Drawbacks Of Sub Plans For Employers
Creating an SUB plan can require a lot of administration and it cant be used in all situations . The viability of the strategy is very dependent on state-specific rules. And its not easy to create a SUB plan quickly. In some states, employers must seek approval for plan designs prior to implementation.
How the CARES Act impacts the implementation of SUB plans is unclear. There are at least a few ways CARES could influence SUBs. For example, there are now additional eligibility requirements to qualify for unemployment. Theres a waived waiting period. And theres the extra $600 per week of Federal Pandemic Unemployment Compensation. All those things could affect SUBs, but so far the I.R.S. hasnt provided guidance.
How Are Supplemental Unemployment Benefits Plans Linked To State Unemployment Benefits
Generally, the discharged employee must be unemployed and eligible for state unemployment benefits in order to receive payments through a SUB plan.
Employers often make SUB plan payments while the discharged employee is actually receiving state unemployment compensation. However, if the plan chooses, it can extend eligibility to a discharged employee who is no longer eligible for state unemployment benefits because they:
The discharged employee must be unemployed and eligible for state unemployment benefits in order to receive payments through a SUB plan.
Supplemental Unemployment Benefit Plan
A Supplemental Unemployment Benefit Plan is an option that can prove beneficial to both employers and employees. It demonstrates that the employer is both compassionate and values work-life balance, and is attractive to potential employees concerned about that added layer of financial security.
These registered plans can be used for unemployment related to temporary stoppage of work, training, injury, illness or quarantine, and are often referred to as a top up to Employment Insurance benefits for employees.
From an employers point of view, here are some advantages of a SUB Plan:
- It is attractive to employees because the payments are not considered insurable earnings and are not deducted from the employees EI benefits
- There is no EI cost to the employer, since these payments are not considered insurable earnings
- It serves to protect the already large corporate investment made in employees for training and the company-specific experience they have developed and
- Employers can choose which type of temporary employment they want to supplement. Those plans supporting maternity, parental, or compassionate care leave do not require formal approval of the plan from Employment and Social Development Canada although records still need to be kept.
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What Are Supplemental Unemployment Benefits
Supplemental unemployment benefits are tax benefits paid out to terminated employees due to training, illness or injury, Reduction in Force , or temporary layoff. These benefits are a supplemental income to state unemployment benefits and are exempt from payroll taxes.
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How Do You Create An Sub Fund
SUB plans can be funded entirely by an employer or by employees, or by some mix. The standard plan is entirely employer funded, with individual funds for each worker. These replace normal severance payments. Employee-funded SUB plans are different, contributions being shared into a collective fund for all employees.
Typically, Supplemental Employment plans use tax-exempt Section 501 or Section 501 Voluntary Employee Benefits Association trusts. However, using these trusts means following additional I.R.S. requirements. In many states it is possible for SUB payments to come out of an employers general assets.
Paycor is not a legal, tax, benefit, accounting or investment advisor. All communication from Paycor should be confirmed by your companys legal, tax, benefit, accounting or investment advisor before making any decisions.
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How Long Do Supplemental Unemployment Benefits Last
Unemployment benefits usually last for 26 weeks. However, each state determines the length of unemployment benefits. Due to the CARES Act, many benefits have been extended to 39 weeks. The length of time is also subject to change depending on other measures Congress takes in the coming months. Individual states have to decide whether to extend the benefits.
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 employees 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?
What are the advantages of a 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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How To Apply For The Supplemental Unemployment Benefit
An employer must register and get approved for the Supplemental Unemployment Benefit by Service Canada.
01. To begin the SUB application process, first, an employer must make a signed Commitment to its employees and Service Canada that it seeks to supplement employee employment insurance payments using the Supplemental Unemployment Benefit program.
02. Next, the employer must make a Supplemental Unemployment Benefit Plan . A sample SUB Plan is located here.
ASUB Plan must comply with the following requirements:
Employee identification
03. The SUB Plan must identify the group of employees covered .
Also, employers must indicate that the SUB Plan covers unemployment caused by one or a combination of the following: Temporary stoppage of work, Illness, injury or quarantine.
Employee EI Instructions
04. The SUB Plan must indicate that employees must apply for and be in receipt of EI benefits.
Value of Sub Payments
05. The SUB Plan may provide SUB payments such that an employee is receiving no more than 95% of his or her normal weekly from both his or her employer and EI. SUB payments can be less than 95% normal earnings.
