With some limited exceptions, all SUB plans seeking to meet the qualifications to be exempt from wages (and therefore exempt from FICA and FUTA taxes) must be substantially the same or identical to those described in Rev. Rul. 56-249, as modified by Rev. Rul. 90-72. Together, these rulings require SUB plans to supplement state unemployment benefits and to link the benefits to the receipt of state unemployment compensation.
Key elements of a SUB plan:
1. BENEFITS ARE PAID ONLY TO UNEMPLOYED FORMER EMPLOYEES WHO ARE LAID OFF BY THE EMPLOYER.
Section 3402(o)(2)(A) of the Internal Revenue Code defines a lay off for purposes of SUB as an involuntary separation from employment (whether or not the separation is temporary) resulting directly from a seasonal lay off, reduction in force, discontinuance of a plant or operation, or other similar condition.
The definition of a layoff can be further expanded, if permitted by state unemployment law, to include a reduction of hours of service that renders the employee eligible to collect state unemployment benefits.
The definition of a lay off does not include an employee terminated for cause or an employee who voluntarily resigns.
Benefits must cease to be payable as of the date that the employee returns to work for any employer (even if it is not the employer who established the SUB plan).
2. ELIGIBILITY FOR SUPPLEMENTAL UNEMPLOYMENT BENEFITS DEPENDS UPON MEETING PRESCRIBED CONDITIONS AFTER TERMINATION OF EMPLOYMENT.
The primary condition is that an employee must be eligible for state unemployment benefits.
There are three limited exceptions to this rule that were established in Rev. Rul.90-72 which permits an employee to receive SUB if they are NOT eligible for state unemployment because:
- The employee does not have sufficient employment to be covered under the state system;
- The employee has exhausted the duration of state unemployment benefits OR
- The employee has not met the requisite waiting
3. THE AMOUNT OF WEEKLY BENEFITS PAYABLE IS BASED UPON STATE UNEMPLOYMENT BENEFITS, OTHER COMPENSATION ALLOWABLE UNDER STATE LAWS, AND THE AMOUNT OF REGULAR WEEKLY PAY.
This is a very broad requirement that allows room for creative benefit formulas.
4. NO EMPLOYEE HAS ANY RIGHT, TITLE, OR INTEREST IN THE BENEFITS UNTIL SUCH EMPLOYEE IS QUALIFIED AND ELIGIBLE TO RECEIVE BENEFITS AND THE BENEFITS
DO NOT ACCRUE UNTIL A PRESCRIBED PERIOD AFTER TERMINATION OF EMPLOYMENT.
Employees have no right to SUB until they have met the requirements of their employers SUB Plan.
5. THE BENEFITS ARE NOT ATTRIBUTABLE TO THE RENDERING OF PARTICULAR SERVICES BY THE RECIPIENT DURING THE PERIOD OF UNEMPLOYMENT.
The employer cannot require that the employee perform any services whatsoever in return for SUB.
6. BENEFITS MAY NOT BE PAID IN A LUMP SUM. Explanation:
SUB benefits must be linked to state unemployment benefits. Receipt of SUB in the form of a lump sum rather than periodic payments would allow the same amount of benefits to be received regardless of how long an individual remains unemployed, and thus would not satisfy the requirement to be linked to state unemployment benefits.