5 best practices.
it’s often been said that disability is much harder to deal with than death, from the standpoint of firm governance. death is clear and finite. but disability is much more complicated and unclear.
more on partnership: when votes must be taken, what are the options? | why voting isn’t such a big deal | what’s in a (firm) name? | protect your business with a solid partner agreement
exclusively for pro members. log in here or 2022世界杯足球排名 today.
- what is the extent of the disability?
- what is the likelihood that the partner can fully recover?
- how long will the recovery take?
- when the partner returns to work, is he or she capable of performing normal partner duties and working normal partner hours?
two types of disability
- temporary disability. situations in which partners suffer a disability that prevents them from working as partners in the firm for a limited period of time, usually less than a year. many temporarily disabled partners hope to return full time. examples: heart attack, serious automobile accident, surgery.
- permanent disability. situations in which partners suffer a disability that permanently prevents them from working as partners in the firm. the vast majority of firms stipulate in their partner agreements that if partners are unable to return to work within a year, they are declared permanently disabled and retired.
disability insurance
some firms carry partner disability insurance and some do not. the high cost persuades many firms to forgo this insurance. another consideration is that most disability policies cover only a fraction – rarely over 60 percent – of a partner’s compensation.
notice and client transition
virtually all firms waive the requirements for notice and client transition when a partner becomes permanently disabled.
disability definition
consistent with the statement that disability is more complicated than death, one of the key issues to address in the partner agreement is the definition of partner disability.
here is a definition that most firms prefer: the inability of a partner to conduct and carry on normal functions and responsibilities as a partner during normal business days (monday through friday of each week, excluding holidays, saturdays and sundays) on a full-time basis because of physical or mental impairment. note that this is a more strict definition of disability than is often found in disability insurance policies.
best practices in cpa firm partner disability
1. in many cases, it’s not clear when the newly disabled partner will be able to return to work. until permanent disablement is determined, there may be a period of time when the partner returns to work and then stops, or works less than full time. the following wording addresses this situation:
- permanent disability shall be declared if partners are off work for an aggregate period of 75 days (not necessarily consecutive) during any 12-month period (not necessarily a calendar year period). this is subject to the condition that, if such partners resume their normal partner duties for at least 25 hours during any week, then no portion of such week shall be counted as one of the 75 days.
- permanent disability shall be declared when there is no reasonable expectation of recovering from the illness or injury, based on a written opinion of a physician.
2. the term “disability” shall not automatically include the consequences of alcohol, drug or other substance abuse. a period of rehabilitation may be granted or withheld by the partners at their discretion. a partner may be granted a leave of absence, without pay, while actively pursuing rehabilitation and making satisfactory progress, as determined to the satisfaction of the other partners, toward such rehabilitation.
3. a partner disabled for one year will be deemed to have retired.
4. during the period in which a partner is disabled but not yet declared permanently disabled, a method of compensating the partner is needed.
we have seen a great many rules and conventions adopted by various firms. these are the variables:
- how long is full-time compensation paid?
- how long is any form of compensation paid?
- if compensation is paid, what percentage of full-time compensation should be paid?
here are examples of rules we’ve seen:
- full time for six months and nothing thereafter
- full time for six months and 50 percent for six months
- a percentage of full-time pay for 12 months
the following is a convention we see fairly often that many firms feel is fair and affordable:
during the disability period, partners shall receive 100 percent of their normal compensation for the first three months of disability, 75 percent for the second three months, 50 percent for the third three months and 25 percent for the final three months. all of these payments will be reduced by any disability payments made to the disabled partner.
5. in the case of the permanent disability of a partner when the disability does not occur on the last day of the firm’s fiscal year, the firm will compute the disabled partner’s share of the firm’s full-year income that the disabled partner is entitled to. this computation is necessary because cpa firms typically earn a disproportionate share of their annual income during the tax season.
the share of income that the disabled partner receives will be computed as follows:
- start with computing the firm’s full-year income. this will obviously have to wait until the year is complete.
- determine what would have been the disabled partner’s share of the full-year income, had he or she not become disabled.
- multiply the disabled partner’s share of the firm’s income by a fraction whose numerator is the number of months the partner was active and whose denominator is 12.
- the amount due a disabled partner will be reduced by any periodic draws and/or salary payments previously made.
alternatively, the firm can simply decide that whatever income a disabled partner received at the onset of the disability is the final compensation amount that the firm owes him or her.
total partner income includes all tiers of partner income, such as interest on capital, draw, salary, bonuses and all other distributions.