The Employer must indicate the value of the payments in the SUB Plan either as a percentage of the employees normal weekly earnings or a fixed amount.
SUB Calculation Example
Registering With The Union Referral Hall
In order to become eligible for Supplemental Unemployment Benefits, you must first be registered with the Referral Hall and be Available for Work. You must also follow the Referral Hall’s daybook procedures. Failure to do so will make you ineligible for benefits under the Plan.
Journeymen: Must register at the IBEW Local 11 Referral Hall at 6023 Garfield Avenue, Commerce, CA 90040, by fax at 726-0623, or any other method that complies with Referral Hall procedures.
Apprentices: Must report to the Electrical Training Institute at 6023 Garfield Avenue, Commerce, CA 90040.
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Why Do People Use Subs
SUBs are a popular option among those who have been unemployed for a few weeks or more. They are also often used by individuals who have survived a layoff and want to keep their monthly income stable while looking for another job.
This type of benefit is for those who have been unemployed for a specific amount of time, meet eligibility requirements, and are within an allowable period. In some cases, SUBs will supplement benefits that are paid by unemployment insurance on a regional or federally funded program.
SUBs help to provide unemployed individuals with the financial resources they need to meet their day-to-day needs, such as utilities, rent, food, health care insurance premiums, essential household items such as furniture or clothes. It gives individuals the opportunity to meet their financial obligations like paying for child care costs and school supplies if applicable.
SUBs are often called top-up, because they provide benefit payments that supplement a persons regular unemployment compensation, which is usually just a fraction of their normal salary. The level of payment depends on a number of factors, including:
- Type of company providing the insurance
- Wages at your last job
- Weekly benefit award
Supplemental Unemployment Benefits Trust
A trust or trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits qualifies as a supplemental unemployment benefit trust exempt under Internal Revenue Code section 501 if the following requirements are satisfied:
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How Do I Become Eligible For Benefits
Once you become a Participant in the Plan, you will become eligible for Supplemental Unemployment Benefits upon meeting all of the following eligibility requirements:
- Covered Employment Terminated: Your Covered Employment must have been terminated involuntarily due to lack of work or reduction in workforce. No benefits are paid if unemployment is due to a strike, work stoppage, lockout, voluntary quit or a discharge due to misconduct and
- Hour Requirement: You must meet the hour requirement by working a minimum of 1,040 hours in Covered Employment in either the four Contribution Quarters prior to your Layoff Date or the 12-Month Review Period and
- Registered with the Union Referral Hall: You must be registered with the Union Referral Hall as Available for Work and follow the Referral Hall’s daybook procedures and
- Application for Supplemental Unemployment Benefits: An application for Supplemental Unemployment Benefits must be filed with the Fund Office and
- Received Unemployment Compensation Benefits: You must provide appropriate proof of your actual receipt of unemployment compensation benefits for days you are claiming Supplemental Unemployment Benefits.
You will not be eligible for Supplemental Unemployment Benefits if you are receiving Pension Plan benefits to which IBEW Local 11 or the International Brotherhood of Electrical Workers is a party or benefits from the Social Security Administration.
When Should I Consider Implementing A Sub Plan
Its always a good time to consider implementing a SUB Plan. Whether you dont have any layoffs planned, have an upcoming reduction in force, or are currently in the process of transitioning employees, the nature of SUB Plans means that exploring them as a possibility in the future is always a good idea.
Blog Post: When To Consider Implementing a SUB Plan
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What Taxes Are Exempt Under A Supplemental Unemployment Benefits Plan
Payments made through a SUB plan are excluded from Social Security and Medicare taxes, plus federal and state unemployment taxes if the legal requirements are satisfied.
The SUB plan payments must be specifically designed to supplement state unemployment benefits.
One requirement, according to IRS Revenue Ruling 90-72, is that the SUB plan payments must be specifically designed to supplement state unemployment benefits. Further, Under the terms of the plan, the employee must be unemployed and must meet the requirements necessary to receive state unemployment compensation benefits.
Additionally:
- The SUB plan payments must be made in installments, meaning over time. Payment cannot be a lump sum.
- The discharged worker must have been involuntarily terminated, such as through layoff, plant closing, or reduction in force.
SUB plan payments are not exempt from federal or state income tax withholding.
