The Value of Supplemental Unemployment Benefits | Lewis & Ellis LLC

Supplemental Unemployment Benefits, or SUBs, are an additional benefit employers can provide to unemployed workers on top of standard state unemployment insurance (UI). Unlike UI, SUBs are often funded directly by employers and are designed to help employees maintain a higher percentage of their previous income during periods of unemployment.

Here, we'll discuss SUBs in detail, including how they work, why they're a valuable strategy for employers (and beneficial to employees) and how to navigate legal and compliance requirements.

What Are Supplemental Unemployment Benefits?

Supplemental unemployment benefits are an alternative to severance pay, offered as a benefit by employers to laid-off or furloughed employees. Here's a brief breakdown and some quick facts about what SUBs entail, how they work, who they're for and more:

Employer-Funded

SUB plans are typically funded by employers and are often part of a collective bargaining agreement between employers and labor unions.

Supplemental to State Unemployment Insurance
At their core, SUBs are intended to supplement regular state-provided unemployment benefits, allowing workers to receive a higher total amount than they would with state UI alone.

Income Replacement

The goal of SUB plans is to provide a greater level of income replacement than standard UI benefits. This helps workers sustain their standard of living while unemployed.

Tax Treatment

In many cases, SUB payments are not considered wages for tax purposes and thus may not be subject to federal income tax withholding, Social Security or Medicare taxes. While the specifics can vary based on the plan and local legislation, SUBs are typically considered an additional benefit, not a form of compensation.

Plan Administration

Employers may administer SUB plans themselves or through a third-party administrator. These plans can be complex, so many employers choose to opt for external support — from actuaries, for example — to ensure coordination with state UI programs.

Why Are Supplemental Unemployment Benefits Valuable for Employees?

Since supplemental unemployment benefits are intended for laid-off or furloughed employees, it's important to touch on the value of these programs for workers themselves:

• Higher income: Typical state-provided unemployment insurance only provides about half of what a worker made while employed. With an employer-funded SUB plan, employers make up the difference, allowing employees to receive more income during periods of unemployment — compared to relying solely on state UI benefits.
• Greater stability: SUB plans provide greater financial stability during furloughs or periods of unemployment and can help employees reduce financial stress and continue to meet their personal needs.
• Enhanced job security: When employees know that SUBs are available, it can increase job security and loyalty, as employees may feel more valued and supported by their employer — even if things get rocky.

Why Are Supplemental Unemployment Benefits Valuable for Employers?

For employers, the value of offering supplemental unemployment benefits may be hard to spot a first; however, there are plenty of great reasons why this additional benefit can add value to your organization:

• Retaining skilled workers: By offering SUB plans, employers can encourage skilled workers to return when work becomes available, reducing turnover and retraining costs.
• Enhanced employee relations: Providing additional benefits can improve employee relations and reduce the likelihood of disputes or strikes.
• Flexible workforce management: SUB plans can be part of broader workforce management strategies, helping companies manage labor costs while maintaining a ready pool of skilled workers.
• Tax exemption: Since the Internal Revenue Service (IRS) considers SUBs a benefit and not competition, employers are exempt from paying taxes on SUBs so long as the plan satisfies the IRS's requirements (more on these requirements below).

When Do SUBs Apply and Who Is Eligible To Receive Them?

There are two main instances where SUBs are most common: layoffs and furloughs:

• Layoffs: When a company lays off employees due to closing a department or location, they may offer SUB payments to ease the financial burden.
• Furloughs: If a company needs to reduce work hours due to slow business, they might provide unemployment benefits to supplement the reduced income employees typically collect from state-provided UI.

Typically, for employees to receive SUBs, they need to meet all necessary eligibility requirements for state UI benefits. These can vary by jurisdiction but generally include the following conditions as outlined by the United States Government:

• Earned at least a certain amount within the last 12-24 months.
• Worked consistently for the last 12-24 months.
• Is actively looking for a new job.

SUB Legal and Compliance Considerations for Employers

When offering SUBs, employers must comply with the necessary rules and regulations set forth by the Internal Revenue Service (IRS) to qualify for tax exemption. The following are required of employers and their SUB trusts, according to the IRS:

The trust must constitute a valid trust under local law, be evidenced by an executed written document, and be part of a written plan.

1. The plan must be established and maintained by an employer or its employees solely for the purpose of providing supplemental unemployment compensation benefits.
2. The plan must provide that the corpus and income of the trust cannot be used for, or diverted to, any purpose other than providing such benefits prior to the satisfaction of all liabilities to the employees covered by the plan.
3. Benefits must be determined according to objective standards, and may not be determined solely in the discretion of the trustees.
4. The eligibility requirements and the benefits payable must not discriminate in favor of officers, shareholders, supervisory employees, or highly compensated employees. Benefits payable under the plan will not be considered discriminatory if they bear a uniform relationship to the total compensation of the employees covered by the plan.

Employee Benefits

Building a Fair and Effective SUB Pay Plan

Beyond what the IRS and state departments require of employers that offer SUBs, there are strategies that can help set a plan up for success early, which include determining:

• Eligibility: Determine who qualifies for SUB benefits. This could be based on seniority, layoff reasons or specific events (plant closure).
• Funding: Decide how the plan will be funded. Options include employer contributions, employee contributions or a combination.
• Benefit levels: Establish the amount of benefits employees will receive. It can be a flat rate or a percentage of regular wages.
• Duration: Set the maximum duration for which employees can receive SUB benefits.
• Compliance: Ensure the plan meets all IRS qualifications to maintain the tax exemption on benefits. Consider consulting a tax advisor for this step.

How Lewis & Ellis LLC Can Help You Develop a Winning SUB Strategy

When it comes to building and deploying your SUB plan, you're not alone. Our experts are available to help you navigate benefit structures and funding strategies for a truly robust and reliable approach that puts you and your employees first. Here's how:

• Benefit structure: Actuaries can help you understand your SUB options and determine the appropriate level and duration of benefits, ensuring they align with your short- and long-term objectives and budget constraints.
• Cost projections: Our experts use statistical models to estimate the cost of the SUB program under various scenarios, considering factors like the likelihood of layoffs, the number of eligible employees and the expected duration of unemployment.
• Funding strategies: We'll advise on the most effective ways to fund your SUB program, whether through self-insurance, setting aside reserves or purchasing insurance products.
• Regulatory compliance: Once finished, we'll ensure your program complies with all relevant federal and state regulations, including coordinating the SUB plan with state unemployment insurance benefits.
• Risk assessment: Finally, our experts will evaluate the financial risks associated with the program and recommend strategies to mitigate them.

Curious to learn more about SUBs or Employee Benefits in general? Contact us today and discover your options.