The Advantages And Challenges Of Supplemental Unemployment Benefit Plans
The economic and financial consequences of the ongoing COVID-19 crisis have forced some employers to furlough and lay off workers, resulting in record numbers of individuals claiming state unemployment benefits across the country. As a result, an increasing number of employers are considering implementing supplemental unemployment benefits plans in order to provide additional benefits to discharged employees. Unlike severance plans, SUB-Pay Plans can be structured to maximize employer savings while providing greater benefit to the employees. This is not always a quick fix, however, as there are numerous legal and administrative issues to consider when implementing a SUB-Pay Plan.
Savings Attained By A Sub Plan Are Generated From Three Sources:
Elimination of Payroll Tax: Under a SUB Plan, separation payments are treated as benefits rather than as wages, and are thus exempt from the payment of payroll taxes for both the company and the benefit recipient. This reduces the benefit costs for the employer while ensuring slightly increased take-home pay for the displaced employee.
Integration with State Unemployment Insurance : The displaced employees income is maintained, but now comes from two sources, employer-sponsored SUB-pay and state UI benefit, thus reducing the benefit cost for the employer on a dollar-for-dollar basis.
Duration Management: SUB Pay acts as a bridge to a released employees next opportunity. Because SUB pay is tied to the employees eligibility for State UI, payments cease when a displaced employee obtains new employment. An employee may receive a reemployment bonus of some percent of the remaining benefit allotment as a taxable bonus. Reemployment rewards a displaced employee for finding new work prior to the expiration of their benefit period while still creating savings for the employer.
Typically, organizations that implement a SUB Plan will save between 25-50% when compared to traditional severance plans. SUB-Plans present a win-win solution to the challenges presented by a reduction in force.
Check With Your Unemployment Office
Because laws vary from state to state, it’s important to check with your state unemployment office for information on how severance pay will be handled. You may find the information you need online, or you will be able to find a phone number to call for assistance. Don’t wait to apply for benefits, even if you’re not sure about your current eligibility.
Get your claim in the system so you can receive the maximum benefits you are eligible for. Report your severance pay when you file the claim, and your unemployment compensation will be calculated for you.
Also, if you’re a member of a union or covered by another type of employment agreement, check with your business office for assistance with unemployment benefits.
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Is A Sub Plan A Fit For My Organization
The most important aspect of a companys severance plan is that it fit the companys culture. For instance, if your organization subscribes to an entitlement culture, paying out a lump-sum windfall in amounts correlating to job level might make a lot of sense. Alternatively, within a finite compensation and benefits budget, this kind of windfall to an employee walking out the door may very well cost retained employees their raises, bonuses or a health-care enhancement. Organizations with a cost-containment culture and pervading commitment to the bottom line likely would benefit from a more practical and economical severance plan design such as a Supplemental Unemployment Benefits Plan.
Employer Benefits Of Sub Plan
Wages paid on the paycheck are subject to payroll taxes and workers compensation premium. An Open Shop Prevailing Wage Contractor has a choice of how he/she pays the fringe components of the prevailing wage. Either on the paycheck as cash or through bona fide benefit plans such as a SUB plan. The average range of effective payroll tax and insurance premium savings a contractor gets, reflected in an hourly amount is between $2.00 and $7.00 per hour. This can be a significant savings per man hour when computed over the length of a job, the number of field employees and type of crafts a contractor hires.
- Payroll taxes including FICA, Medicare and SDI are eliminated from the amount of fringe taken off the paycheck.
- Workers Compensation Insurance and potentially General Liability Insurance are also reduced based on the amount of fringe taken off payroll.
- Provides for more competitive bidding and more profit as a result of less tax and less insurance premium paid by the contractor.
Employee Benefits of SUB Plan
The field employee also eliminates his/her share of payroll taxes.
- Field Employees get cash when they need it most during periods of Under-Employment, Unemployment, Holidays, Sick Days, etc.
- SUB Plan benefit payments are made in addition to State Unemployment Insurance benefits.
Important Provisions
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Before I Filed For Benefits My Last Day Of Work Was At My Part
Based on your school wages, you are not eligible to receive benefits during the recess period because you were given reasonable assurance to return to work for a school employer for the next school year.
However, if you earned enough wages from your non-school employer to establish a valid claim, you may be eligible for benefits based on these wages, if all other eligibility requirements are met.
