The financial fallout from the outbreak of COVID-19 has unfortunately forced employers to turn to layoffs and furloughs. Many employers facing these decisions are looking for cost effective ways to mitigate the financial impact on affected employees. A supplemental unemployment benefit plan (“SUB Plan”) may be one way to assist employees while generating some cost savings for the company.
A SUB Plan is a unique type of severance benefit plan that permits employers to supplement state unemployment benefits on an employment tax-favored basis. The employer can make up the difference between an employee’s normal wages and state unemployment benefits and, unlike traditional severance, payments under a SUB Plan are treated as a benefit rather than wages and are thus not subject to FICA or FUTA for the employer or employee.
Key features of SUB Plans include:
- Unlike traditional severance, SUB Plan benefits will generally not impact the availability of state unemployment benefits. State approval of the SUB Plan may be required to insure coordination with state benefits and state taxation.
- SUB Plan payments may not be paid in a lump sum. Instead, they must be paid in installments as the former employee receives state unemployment benefits. In the current environment, the payment of benefits over time may represent an appealing cash flow benefit for employers.
- If a person receiving SUB Plan benefits ceases to be eligible for state unemployment benefits, SUB Plan benefits must cease as well. Participants will have to demonstrate that they are eligible for state unemployment benefits, both initially and periodically thereafter.
- If impacted employees live in different states they may not all qualify for benefits under the SUB Plan depending on state eligibility for benefits.
- In most states, SUB Plan benefits may be paid from the general assets of the employer. Alternatively, an employer could use a tax-exempt trust to fund benefits which may have tax deduction benefits for the employer. If an employer uses a trust, the trust must meet IRS requirements and it must be submitted to the IRS for preapproval.
- Most SUB Pans will be considered a welfare plan subject to ERISA. Thus, a SUB Plan must be in the form of a written plan document that complies with ERISA’s requirements and may be subject to Form 5500 reporting.
The interaction of SUB Plans with the recently enacted Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) is not entirely clear at this time. For example, the CARES Act encourages states to eliminate waiting periods for collecting unemployment benefits. For states that do eliminate waiting periods, it appears that any SUB Plan waiting period would be eliminated as well. Similarly, the CARES Act provides potential unemployment benefits to former employees who might otherwise be eligible for benefits under state law. It appears that SUB Plan benefits could be provided to such former employees as well. While SUB Plans do present some administrative and compliance issues, the value to a cash-strapped employer facing reductions in force may make it worth the effort of establishing and maintaining a SUB Plan.
For more detail, contact your Baker McKenzie attorney.