COVID-19 Drives Interest in Supplemental Unemployment Benefits

SUB plans can keep income consistent for furloughed employees

By Lin Grensing-Pophal May 29, 2020
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distraught laid-off woman

Supplemental unemployment benefit (SUB) plans allow employers to augment unemployment insurance (UI) benefits for laid-off employees, raising their overall pay to the full amount they previously received. That boost can help employers maintain goodwill with employees until the coronavirus crisis recedes and workers are back on the payroll.

It's a benefit option that has been available to employers since the 1950s, having emerged through the auto industry and negotiated on behalf of unionized employees. Now, as companies across the U.S. are furloughing valued employees while they ride out the COVID-19 pandemic, more are turning to SUB plans.

The new prominence of SUB plans also means employers are keeping these programs top of mind in case of future economic downturns.

COVID-19 Driving Adoption

UI programs, administered by state governments and funded by employer and employee contributions, were never intended to replace an employee's full salary, but were designed to help them meet basic needs while looking for new job opportunities. However, COVID-19, which has brought about national and state mandates for "nonessential" employers to cease operations, has changed that. Many employers hope to bring back employees who are now receiving UI payments once the crisis abates.

"Many organizations have been putting SUB plans in place so that they can supplement their employees' income in the most cost-efficient way possible," said Lana R. Mellis, manager of business development and client services at Transition Services Inc., a Stamford, Conn.-based employee separation and offboarding services firm.

The firm calls IRS-approved SUB plans a "smart alternative to traditional severance." That's because these plans let employers maintain weekly income for displaced employees with payments exempt from both income and FICA payroll taxes and without disqualifying employees from receiving state UI.


SHRM Resource Spotlight
Coronavirus and COVID-19

How SUB Plans Work

Instead of paying an employee's former salary, as a typical severance plan would, SUB plans pay the difference between what employees receive through UI and their salary.

"An employer utilizing a SUB plan rather than a FICA-taxable severance plan may achieve cost savings via two mechanisms: an offset to the company-paid benefit by the amount of state unemployment compensation and via the FICA-tax exemption on SUB benefits," Mellis said. She estimates that an employer will typically save 25 percent to 50 percent through the use of SUB plans compared to traditional severance policies.

SUB plans are governed by the Employee Retirement Income Security Act but have substantial design flexibility, Mellis noted. Companies that use a SUB plan typically engage a third-party administrator to track state regulations, state unemployment claims and the employment status of participants, as well as to communicate with furloughed employees and calculate ongoing benefit payments, she said.

[SHRM members-only HR Q&A: What is an unemployment SUB plan, and how can it help my employer save money during a reduction in force?]

Unemployment and the CARES Act

As the economic effects of COVID-19 were taking hold, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide economic support to companies and workers during the pandemic. The legislation provided for a $600 weekly addition to employees' UI benefits.

For some workers, receiving the additional funds meant reaching, or exceeding, former pay levels. For others, however, SUB plans help maintain income levels while furloughed or without a job.

"When you have a workforce reduction or you are laying off people, those folks could apply for unemployment insurance. But then you can supplement that on a weekly basis to the amount of their original salary," said John H. Chuang, CEO of Aquent, a Boston-based international staffing agency.

Chuang identified four questions that remain to be answered relative to SUB plans and the CARES Act:

1. The CARES Act waives the waiting period for unemployment insurance. Does that mean the waiting period is waived for SUB plans, as well? Chuang believes it should be.

2. With the federal government providing an additional $600 per week of unemployment coverage through the CARES Act, should that additional amount offset what employers would need to pay to bring the employee back to full wages? Again, Chuang believes the answer should be yes. "Creating a windfall situation" is not, or at least should not be, the intent of either UI or SUBs, he said.

3. The CARES Act also has extended by 13 weeks the length of time that employees can receive unemployment benefits—from 26 to 39 weeks. Should SUBs likewise be extended? Chuang thinks so.

4. The CARES Act now covers gig workers who may receive unemployment benefits. Should this be the case? Chuang says no but explains, "It sort of legitimizes their misclassification." Instead, "a lot of these gig workers should be employees to begin with."

Beyond the Coronavirus

SUB plans can offer benefits in other situations, as well, said Mellis, such as:

  • Help for employees who have seasonal or cyclical work schedules, or coverage for employees during weather-related shutdowns or plant retooling.
  • The reallocation of benefit spending to enhance health care or paid family leave.
  • Support for employees who were let go after a reorganization or acquisition.
  • A longer severance benefit after a reduction in force.

[SHRM members-only HR Q&A: Can employees refuse a recall to work and still collect unemployment?]

Employer Concerns

Mellis addressed concerns employers may have about the use of SUB plans:

  • A SUB plan could cause an increase in a company's state unemployment tax rate.  "While this is a possibility, the amount of savings a SUB plan offers far outweighs a potential increase in state unemployment taxes," she said, noting that the payments can keep employees from finding new jobs, which would mean hiring costs for employers.
  • The plan could reduce the protections of a release and waiver signed as part of a severance agreement. "There is no evidence that using a SUB plan increases this risk," Mellis said.
  •  Employees prefer traditional severance benefits, and the use of SUB plans could cause backlash. "It is extremely rare for individuals to either take or leave a position because of the severance policy," Mellis said. The vast majority of employees "understand that a SUB plan provides a fair benefit during the unemployment period."

SUBs can be a good way to help employees financially while building loyalty and goodwill that, when the time is right, will help to fuel a positive transition back to the workplace.

Lin Grensing-Pophal is a freelance writer in Chippewa Falls, Wis.

Related SHRM Resources:

U.S. Loses Over 20 Million Jobs, Unemployment Rises to 14.7 Percent, SHRM Online, May 2020

What Happens When Unemployment Pays Too Well?, SHRM Online, May 2020

Emergency Relief Funds Throw Employees a Lifeline During Pandemic, SHRM Online, April 2020

Unemployment Insurance and Furlough Q&As, SHRM Online, April 2020

[Visit SHRM's resource page on unemployment.]


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