Is A School Employee Eligible For Unemployment Insurance Benefits During A Recess Period
Yes, if you meet any of the following criteria:
- You have enough non-school wages in the base period to establish a valid claim. A base period is a specific 12-month term that we use to determine if you earned enough wages to establish an Unemployment Insurance claim.
- You are available to work for a school employer who has said they may call you to work during the recess period.
- You do not have reasonable assurance to return to work after the recess period ends.
- Your employment depends on enrollment, funding, or program changes.
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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.
How Do Supplemental Unemployment Benefits Plans Work
SUBs got popular in the 50s as a way to help workers in industries with cyclical employment patterns get a more steady income. SUBs were often fought for in collective bargaining agreements. Theyre growing in popularity again across industries. Under a SUB plan, in the event of a Reduction in Force or temporary unemployment due to training, illness or injury, laid-off employees maintain their previous salary, with their former employer supplementing their states unemployment benefits.
These plans can offer a reemployment bonus of some percentage of remaining benefits when a employee returns to work. SUB plans can also offer income support for employees who are required to work reduced hours due to a RIF.
SUB plans are paid out over time, not as a lump sum. To qualify, employees must be eligible for state unemployment benefits . This means plans may differ depending on which state an employee works.
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Supplemental Unemployment Benefit Program
The Supplemental Unemployment Benefit program is a plan that allows an employer to top-up an employees EI benefits during periods of unemployment due to various factors including a temporary stoppage of work or illness, injury or quarantine. This is not a new plan but is a potential option for employers to help cover the cost of employees wages.
Questions Asked When You File A Claim For Unemployment Benefits
You will answer yes or no during the application process:
Are you receiving or will you receive subsistence from your employer?SUB pay plans are submitted to the agency by the employer to be approved.
Did your last employer say you would be called back? This question is asking you if you have a definite return to work date within 10 weeks. If you do have a return to work date within 10 weeks answer yes.
Are you receiving retirement pension other than Social Security? Are you receiving a pension from a previous employer?
Are you receiving Workers’ Compensation?
Do you currently have a part-time job?
Have you filed a claim against any state in the last 12 months?
Did you work in Tennessee during the last 18 months?
Did you work for an employer outside of TN during the last 24 month?If you have worked in another state you may have eligibility in that state. Every state has its own guidelines and weekly benefit amounts.
Did you work for the Federal Government as a Federal civilian employee during the last 18 months?If so, was your duty station in Tennessee?
Did you serve on active duty with the military during the last 18 months?Only active duty where you received a DD-214 is covered for unemployment purposes. Title 32 orders under 90 days are not covered for UI purposes.
Are you a member of the military reserve or National Guard?
Do you get your job exclusively through a hiring Union?If so, please enter union name abbreviation and union number.
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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 .
Note:The Coronavirus Aid, Relief, and Economic Security 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 states unemployment insurance office to learn more.
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.
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Benefits For Employers And Employees
While this may not be a well-known benefit, the savings to employers makes it a highly attractive option over the traditional severance package plan for a few reasons.
- Tax savings: On severance packages with a salary continuation plan, for example, employees must pay close to 8% in FICA taxes, which fund Social Security and Medicare, as well as close to 3% in federal and state unemployment taxes, commonly known as FUTA and SUTA. With a SUB plan, they only pay the benefit money, saving them close to 11% in taxes.
- Cash flow management: Some employers offer a lump-sum severance, but from the employee point of view, payments over time are easier to manage, in addition to being an efficient way for organizations to manage their cash flow. SUBs are always administered over designated periods and never in a lump sum.
- Better terms: Because its tied to the state unemployment plan, the objective of the SUB is to make the employees weekly income whole until they find a new job.
Supplementary Unemployment Benefit Plan
A supplementary unemployment benefit plan is a plan established by an employer or group of participating employers to top up employees’ employment insurance benefits during a period of unemployment due to a temporary or indefinite layoff for:
- health-related benefits
- maternity, parental, compassionate care, family caregiver leave
- sickness, accident, or disability
- training
A SUBP may be registered or unregistered. A SUBP may be registered with:
- Service Canada, if the plan meets the requirements of article 37 of the Employment Insurance Regulations
- the minister of national revenue , if the plan satisfies the conditions for registration under section 145 of the Income Tax Act.
