What is a supplemental unemployment benefit (SUB) plan?

A SUB is a benefit that’s meant to approximate the working wage of an involuntarily unemployed worker who’s also collecting state unemployment wage benefits. Primarily, SUB plans were for blue-collar workers who were more prone to cyclical unemployment, such as those in the farm and automobile industries.

The one major issue workers ran into was with the IRS. Unemployment insurance benefits stated that employees who were collecting wages would be ineligible to collect unemployment. In response to this, the IRS adjusted the definition of wages under Revenue Ruling 90-72 to reclassify the SUB as a benefit instead of a wage. Over the last 25 years, this benefit has been adopted by other industries, primarily because of the benefits it provides employers.

Types of supplemental unemployment benefits

SUBs can be used during times when temporary layoffs have been extended or have become permanent reductions-in-force and during furlough periods when employees work fewer hours than normal. SUB funds can be individual or collective. In an individual fund, the employees contribute to accounts from which they can take their benefits, while a collective fund is a common fund that’s used by multiple employees. SUB payments can be made from an employer’s assets or from a tax-exempt trust fund that’s been preapproved by the IRS.

How do SUB plans work?

SUB plans are linked to the state’s unemployment insurance scheme, so if the individual is ineligible for the state unemployment payment, they can’t receive a SUB payment. If the qualified unemployed worker typically makes $650 weekly, for example, and is only paid $400 by the state unemployment plan, the supplemental unemployment benefit would add that $250 to make that employee on par with what they were making.

Benefits for employers and employees

While this may not be a well-known benefit, the savings to employers makes it a highly attractive option over the traditional severance package plan for a few reasons.

• Tax savings: On severance packages with a salary continuation plan, for example, employees must pay close to 8% in FICA taxes, which fund Social Security and Medicare, as well as close to 3% in federal and state unemployment taxes, commonly known as FUTA and SUTA. With a SUB plan, they only pay the benefit money, saving them close to 11% in taxes.
• Cash flow management: Some employers offer a lump-sum severance, but from the employee point of view, payments over time are easier to manage, in addition to being an efficient way for organizations to manage their cash flow. SUBs are always administered over designated periods and never in a lump sum.
• Better terms: Because it’s tied to the state unemployment plan, the objective of the SUB is to make the employee’s weekly income whole until they find a new job.

Little-known SUB plan design options

In general, severance and separation benefit plans are confidential, so unless employees have worked for a company that uses SUB plans in their benefits packages, they may not be aware that they exist or how flexible they are. Some little-known benefits include:

• Reemployment bonus: Should the employee be reemployed prior to the benefit expiration, approximately 30% to 50% of the remaining benefit may be offered as an incentive for employees to return.
• Additional assistance: Whatever savings the employer gets can be used to provide additional help to unemployed individuals after that initial benefit period.
• Standard benefit amount: Employers can pay a flat amount to employees regardless of what they’re getting from state unemployment. That means for the employee receiving $400 of their usual $650 weekly wage, employers can pay their own designated amount—$200, for example—during their benefit period.

Potential challenges for SUB plans

While there are plenty of reasons for businesses to adopt this supplemental unemployment scheme as an attractive job perk versus a typical severance, there are a few challenges that need to be considered. First and foremost, it’s a time-consuming administration that’s not easy to create. Employers have to get it approved before they can get started.

Secondly, the Coronavirus Aid, Relief and Economic Security (CARES) Act section of the Federal Pandemic Unemployment Compensation is unclear about how SUBs affect or are affected by CARES. One question is whether the waiting period waiver for state benefits also applies to SUB benefits. It’s also unclear how the SUB-pay calculation would need to be adjusted due to the weekly federal benefit and the separate state compensation. There’s also the question of whether employers need to design their plans to match the additional 13-week extensions CARES enacts. Going forward, these are the types of challenges the IRS, states and employers need to understand so they can be more prepared for the next potential global challenge.

FAQ

Are supplemental unemployment benefits the same as unemployment benefits?

While they’re related, they’re not the same. Unemployment benefits are provided by the state in response to an employee experiencing reduction-in-force or furlough. Supplemental unemployment is tied to state benefits and is designed to provide additional tax-exempt income.

What is the purpose of a supplemental unemployment benefit plan?

The SUB is meant to bring the unemployed person’s wage closer to what they earned when they were employed. Because state unemployment doesn’t always provide a livable wage, the SUB makes up the difference to provide employees with a comparable weekly wage.

What is the difference between severance and SUB pay?

Severance can be given as a lump sum or as a continued payment for a period of weeks. This wage is subject to FICA and other taxes. SUB pay is a weekly supplementary benefit that’s tax-exempt and cheaper for employers to implement because they save by not paying those taxes.