What are supplemental unemployment benefits?

Supplemental unemployment benefits provide periodic payments to employees who are laid off due to a reduction in force or mandatory training. Employees who are temporarily claiming unemployment due to an illness or injury can also receive these payments. Unlike temporary disability insurance, the payments come directly from your company rather than an insurance company.

How does a SUB plan compare to a severance package?

Severance packages are lump sums that your company would pay when laying off employees. You can determine the amount of the payment based on any criteria you choose. Most often, the duration of employment and current salary are key factors in determining the amount of a severance package.

Supplemental employee benefits are paid over time. The payments bridge the gap between what traditional unemployment benefits pay employees and their usual earnings. For example, an employee making $1,000 per week prior to a layoff who receives $500 in state unemployment benefits would receive a weekly payment of $500 from an SUB plan.

What’s a reemployment bonus?

A reemployment bonus is an optional feature of SUB plans that provides an extra payment to employees when they’re rehired following a layoff. Adding one to your SUB plan can encourage employees to return to work quickly when you’re ready to reemploy them.

What are the benefits of SUB plans for employers?

SUB plans benefit employers by:

• Providing tax savings: Your company must pay FICA taxes on severance pay because the IRS considers it income. SUB plans are classified as benefits and don’t increase your FICA tax liability.
• Enhancing benefits packages:A SUB plan provides a meaningful benefit for employees and can help your company attract candidates.
• Improving cash flow: During slowdowns, it may be easier to make SUB plan payments to employees rather than large, lump-sum severance payments.
• Increasing employee retention: SUB plans encourage employee loyalty and can increase the likelihood your team will return to work when you’re ready to rehire, especially if you offer a reemployment bonus.

What are the benefits of SUB plans for employees?

SUB plans benefit employees by:

• Making temporary layoffs, illness and disability less stressful. A SUB plan provides assurance that employees can maintain their standard of living while out of work.
• Allowing them to receive full unemployment benefits. Severance package payments may reduce an employee’s unemployment benefits, but SUB plans don’t affect payment calculations.
• Reducing their tax liability. Like your company, employees are responsible for paying FICA taxes on severance pay. SUB plans are only subject to federal, state and local income taxes.

Who pays for SUB plans?

With traditional unemployment benefits, your business pays for 100% of the coverage through your payroll taxes. Supplemental unemployment benefits are generally paid through a trust established by your company or out of general assets, depending on state law requirements. Alternatively, employees can pay for the coverage directly, or you can fund your SUB plan through a mix of employee and employer contributions. With employee-funded plans, payments are pooled into a fund that provides coverage to all staff members.

Who’s eligible to receive payments from a SUB plan?

Generally, an employee must qualify for and be receiving traditional unemployment benefits in your state to be eligible for payments through a SUB plan. Visit your state’s Department of Labor website for more information.

How does a company start providing supplemental unemployment benefits?

Although SUB plans are legal in all 50 states, the laws that govern them vary widely. Setting up a SUB plan is a lengthy process, and care must be taken to ensure the plan is administered properly. The IRS hasn’t provided guidelines on how the CARES Act affects the plans, which complicates matters. For guidance, consult an attorney experienced in supplemental unemployment benefits and establishing SUB plans.