What are Supplemental Unemployment Benefits?
supplemental unemployment benefits

What are Supplemental Unemployment Benefits?

Reductions in force are unavoidable in economic downturns, but are traditional severance packages the way to go? They can be a big hit to your company’s cash flow and are subject to payroll taxes. The tax-friendlier option, Supplement Unemployment Benefits plans (SUBS), can spread out costs and deliver the same value for the employee, too.

How Do Supplemental Unemployment Benefits Plans Work?

SUBs got popular in the ‘50s as a way to help workers in industries with cyclical employment patterns get a more steady income. SUBs were often fought for in collective bargaining agreements. They’re growing in popularity again across industries. Under a SUB plan, in the event of a Reduction in Force (RIF) or temporary unemployment due to training, illness or injury, laid-off employees maintain their previous salary, with their former employer supplementing their states’ unemployment benefits.

These plans can offer a ‘reemployment bonus’ of some percentage of remaining benefits when a employee returns to work. SUB plans can also offer income support for employees who are required to work reduced hours due to a RIF.

SUB plans are paid out over time, not as a lump sum. To qualify, employees must be eligible for state unemployment benefits (there are exceptions, so you may need to consult an employment attorney). This means plans may differ (in details and quality) depending on which state an employee works.

Benefits of SUB Plans for Employers

The main benefit for employers is that they avoid the pain of a lump sum severance payment. This will be especially helpful if your business just went through a painful downsizing and cash reserves are low or nonexistent. Other good news for participating employers: the IRS categorizes SUB plans as benefits, not wages, and that reduces payroll tax liability. This allows companies to avoid Federal Insurance Contributions Act (FICA) taxes, Federal Unemployment Tax Act (FUTA) costs and state unemployment taxes.

Drawbacks of SUB Plans for Employers

Creating an SUB plan can require a lot of administration and it can’t be used in all situations (which means you may have to develop different versions—again, it can be a time suck). The viability of the strategy is very dependent on state-specific rules. And it’s not easy to create a SUB plan quickly. In some states, employers must seek approval for plan designs prior to implementation.

How the CARES Act impacts the implementation of SUB plans is unclear. There are at least a few ways CARES could influence SUBs. For example, there are now additional eligibility requirements to qualify for unemployment. There’s a waived waiting period. And there’s the extra $600 per week of Federal Pandemic Unemployment Compensation. All those things could affect SUBs, but so far the I.R.S. hasn’t provided guidance.

How Do You Create an SUB Fund?

SUB plans can be funded entirely by an employer or by employees, or by some mix. The standard plan is entirely employer funded, with individual funds for each worker. These replace normal severance payments. Employee-funded SUB plans are different, contributions being shared into a collective fund for all employees.

Typically, Supplemental Employment plans use tax-exempt Section 501 (c) (17) or Section 501(c)(9) Voluntary Employee Benefits Association (VEBA) trusts. However, using these trusts means following additional I.R.S. requirements. In many states it is possible for SUB payments to come out of an employer’s general assets.

Paycor is not a legal, tax, benefit, accounting or investment advisor. All communication from Paycor should be confirmed by your company’s legal, tax, benefit, accounting or investment advisor before making any decisions.

Paycor is Here for You

Paycor builds HR software for leaders of medium & small business. For 30 years, we’ve been listening to and partnering with leaders, so we know what they need: HCM technology that saves time, powerful analytics and expert HR advice to help them solve problems and achieve their goals.

Get HR Expertise

More to Discover

How to Hire Employees in California

How to Hire Employees in California

Wherever you operate, hiring new employees means not only searching for the best talent but also staying compliant. Nowhere is this more true than in California, with businesses needing to be aware of notoriously complex labor laws, relating to all stages of the employment process.For a small business, this can seem overwhelming. How can you recruit and hire great new employees while staying compliant with numerous regulations? The good news is, Paycor can help. Recruitment Best Practice Finding star talent is the same everywhere—you need to make sure that the right people know about the open position, you need to be able to filter applications to select for the skills and attributes you need, and you want a streamlined and optimized...

Types of Wages That Small Businesses Need to Know

Types of Wages That Small Businesses Need to Know

If you’re running a small business, you’ve got a lot on your plate. Right at the top of your list of priorities will be paying employees, and you don’t have time to be confused by all the different terms for kinds of wages and salaries. If you’re just starting out in business, we’ve got you covered. Here’s a breakdown of the types of employee payments that small businesses need to know. Regular Wages Most employees receive wages as part of a regular salary or based on hourly work. Businesses will have to choose the frequency of pay periods to find what works for them while abiding by any state regulations. Salary Wages Employees who receive a salary are guaranteed a fixed sum every pay period. The pay per hour worked must meet the...

Webinar: October Virtual Summit - Maximizing Workplace Health & Safety During a Pandemic - 10/14 @11:30AM ET

Webinar: October Virtual Summit - Maximizing Workplace Health & Safety During a Pandemic - 10/14 @11:30AM ET

As businesses reopen their offices and workplaces, employers must act to provide safe and healthy working environments.Join us for our upcoming webinar as Kara Govro, Senior Legal Analyst, discusses safety strategies for offices as well as workplaces open to the public, what to do if an employee has been diagnosed with COVID-19, and what you should be thinking about with respect to sick leave policies. Speaker: Kara Govro Kara Govro is a Senior Legal Editor for Mammoth HR and been with Mammoth HR for over 5 years.Wednesday, October 14, 2020 11:30AM ET

Webinar: October Virtual Summit - Preparing for Change: How the 2020 Election Could Impact HR Leaders - 10/13 @2PM ET

Webinar: October Virtual Summit - Preparing for Change: How the 2020 Election Could Impact HR Leaders - 10/13 @2PM ET

In a year of so much change, how could there still be more?HR is a heavily regulated industry and election years always bring a degree of uncertainty as those regulations tend to shift pending election results. Attend this session to learn about initiatives that may come into play following the November election. What are some potential workplace initiatives we may witness and will you be ready for these changes? We’ll discuss possible changes, examine and speculate on some additional happenings, and give you solid resources and suggestions for how you can best prepare to have your “HR house” in order!Speaker: Amy Letke Amy is the Founder of Integrity HR, Inc. Amy provides workplace solutions to improve performance, reduce liability and...