Registered SUBPs offer certain advantages for the employee and the employer over unregistered plans.
If an employer’s contributions are made to a SUBP that does not qualify for registration with the minister of national revenue , then any top-up amounts paid out of the plan to the employee by an employer or a trustee out of the plan are considered to be income from an office or employment. This is true whether the SUBP is registered with Service Canada or not.
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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 Definition
In 1955, the United Automobile Workers Union and Ford Motor Company came up with a way to supplement workers who were involuntarily terminated. Unfortunately, state unemployment insurance was inadequate to support workers and their families, because its meant to supplement and not replace the wages of the unemployed worker. Thanks to these two organizations, the Supplemental Unemployment Benefit Plan became a viable solution.
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The Supplemental Unemployment Benefit Program
Overview
The Supplemental Unemployment Benefit program is an option for employers dealing with the COVID-19 pandemic. The SUB program, delivered by Service Canada, allows for an increase in employees weekly benefits when they are unemployed due to a temporary stoppage of work, illness, injury or quarantine. Registered SUB plans can benefit both employees and employers during time of economic uncertainty: it enables employers to continue supporting their employees, while the burden of the majority of the employees income is carried by Employment Insurance .
Advantages
A registered SUB plan provides advantages to employers and employees. Payments received from registered SUB plans are not deducted from the employees EI benefits, and since payments under registered SUB plans are not considered insurable earnings, EI premiums are not deducted. SUB plans also provide for longer layoff periods, allowing for up to 35 weeks within a 52-week period, rather than the 13 weeks in a 20-week period allowed under the Employment Standards Act. A SUB plan gives employers flexibility when it comes to designing their own plan. The program allows employers to choose the duration of the SUB benefits and determine how the benefit will be calculated, whether based on a percentage of the regular weekly income or a fixed weekly amount.
Basic Requirements
Illness, injury or quarantine
Employment Tax Exemption For Supplemental Unemployment Benefit Plans
A supplemental unemployment benefit plan is designed to provide additional protection to employees in the event of involuntary termination of employment. If certain requirements are satisfied, SUB plan benefits are subject to federal income tax, but exempt from FICA and FUTA taxes.
SUB plan benefits must be paid only to unemployed former employees who are involuntarily terminated due to a reduction-in-force, location closure or a similar condition. Generally, eligibility for SUB plan benefits must depend on continued eligibility for state unemployment compensation. However, if desired, a SUB plan may expand eligibility to a former employee who is no longer eligible to receive state unemployment compensation because the former employee has insufficient wage credits for state unemployment compensation, exhausted the period for state unemployment compensation or failed to satisfy a required waiting period for state unemployment compensation, provided that benefits will commence once the waiting period expires.
Unlike severance plans, SUB plan benefits may not be paid in a lump sum. Rather, the payment must be linked to the continued receipt of periodic state unemployment compensation. Even in the case of former employees who have exceeded state unemployment compensation limits or have insufficient wage credits, SUB plan benefits must be paid periodically as if the individual still qualified for state unemployment compensation.
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Whatis The Supplemental Unemployment Benefit
The Supplemental Unemployment Benefit is a Government of Canada program made pursuant to Employment Insurance Regulation , section 37 in which an employer is allowed to top up an employees EI earnings when they are unemployed due to a temporary stoppage of work, illness or quarantine without affecting an employees employment insurance earnings.
In light of the novel coronavirus, COVID-19, the Supplemental Unemployment Benefit is a program we would recommend to employers seeking to make their employees whole while they are laid off or on a sick leave, quarantine or Infectious Disease Emergency Leave.
In addition, although this is untested, in the unique circumstance posed by the coronavirus, there is chance that employers who top up employees on EI with the Supplemental Unemployment Benefit equaling around 80-95% of normal pay may be shielded from constructive dismissal claims from laid off employees. After all, the hallmark of a classic constructive dismissal case is a stoppage of earnings. Accordingly, where a laid off employee, under the Employer Supplemental Unemployment Benefit essentially only loses 20-15% of his or her earnings, he or she may not be able to advance a successful constructive dismissal claim. However, earnings under this program resulting in less than around 80% of normal earnings would likely still trigger a constructive dismissal. Nevertheless, none of this is legal advice, so us for more information.
