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When employees are laid off involuntarily due to a reduction in job force, reorganization and other employer circumstances, Supplemental Unemployment Benefits or SUB plans can come into play.

Here are some commonly asked questions about SUB plans to guide both employers and employees.

1.    What are Supplemental Unemployment Benefit Plans?

An SUB plan is a unique type of severance plan. They are private funds set aside by the employer. They are meant to provide additional unemployment compensation to employees who are terminated for reasons that are not their own doing.

Usually, SUB plans come from an agreement between the employer and a labor union. Contributions to the special unemployment fund are made regularly. Depending on the agreement, the plan can be funded by employers only, by employees, or by both parties. The amount depends on an agreed upon amount computed per-hour and per-employee.

2.    Are SUB plans taxed?

Supplemental Unemployment Benefit Plans are legally defined as a tax-exempt, Section 501 (c) (17) plan or trust. SUB plan benefits are not considered wages, which qualify for Federal Insurance Contributions Act (FICA) tax.

However, while SUB plans are exempt from FICA tax, they are generally subject to federal and state income tax.

As a FICA tax qualified plan, employers can appreciate the benefits of lower payroll tax obligation when severance packages need to be given.

3.    How much can an employee receive from an SUB plan?

How much an employee receives from a SUB plan depends on the agreement between the employer and the employee regarding the benefit formula. In general, the amount of weekly benefits should be based upon state unemployment benefits, the amount of regular weekly play, as well as other allowable compensation.

4.    How do SUB plans differ from state unemployment benefits?

Firstly, eligibility for federal-State Unemployment Compensation benefit plans is not affected by payment of supplementary unemployment benefits to a terminated employee.

Unemployment compensation funds are also taken from taxes. SUB plans are essentially trust funds managed and funded by the employer.

5.    Can any employee qualify for a SUB plan?

SUB plans have limited coverage. Employees must be terminated for reasons that are not their own doing. Employees who are not eligible include those who were terminated for a good cause or reason, as well as workers who resigned voluntarily.

There are also some similarities between SUB plans and state unemployment benefits when it comes to requirements and eligibility. Former employees need to apply and be eligible for state unemployment benefits in order to receive SUB. They must also continue to verify their unemployment status, capability and availability for work, each week.

Once the former employee returns to work for any employer, they can no longer qualify for SUB.

6.    Do SUB plans fall under the prevailing wage law fringe benefit requirements? 

An SUB plan can be used to meet the fringe benefit requirements of the Davis Bacon Act and related prevailing wage laws, as long as the plan is funded. Contributions to funded plans by the employer can be credited towards the prevailing fringe benefit requirements.

Learn More about SUB Plans with ARCHER JORDAN

ARCHER JORDAN is a third party administrator providing fringe benefits to government contractors and hourly hires. Our decades of experience and expertise on fringe benefits, prevailing wage, and related issues are at your company’s service. Contact our team today to learn more about supplemental unemployment benefit plans and other compensation strategies!