Supplemental unemployment benefits (SUB) are tax benefits that are paid to laid-off and furloughed workers. These benefits serve as an additional income to the state unemployment benefits workers receive.

How does the SUB scheme work?

Supplemental unemployment benefits serve as an alternative to severance pay. Since providing a lump sum to laid-off and furloughed employees can be costly, SUB plans minimize this financial impact by distributing funds in installments over time.

The amount of the SUB payment depends on:

• How much does an employee get in state unemployment compensation?
• how much the worker was paid during their employment

The SUB payment typically makes up the difference to provide the individual with 100 per cent of their pre-employment salary.

No, supplemental unemployment benefits are not taxable.  The IRS  classifies SUB as a benefit rather than wages. 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 employer funds or from a tax-exempt trust fund pre-approved by the IRS. This trust fund   must comply with 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 the closure of  a “ plant or operation ” may provide SUB payments to terminated employees.
• Leave Benefits:  Employers may also offer supplemental unemployment benefits to people who have to work fewer hours due to workforce reductions.

Please note: For an employee  to be eligible for unemployment benefits  and receive SUB payments, they must be terminated for reasons beyond their control. For employees terminated for cause, this involves proving conditions that make the termination illegal, such as discrimination or retaliation for whistleblowing. Employees who voluntarily quit their job may be eligible for unemployment benefits if they are able to prove they left the job for “good reason,” such as unsafe working conditions or harassment.

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

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

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

Let's say your employee has been furloughed for eight weeks. While on the job, he received a salary of $1,000 per week.

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

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

SUB plans continue as long as the former employee is eligible for unemployment benefits. The eligibility period and weekly payment amount  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, giving employees a financial incentive to find new employment quickly. When a laid-off or furloughed employee resumes working, he or she becomes ineligible for unemployment benefits and regular SUB payments stop.