John T, Here Are Your Articles for Thursday, October 22, 2020
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What Is a Supplemental Unemployment Benefits Plan?

 

A Supplemental Unemployment Benefits plan is an employer-sponsored benefit that provides severance pay to employees who involuntarily lose their jobs — such as through layoff, reduction in force or plant closing. Payments funneled through the SUB plan are made in addition to the former employee's state unemployment compensation. Therefore, to receive SUB plan payments, discharged workers must qualify for unemployment benefits under state law.

 A SUB plan can be funded by the employer or the employee or both. The plan payments make up the difference in the discharged workers' state unemployment compensation and their prior regular weekly income. For example, an employee was getting $500 per week before being laid off. If his or her state unemployment benefits are $250 per week, the SUB plan pays the remaining $250. 

 How do SUB plans differ from traditional severance?

  • Former employees do not have to qualify for state unemployment benefits in order to receive traditional severance pay. However, to obtain SUB plan payments, the employee must be eligible for state unemployment benefits. In some cases, a SUB plan can extend eligibility to discharged workers who are no longer receiving state unemployment benefits.
  • Traditional severance pay may lower the amount of state unemployment benefits the discharged worker receives or render the worker ineligible for unemployment. Conversely, SUB plan payments generally do not affect state unemployment benefits amount or eligibility.
  • Unlike traditional severance agreements, SUB plans cannot make lump-sum payments. SUB plan payments must be administered in installments.
  • Traditional severance pay is subject to regular employment taxes, including federal and state income taxes, Medicare tax, Social Security tax, and federal and state unemployment taxes. Qualified SUB plan payments, on the other hand, are not subject to Medicare tax, Social Security tax, or federal and state unemployment taxes — only federal and state income taxes.

What are the advantages of a SUB plan?

  • SUB plans have received increased attention from employers during the COVID-19 pandemic. The plans may come in handy for employers seeking cost-effective ways to help discharged employees meet their financial obligations while looking for a new job.
  • In an economic downturn, employers may find it easier to make installment payments via the SUB plan instead of having to come up with a lump-sum severance payment.
  • SUB plans allow former employees to maintain their regular weekly income without being disqualified from state unemployment benefits.
  • Both the employer and the former employee reap tax savings from the SUB plan.

Although SUB plans have many upsides, they take time to set up and implement. They must also conform to IRS and state-specific rules and can require a lot in terms of administration.

 For more information on SUB plans, including how they might apply to your business, consult with a benefits expert.

 

 
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John T Andrews CPA, PC
John T Andrews CPA, PC
cawhite@jtacpa.com
45 Sterling Street Suite 3
West Boylston, MA 01583
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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