Supplemental Unemployment Plans Benefit Employees and Employers

Employers should consider supplemental unemployment benefit plans as a tax-advantaged alternative to severance pay, two benefit plan experts said May 15.

A supplemental unemployment benefit plan, commonly referred to as a “SUB-pay plan,” provide extra compensation to former employees that is in addition to their state unemployment benefits, said Tom Towson, managing director for employment tax consulting at Equifax Workforce Solutions. Unlike severance pay, SUB-pay plans are considered a benefit exempt from employee and employer Social Security and Medicare taxes and employer federal and state unemployment tax.

SUB-pay plans can have two other additional benefits over severance pay, he added. Since the plans only supplement state unemployment benefits, the amount paid by the employer might be less than certain severance pay that provides former employees their full wage for a predetermined amount of time. Additionally, SUB-pay plans can cease once a former employee is reemployed.

“Many plans will incorporate a reemployment bonus,” Towson said at PayrollOrg’s 43rd Congress in Kissimmee, Florida. “If I’m an employee and I deserve 12 weeks of benefits, what’s the incentive for me to get a job? [The reemployment bonus] gives them a little bit of an incentive to get back to work.”

However, unlike SUB-pay plan benefits, reemployment bonuses are subject to employment taxes, he warned.

Since SUB-pay plans require former employees to be eligible for and receive state unemployment benefits, the plans could result in employers having a slightly increased state unemployment tax rate, added Joe Kane, vice president of Total Management Solutions. This is because former employees have more of an incentive to apply for unemployment benefits under a SUB-pay plan.

Employers concerned about their state unemployment tax rate can conduct a rate impact analysis to determine whether the cost savings of a SUB-pay plan would exceed the any additional amount of state unemployment tax, Towson said.

SUB-pay plans have additional requirements besides the need for former employees to be receiving state unemployment benefits, Kane said. States generally require employers to notify them of any SUB-pay plans and, in some instances, seek state approval. Others also require benefits to be paid from a trust, which requires the filing of IRS Form 1024, Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code.

Other requirements of SUB-pay plans include having a written plan, using objective standards to determine how benefits are paid, and establishing a periodic payment of benefits, Kane added.

“It must be paid out in installments, so no lump sum,” Kane said. “Often, we find that it’s mostly paid out over normal pay schedules. What that means for payroll is keeping [the benefit payment] as it was before. There’s a couple of states that require weekly [payment], but it is not very often, and some states are changing the rules to allow for normal pay cycles.”

Even within its legal constraints, SUB-pay plans can be tailored to fit an employer’s needs, Kane said. For example, if a former employee’s state unemployment benefits expire but the individual is otherwise still eligible for state unemployment benefits, a SUB-pay plan can continue paying benefits to that individual. Plans might also include the aforementioned reemployment bonus, or there may be a provision in the plan that uses any costs savings to help former employees, he said.

"[SUB-pay plans] are a great way to keep people whole while they are unemployed and looking for work,” Kane said.