Supplemental unemployment benefits (SUB) are tax benefits paid out to terminated employees due to training, illness or injury, Reduction in Force (RIF), or temporary layoff. These benefits are a supplemental income to state unemployment benefits and are exempt from payroll taxes.
How Does a Supplemental Unemployment Benefit Plan Work?
When a company is downsized, it can be costly for the employer to pay out a lump sum to laid-off employees, therefore a SUB plan allows them to contribute to the fund over time and minimize the financial impact on the company.
SUB pay is classified as benefits, not wages, which results in a reduced payroll tax liability for both the employer and employee. In other words, these funds are exempt from payroll taxes (FICA, FUTA, SUTA) and offered in lieu of traditional severance pay.
Businesses with expected periods of downtime, such as construction companies, typically have SUB plans in place to help their employees maintain an income while they are out of work. This encourages employees to remain loyal to their employers and return to their jobs once the company reopens. Once employees return to work, SUB payments are halted.
SUB Payment Example:
If an employee's weekly compensation was $1,000, and he/she receives unemployment insurance (UI) of $650 per week, the employer would then provide a weekly benefit of $350 to supplement the UI funds. This equates to 100% of the employee's take-home pay.
How to apply for SUB:
To receive SUB pay, former employees must be eligible for state unemployment benefits and willing participants of their employer's SUB plan. They are also required to file a claim with the unemployment insurance office in the state where they worked (SUB rules may differ depending on the state you are in).
Note: The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020, has given states the option of extending unemployment insurance to workers who were previously ineligible for these benefits. Contact your state’s unemployment insurance office to learn more.
Benefits and Disadvantages of SUB Plans:
Avoid payment of lump sums.
Designing a SUB plan requires detailed analysis of company financials.
Eliminates payroll taxes.
Participants have to prove they are entitled to state unemployment benefits.
Saves on costs.
Admin can be time consuming.
Allows for better cash flow management.
Assists employees to maintain an income while they are out of work.
What are supplemental unemployment benefits (SUB)?
Supplemental unemployment benefits (SUB) are tax benefits paid out to terminated employees due to training, illness or injury, Reduction in Force (RIF), or temporary layoff. These benefits are a supplemental income to state unemployment benefits.
How do you apply for supplemental unemployment benefits?
Laid-off employees are required to file a claim with the unemployment insurance office in the state where they worked.
How long will the supplemental unemployment last?
Supplemental unemployment benefits last until the employee is rehired or finds alternative work.
Are supplemental unemployment benefits taxable?
Supplemental unemployment benefits are exempt from payroll taxes (FICA, FUTA, SUTA) but subject to federal and state income taxes.
How long can a company furlough an employee?
Employees can be furloughed until the company for which they work reopens.
What can't a SUB plan provide for?
Termination for cause or resignation.