After being laid off, many people can have trouble with their finances while looking for new employment and find themselves drowning in credit card debt, car loans, mortgage payments and other monthly payments while they are unemployed. This can be an incredibly difficult and financially devastating situation for many people. This is where Supplemental Unemployment Benefits (SUB) come into play — they offer a financial bridge for those experiencing financial difficulties due to underemployment and unemployment.
The benefits and outcomes of SUBs have been discussed at length and they’re a popular conversation in modern society. In this article, we’ll provide a concise explanation of what SUBs are, why people use them, and how they work.
What are supplemental unemployment benefits?
SUBs are consistent, reliable payments that continue to come in during a person’s unemployment period. They are typically granted by employers, either voluntarily or because they must provide them under law, depending on where the company is based.
SUBs are not meant to cover the individual’s entire wage income, but rather replace some of it so he or she can pay for important living expenses during difficult times of unemployment or underemployment. Supplemental unemployment benefits are a supplement to the regular unemployment compensation that is received by an unemployed individual on a weekly, biweekly, or monthly basis.
SUBs will look different for each individual, company, and industry, so make sure to consult with your company’s Human Resources department if you have more questions particular to your own situation.
Why do people use SUBs?
SUBs are a popular option among those who have been unemployed for a few weeks or more. They are also often used by individuals who have survived a layoff and want to keep their monthly income stable while looking for another job.
This type of benefit is for those who have been unemployed for a specific amount of time, meet eligibility requirements, and are within an allowable period. In some cases, SUBs will supplement benefits that are paid by unemployment insurance on a regional or federally funded program.
SUBs help to provide unemployed individuals with the financial resources they need to meet their day-to-day needs, such as utilities, rent, food, health care insurance premiums, essential household items such as furniture or clothes. It gives individuals the opportunity to meet their financial obligations like paying for child care costs and school supplies if applicable.
SUBs are often called “top-up,” because they provide benefit payments that supplement a person’s regular unemployment compensation, which is usually just a fraction of their normal salary. The level of payment depends on a number of factors, including:
- Type of company providing the insurance
- Wages at your last job
- Weekly benefit award
- Employer’s number of employees
- How long you were working at your last job
- Whether you’re a member of a labor union
Since SUB programs are carefully governed by rules and regulations, keeping track of your expenses that you use SUB income on is important. It is easy to do this by generating an invoice or creating a paystub.
How supplemental unemployment benefits work
Payments are designed to put some money in the hands of people who desperately need it, and also help stimulate the economy. However, it is important that you understand just what happens with your money before you decide on a SUB plan.
In order to provide workers in sectors with cyclical employment patterns with a more stable income, SUBs gained popularity in the 1950s. As part of collective bargaining agreements, Supplemental Unemployment Benefits were frequently contested. In all industries, their popularity is rising once more. In the case of a SUB plan, laid-off workers preserve their prior salaries while receiving additional unemployment benefits from their former company in the event of a Reduction in Force (RIF) or temporary unemployment as a result of training, illness, or injury.
When an employee rejoins the workforce, these plans may offer a “reemployment bonus” of a certain proportion of the remaining benefits. Additionally, SUB plans may provide economic support for workers who are obliged to work fewer hours as a result of a RIF.
Supplemental Unemployment Benefits programs pay out over time rather than all at once. Employees must be ineligible for state unemployment benefits to qualify (there are exceptions, so you may need to consult an employment attorney). This implies that depending on the state an individual works in, plans may vary (in terms of specifics and quality).
There are three different plans:
- Payment in lieu of wages — You will be paid a flat rate, which is usually less than minimum wage. Payments can be frequent or sparse, depending on the rate.
- Advance payments — This type of payment is like an interest-free loan that you repay later when you are earning income again.
- Severance pay — The amount of money per week will vary depending on your previous income and your state’s unemployment law, but will usually be more than a payment in lieu of wages. This option also requires a waiting period before it begins.
Supplemental unemployment benefits can help provide the consistency and reliability that people need in order to pay for food, shelter, and other necessities when they are unemployed because it replaces some or all of their lost income while they continue to look for work.
Employer advantages of SUB plans
The main advantage for employers is that they are spared the agony of a lump sum severance payment. This will be especially useful if your company has recently undergone a painful downsizing and your cash reserves are low or nonexistent. Another piece of good news for participating employers: the IRS classifies Supplemental Unemployment Benefits plans as benefits rather than wages, which reduces payroll tax liability. This allows businesses to avoid FICA taxes, FUTA costs, and state unemployment taxes.
Employer and employee advantages
While this is not a well-known benefit, the savings to employers make it a far more appealing option than the standard severance package plan for a number of reasons.
- Tax breaks: Employees must pay close to 8% in FICA taxes, which fund Social Security and Medicare, as well as close to 3% in federal and state unemployment taxes, often known as FUTA and SUTA, on severance packages with a salary continuation plan, for example. They just pay the benefit money with a SUB plan, saving them close to 11% in taxes.
- Cash flow management: While some employers offer lump-sum severance, payments over time are easier to handle for employees while also being an efficient approach for organizations to manage their cash flow. SUBs are always administered over time and never in one big payment.
- Better words: Because it is linked to the state unemployment plan, the SUB’s goal is to make up the employee’s weekly income until they find a new work.
Employer disadvantages of SUB plans
Creating a Supplemental Unemployment Benefits plan can be time consuming because it cannot be used in all situations (which means you may have to develop multiple versions—again, time consuming). The strategy’s viability is heavily reliant on state-specific rules. And developing a SUB plan quickly is not easy. Employers in some states are required to seek approval for plan designs prior to implementation.
It is unknown how the CARES Act affects the implementation of SUB programs. CARES could effect SUBs in a variety of ways. For example, there are now extra eligibility restrictions for unemployment benefits. There is no waiting period. There’s also the additional $600 per week in Federal Pandemic Unemployment Compensation. All of these factors could have an impact on Supplemental Unemployment Benefits, but the IRS has yet to provide guidance.
How do you set up a supplemental unemployment benefits fund?
SUB plans might be wholly sponsored by an employer, entirely funded by employees, or a combination of the two. The typical plan is wholly funded by the business, with individual funds for each employee. These are in place of traditional severance payouts. Employee-funded Supplemental Unemployment Benefits plans vary in that donations are pooled into a single fund for all employees.
Supplemental Employment plans typically make use of tax-exempt Section 501 (c) (17) or Section 501(c)(9) Voluntary Employee Benefits Association (VEBA) trusts. Using these trusts, however, entails additional I.R.S. obligations. In several states, SUB payments can be deducted from an employer’s general assets.
Not only do SUBs help provide some financial relief to those who need it, but they can also help stimulate the economy: first, by providing much needed income to people who are out of work, and second, by helping people to save in order to contribute to the economy through spending once they return to work.
SUBs have been the point of significant discussion and debate over their purpose and effectiveness. However, they currently play an important role in the economy and in the lives of individuals who face financial hardship during periods of unemployment. They can be life-saving programs that put money into the pockets of those who need it to purchase basic day to day goods, such as food or rent, on a temporary basis while looking for more work.