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An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

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Supplemental Unemployment Benefits

What Are Supplemental Unemployment Benefits?

Supplemental unemployment benefits (SUB) are tax benefits offered to terminated and furloughed employees. These benefits serve as additional income, in conjunction with state unemployment benefits workers receive. 

How Does a SUB Plan Work? 

Supplemental unemployment benefits serve as an alternative to severance pay. Since it can be costly to provide lump sums to laid-off and furloughed employees, a SUB plan alleviates this financial impact by distributing the funds over time in installments. 

The amount of SUB payments depends on: 

  • How much the worker receives in state unemployment compensation 

  • How much the worker was paid during their employment

SUB payments generally make up the difference to provide the individual with 100 percent of their prior employment pay.

Are Supplemental Unemployment Benefits Taxable?

No, supplemental unemployment benefits are not taxable. The IRS classifies SUB as a benefit instead of a wage. Therefore, SUB plans are exempt from the following payroll taxes:

  • Federal Insurance Contributions Act (FICA)

  • Federal Unemployment Tax Act (FUTA)

  • State Unemployment Tax Act (SUTA)

SUB payments can be made from an employer’s fund or from an IRS pre-approved tax-exempt trust fund. This trust fund must abide by IRC Section 501(c)(17).

What Are the Different Types of SUB?

There are two main types of supplemental unemployment benefits: 

  • Layoff benefits: Employers who have laid off employees due to a discontinuation of a “plant or operation” may provide SUB payments to terminated workers.

  • Furlough benefits: Employers may also provide supplemental unemployment benefits to those who need to work fewer hours due to workforce reductions.

Please note: In order for a worker to qualify for unemployment benefits and receive SUB payments, they must have been terminated for reasons beyond their control. For employees terminated for cause, this involves proving conditions that would make the termination illegal, such as discrimination or retaliation for whistleblowing. Employees who quit voluntarily may qualify for unemployment benefits if they are able to prove they quit for “good cause,” such as unsafe working conditions or harassment..

How Do You Apply for Supplemental Unemployment Benefits?

Some states require employers to receive pre-approval from their respective state unemployment compensation agency. States may also have their own rules and eligibility requirements for SUB plans. Employers may access their individual state’s unemployment agency, courtesy of the Department of Labor. 

Employees who are set to receive SUB must file for state unemployment.

Employers may choose to work with a third-party administrator to track state SUB regulations and unemployment claims, and to calculate and disburse benefit payments.

What Is An Example of a Supplemental Unemployment Benefits Plan?

Let’s say your employee is furloughed for eight weeks. While employed, they had a weekly pay of 1,000 dollars. 

Your employee applies for state unemployment, for which they are eligible to receive 500 dollars per week. Under the SUB plan, the organization would make up the difference between their prior salary and their unemployment benefit payment, providing the remaining 500 dollars. 

Together, these two benefit payments compensate the employee at the same level as when they were employed. The payments are not taxed, which saves the employer money, and the employee takes home more money

How Long Does Supplemental Unemployment Last?

SUB plans continue for as long as the former employee is eligible for unemployment benefits. Eligibility periods and weekly payment amounts vary from state to state

Some SUB plans include a reemployment bonus, which pays a percentage of the remaining benefit amount as a taxable bonus when the employee finds new employment, providing a financial incentive for employees to quickly find new employment. When a terminated or furloughed worker begins working, they become ineligible for unemployment benefits and regular SUB payments stop.