Poyner Spruill Welcomes Education Law Practice Group

Sign Up Created with Sketch. Want to receive our thought leadership?     Sign Up

In face of the Covid-19 emergency, many employers are faced with furloughing or laying off employees, but they want to do what they can to provide some benefit.  While severance payments are one option, these benefits generally reduce state unemployment benefits to which employees would otherwise be entitled.  A supplemental unemployment benefit (SUB) plan may be a more cost-effective solution to assist employees through these trying times.

A SUB plan is a fringe benefit that provides employees with a payment to supplement state-provided unemployment benefits, without reducing those state benefits. The payments to employees are taxable as income (and are deductible for the employer), but they are not treated as wages for FICA, FUTA and RRTA purposes.

To qualify as a SUB plan, the plan should be documented in writing and the design must meet certain requirements, including:

A SUB plan may be funded or unfunded.  If the plan is funded, the employer may use a trust designated for this purpose and apply for tax-exempt status under IRC §501(a)(17).  If insurance is purchased to provide the benefit, premiums for the coverage are excluded from employee’s income.

While we are still evaluating the new CARES Act, we suspect that SUB plan payments may not qualify as wages for certain tax credits.  Employers should balance the financial impact of coordinating with state unemployment benefits against the other available financial incentives in recent legislation.

However, for certain employers, adopting a SUB plan to supplement state unemployment compensation may be a cost-effective way to assist employees in these trying times.  Our employment and benefit attorneys can help you evaluate your options and/or implement a SUB plan.

◀︎ Back to Thought Leadership