Lewis & Ellis Inc.

What are supplemental unemployment benefits?

Employee Benefits
by Cabe Chadick
Knowing the ins and outs of SUB can help you prepare your staff members in case a scenario requiring its use were to come to fruition.
Knowing the ins and outs of SUB can help you prepare your staff members in case a scenario requiring its use were to come to fruition.

You may have heard the term supplemental unemployment benefit (SUB) in reference to terminated employees and what they can receive as compensation.

SUBs are a taxed benefit, usually made by the employer, created to provide additional income to employees who have been fired, in addition to state unemployment benefits. Knowing the ins and outs of SUB can help you prepare your staff members in case a scenario requiring its use were to come to fruition. Employers should ensure that all workers are aware of their benefit options post-employment.

Let's take a closer look at supplemental unemployment benefits.

Defining supplemental unemployment benefits

SUB can be provided as a source of income to someone who has lost their job, usually as a result of workplace injury, illness, or a training accident. The compensation can be negotiated in collective bargaining agreements and the employer can offer them as an option to the unemployed worker in some cases as severance pay due to workforce reduction or an office, plant or another facility closing.

Ideally, the supplemental benefit payment will make up the difference between regular unemployment benefits and the worker's usual pay. There are different kinds of supplemental benefits for different situations:

  • Extended layoff benefits: Only offered for temporary layoffs, maybe to cut costs for the employer.
  • Furlough benefits: Provided for employees who experience a severe reduction in working hours. In this case, payments that are not wages are supplied as a part of SUB.

Who needs supplemental unemployment benefits?

As previously mentioned, not everyone is eligible for unemployment benefits. As an employer, it is important to make it clear that SUB plans are available. In addition, give the employees all the tools they need to file a claim through your program. It is valuable for any potential beneficiary to know that they must be eligible for state unemployment benefits first. All interested individuals must first file a claim with their state's unemployment insurance office, specifically in the state where they worked.

Those who have lost their job as the result of cost-cutting endeavors, or due to a reduction in force (RIF) occurring, could receive benefits. These SUB benefits even extend to those who may find themselves temporarily unemployed because of a workplace injury. As an employer, SUB plans have many benefits.

How to set up a supplemental unemployment benefit plan

There may be some concern about where the funding for SUB plans comes from. It depends on the size of the company and its specific needs. Some are funded by employers, some by employees. Most plans are entirely employer-funded, according to HR software company Paycor. On the other hand, employee-funded SUB plans take contributions from staff and put them into a collective fund.

To establish your SUB plan, look at tax-exempt Section 501 (c) (17) or Section 501(c)(9) Voluntary Employee Benefits Association (VEBA) trusts. Adhere to the IRS rules and regulations for maximum possible tax benefits. The trust option is available in all states, and in some states, it is possible for the SUB payments, or SUB pay, to come straight from the employer. In addition, the plan may need to obtain tax-exempt status from the IRS to proceed.

Most components of a SUB plan are subject to the laws of each state in which it operates. As such, some states require that the employer submit the SUB plan for pre-approval before implementation. Keep this in mind when looking to install a policy, because the pre-approval process can be lengthy.

Payments from a SUB plan are not seen as a wage, and will not be taxed as such. Instead, they are recognized as benefits. Payments will be different depending on the employee because they are meant to make up the difference between state benefits and regular wages. A simple equation will reveal how much. Let's look at an example: An employee's usual salary is $600 per week and their state unemployment benefits are $250. This means that your staff member will require $350 from the SUB plan a week for as long as the benefits continue.


More employers have taken note of SUB plans because of COVID-19 pandemic-related layoffs. Here are some of the best benefits to you as an employer:

  • Unlike traditional severance agreements, SUB plan payments must be given out in installments, making it easier to plan for.
  • A SUB plan usually does not affect state unemployment benefits eligibility, providing former employees access to more support.
  • Beneficial for employers who are looking for more cost-effective ways to assist terminated staff members.
  • Both the employer and ex-employee can receive tax savings from their SUB plan.

To learn more about how to set up a SUB plan or what this could mean for your workplace, contact a Lewis & Ellis consultant today.



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