Introduction
Supplemental Unemployment Benefit (SUB) plans provide compensation to employees in addition to state unemployment insurance during periods of layoff. SUB plans, when designed correctly, offer employers a way to provide employees with enhanced income during periods of unemployment without diminishing state unemployment benefits and are not subject to FICA or FUTA taxes.
SUB plans ease financial stress faced by employees during periods of layoffs, thereby generating peace of mind and worker loyalty, as well as significant tax advantages compared to severance pay.
Although SUB plans can be beneficial for employers in any industry, they are particularly well suited for merit shop construction companies that are subject to prevailing wage rules under the Davis-Bacon Act or other state prevailing wage laws.
Construction companies can fund SUB plans with fringe benefit payments required under prevailing wage regulations, and implement best practice strategies while remaining compliant with applicable federal and state laws.
History / Basis in the Law
“SUB plans originated in response to organized labor’s claims during the 1950’s that state unemployment benefits were insufficient to aid employees during periods of layoffs.1” Organized labor considered it critical that supplemental unemployment benefits be excluded from the definition of “wages” because a workers’ receipt of “wages” triggered the cessation of state unemployment benefits. Therefore, by classifying supplemental unemployment benefits as something other than “wages,” laid off workers are eligible to receive both state unemployment benefits and supplemental unemployment benefits simultaneously. Furthermore, because supplemental unemployment benefits are not “wages,” tax consequences attach differently, thereby providing planning opportunities to contractors.
The exemption for supplemental unemployment benefits treatment as “wages” was codified in 1956 when the IRS created an administrative exception through the issuance of Rev. Rul. 56-249. This ruling both removes supplemental unemployment benefits from classification as “wages” and excludes these benefits from FICA and FUTA taxes. Subsequent revenue rulings (60-330 & 90-72) have broadened the scope of Rev. Rul. 56-249.