a trust providing incidental sick and accident disability benefits or an association funded to pay sickness and accident disability benefits to which both the employer and employee contribute) the portion of the amounts received which are attributable to employer payments shall be determined in accordance with the rules contained in paragraph (2) of this subdivision.

(e) Last Employer. The last employer for whom the employee worked prior to becoming sick or disabled or for whom the employee was working at the time he became sick or disabled shall be deemed to be the last employer for purposes of this section, provided that the employer made contributions on behalf of the employee to the plan or system under which the employee is being paid. The application of these rules may be illustrated by the following examples:

EXAMPLE 1. B is employed by Company M. B becomes sick and is absent from work for 3 months. While B is absent from work, he receives sick pay from Insurance Company N pursuant to a plan established by M and to which M has made contributions on behalf of B. M is the employer for purposes of this section.

EXAMPLE 2. C is employed by Company O and is also employed on a part-time basis by Company Q. C becomes sick while at work a Q's place of business. C is absent from work for 3 months. While C is absent from work, he receives sick pay from Insurance Company P pursuant to a plan established by O and to which O has made contributions on behalf of C. Q is not a member of the plan and has made no contributions on behalf of C. O is the employer for purposes of this section.

EXAMPLE 3. D is a member of a labor union whose members receive health and welfare benefit payments from a trust fund which is supported by the payments from the various employers who employ the labor Union's members. D has been employed by Company R for 4 days when be becomes sick and is absent from work for 3 months. While D is absent from work he receives sick pay from his union's trust fund to which R has made contributions on D's behalf. R is the employer for purposes of this section.

(f) Multiple employer plan. A multiple employer plan is a plan to which more than one employer provides contributions to fund payment on account of sickness or accident disability. The plan may be set up pursuant to a collectively bargained agreement or by employers who voluntarily join together to obtain insurance, to benefit from discounts or to provide a plan which would not be obtainable for small entities.

Cal. Code Regs. Tit. 22, § 931.5-1

1. New section filed 10-27-89; operative 11-26-89 (Register 89, No. 45).

Note: Authority cited: Sections 305 and 306, Unemployment Insurance Code. Reference: Sections 931, 931.5, 933, 1088, 13028.6 and 13050, Unemployment Insurance Code.

1. New section filed 10-27-89; operative 11-26-89 (Register 89, No. 45).