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

Employment at Will Laws by State

Employment at Will Laws by State

Unlike most nations, the US labor law heavily favors employers. Employment is generally ‘at will’, and can therefore be terminated at any time. There is usually no burden on employers to prove “just cause”—they simply have to avoid discriminatory or illegal action. However, many states do apply important exemptions.To visualize these difference, we’ve created a map detailing at-will employment laws across the US.Here are at-will employment rules by state broken down in a helpful table. State Public Policy Exemption Covenant of Good Faith Implied Contract Exception Alabama No Yes Yes Alaska Yes Yes Yes Arizona Yes Yes Yes Arkansas Yes Yes Yes California Yes Yes Yes Colorado Yes Yes Yes Connecticut Yes Yes Yes Delaware Yes Yes No Florida...

Emergency COVID Leave Request Form

Emergency COVID Leave Request Form

Businesses are working overtime to create safe workplaces, but when a COVID surge hits your community, there’s only so much you can do. Employees may suddenly require time off—to isolate, care for their children or quarantine, if instructed to do so by local authorities.In these cases, employees will qualify for Emergency Sick Leave and Emergency FMLA, as established back in March by the Families First Coronavirus Response Act (FFCRA). Download COVID-Related Leave Request Form Emergency Leave for COVID The FFCRA applies to companies with 500 employees or fewer, and offers: Extended Paid Sick Leave Two weeks (up to 80 hours) at 100% of regular salary (up to $511 daily and $5,110 total) if an employee is … Quarantined (ordered by...

Employee Vaccination Policy Template

Employee Vaccination Policy Template

Employers have a responsibility for the health and safety of their employees, but is it their place to enforce mandatory vaccinations? And is that even legal? Every year, employers ask these very questions and in industries like healthcare, the stakes couldn’t be higher. Now is the time to think about creating an employee vaccination policy—here’s everything you need to know. Download Employee Vaccination Policy Template Can Employers Make a COVID Vaccine Mandatory? The reality is, at this stage we don’t know which vaccines will be released on the market first—there are big questions to be answered about how widely available vaccines will be, their cost and their effectiveness. It may be some time until a vaccine is freely available to...

Webinar: Getting it All Done: 6 Compliance Issues your HR Department Must Embrace - 12/31 @11AM ET

Webinar: Getting it All Done: 6 Compliance Issues your HR Department Must Embrace - 12/31 @11AM ET

For HR departments to avoid costly errors and fines, there are 6 areas of compliance they need to consistently follow. During this webinar, we’ll breakdown each area and provide actionable steps to take to gain visibility as a strategic HR leader at your organization.Speaker: Lori Kleiman Lori Kleiman is a business expert with more than 25 years of experience advising companies on HR issues. Her background as a human resources professional and consultant gives her unique insight on how HR professionals and executives can work together effectively to achieve business goals. Her programs are designed to provide critical HR updates and best practices to small businesses. In addition, she is has served as adjunct faculty member at a number...