Are Sub Plans Only For Permanent Reductions
In addition to permanent reductions-in-force, SUB Plans offer a valuable solution to temporary furloughs and operational downtimes. During downtimes, a SUB Plan allows employees to maintain a secure, reliable income and remain ready and available to be called back to work while also generating impactful cost savings for the employer. For companies who face retention challenges because of operational fluctuations, a SUB Plan can be the key to retaining talent within a finite budget, and achieving the ability to guarantee a steady, reliable workforce season after season.
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Supplemental Unemployment Benefits Definition
Supplemental unemployment benefits refers to taxed benefits designed to provide additional income to terminated employees along with the state unemployment benefits. This types of benefits are usually found in collective bargaining agreements.
SUBs typically come into play when unemployment is due to training, illness or injury, temporary lay off etc.
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How Much Does The Supplemental Unemployment Benefits Plan Pay
SUB plans pay the difference between the discharged employees state unemployment benefits and their regular wages before the layoff.
For example, the discharged employee receives $375 in state unemployment benefits and their weekly pay used to be $575. The SUB plan would pay the difference of $200 per week.
How Are Payments Made
Unless the state says otherwise, you can make SUB plan payments from your general assets. Alternatively, you can establish and pay through a tax-exempt trust that conforms to IRC Section 501.
Also, the employer, the employee or both can fund SUB plans. In the private sector, the employers often fund them.
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Sub Plan Adoption Challenges
- If the SUB plan must be submitted to the state or the IRS for pre-approval, this could considerably delay implementation.
- The SUB plan must be carefully designed to ensure the employer and the employee get the most out of the program. This step requires strong knowledge of how SUB plans work and the related laws and tax implications.
- SUB plans are typically more complicated to administer than traditional severance plans, mainly because of their association with state unemployment benefits.
- SUB plan payments are subject to federal income tax withholding and must therefore comply with IRS rules for nonqualified deferred compensation unless an exception applies. To meet this exception, employers often design their SUB plan as a separation pay plan.
- SUB plans are usually considered welfare plans under the Employee Retirement Income Security Act of 1974. This means the plan must adhere to applicable ERISA laws, including developing a written plan document.
Life Happens Protect Your Employees With A Supplemental Unemployment Benefit Plan
- Date
Natalie Evans, CPA, CGA, LPA, Partner
There are many reasons why people find themselves temporarily unemployed, and it can happen to any employee.
Life happens families grow, people fall ill, additional training is required for a career opportunity, and often the employer has no financial contingency to get the employee through the hardships.
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Subp : A Layoff Option
A Supplementary Unemployment Benefits Plan is a plan, approved by Service Canada, which allows an employer to top up an employees EI benefits during periods of unemployment due to one of or a combination of the following three legislatively permitted types of unemployment:
- Temporary stoppage of work,
- Training, and/or
- Illness, injury or quarantine.
The following is an exploration of SUBP plans. As this article is not client-specific, this document is merely information and not legal advice. Before taking any steps, we urge you to seek legal advice to confirm that those steps are appropriate at the current time and in light of your specific circumstances. Our main office contacts for Employment Law are at the bottom of this document.
A registered SUB Plan is an option for employers that benefits employers and employees . Payments from properly registered SUB Plans are not considered insurable earnings and, accordingly, are not deducted from the employees EI benefits.
In order to comply with the Employment Insurance Regulations, the following requirements should be met:
TO SET UP A SUB PLAN:
1. Create a plan
Delayed Employment Taxes Under Cares Act
The Coronavirus Aid, Relief and Economic Security Act includes a number of measures that offer relief to employers struggling to survive during this difficult period. Among them is a provision permitting employers to delay the payment of the employer portion of Social Security taxes that are due to be made during the period from March 27, 2020 through December 31, 2020. Payment of the first 50% of these employment taxes can be delayed until December 31, 2021. The remaining portion must be paid no later than December 31, 2022. Unlike other provisions of the CARES Act, there is no need-based eligibility requirement and the relief is not limited with respect to the type and amount of wages. Thus, all employers are eligible and payment of the employer portion of FICA taxes due on severance payments, reported as wages, can be delayed under this provision.
Employers that qualify for this relief must not have availed themselves of the debt relief offered under another CARES Act measure, the Paycheck Protection Program . Under the PPP, certain small businesses with fewer than 500 employees may apply for loans to maintain payroll and health plan coverage. As of this writing, the loans are available through June 30, 2020. The PPP offers forgiveness for the portion of the loan used for payroll, benefit and certain other costs during the eight-week period following the date of the loan origination.
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