Most employers elect to provide Supplemental Unemployment Benefits plans through a trust fund rather than directly through the company.
A trust fund that meets the necessary qualification requirements is tax-exempt and, therefore, the contributions made by the employer to fund SUB benefits are deductible at the time of contribution. Any earnings on the corpus (assets) of the trust are also exempt from taxation.
A supplemental unemployment benefit trust organized under IRC 501(c)(17) or 501(c)(9) are the most common types of tax-qualified exempt trusts.
Necessary requirements of a trust:
1. THE TRUST IS A VALID, EXISTING TRUST UNDER LOCAL LAW AND IS EVIDENCED BY AN EXECUTED WRITTEN DOCUMENT.
Explanation:
You must have a written trust document.
2. THE TRUST IS PART OF A WRITTEN PLAN ESTABLISHED AND MAINTAINED BY THE EMPLOYER SOLELY FOR THE PURPOSE OF PROVIDING SUB.
Explanation:
The trust document must reference a specific written plan document that meets the requirements for SUB.
3. THE TRUST IS PART OF A PLAN, WHICH PROVIDES THAT THE CORPUS AND INCOME OF THE TRUST CANNOT BE USED FOR, OR DIVERTED TO, ANY PURPOSE OTHER THAN THE PROVISION OF OR SUB THE ADMINISTRATION OF THE PLAN.
Explanation:
Once funds are contributed to the trust, the funds can only be used for Supplemental Unemployment Benefits benefits. Funds cannot revert to the employer or be transferred to other benefit plans (i.e. retirement, death benefits, etc.). However, IRC 501(c)(17) permits sick and accident benefits to be paid under the plan provided they are subordinate to the separation benefits.
4. THE TRUST IS PART OF A PLAN WHOSE ELIGIBILITY CONDITIONS AND BENEFITS DO NOT DISCRIMINATE IN FAVOR OF HIGHLY COMPENSATED EMPLOYEES.
Explanation:
A Highly Compensated Employee is an individual who:
Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or For the preceding year, received compensation from the business of more than $120,000 (if the preceding year is 2016 or 2017), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
5. THE TRUST IS PART OF A PLAN, WHICH REQUIRES THAT BENEFITS ARE TO BE DETERMINED ACCORDING TO OBJECTIVE STANDARDS.
Explanation:
Benefits cannot be determined solely at the discretion of the trustees or plan sponsor.