Supplemental Unemployment Benefits: How Do They Work?

Employers face tough choices when businesses need to force a reduction in force or plant closure. Supplemental unemployment benefits offer a smart way to support displaced workers while protecting the organization from higher costs. These plans help former employees maintain weekly income during unemployment and can create real cost savings for the company.

What are supplemental unemployment benefits?

Supplemental unemployment benefits are payments made by an employer to an employee who has been made unemployed through no fault of the employee. These benefits supplement the state's unemployment benefits and allow the unemployed employee to retain a greater portion of his or her regular weekly pay.

A supplemental unemployment benefits plan is established by the employer and includes provisions for eligibility and the number of benefits to be received. Plans are most implemented for employees impacted by a reduction in force or other business events.

The benefits are then paid only to eligible employees who meet specified criteria upon termination, with a specified number of weeks while the employee remains unemployed and receives state unemployment benefits. This type of plan also offers control to the employer and may result in cost advantages over other severance plans.

For employers reviewing affected positions, CompAnalyst® helps match company jobs with appropriate compensation survey data, making it easier to understand the market value of affected roles before making compensation decisions.

Supplemental unemployment benefits vs unemployment benefits

Supplemental unemployment benefits add to the basic payments workers receive from the state system.

Aspect	State Unemployment Benefits	Supplemental Unemployment Benefits
Source of funds	State unemployment insurance program funded by employer payroll taxes under state and federal rules	Employer contributions into a private fund or trust set up under a written plan
Who pays	Employers pay unemployment taxes into the state system for covered employment	The employer funds the SUB plan directly and may use a third-party administrator or voluntary employee's beneficiary association
Amount received	Fixed by state law based on prior wages and limited by state maximums	Calculated to fill the gap so the worker receives a higher total weekly income while collecting state UI
Tax treatment for employer	Subject to Federal Unemployment Tax Act and state rules	Can be structured so sub payments avoid certain payroll taxes when the plan meets IRS standards
Duration and control	Set by state unemployment compensation rules and claim status	Employer designs the length and rules inside the plan document

SUB pay vs. Severance pay

SUB pay and severance pay both help workers after job loss but follow very different rules that matter to employers.

Aspect	SUB Pay	Severance Pay
Link to unemployment	Must be tied to the worker collecting state unemployment benefits and paid on a periodic basis	Usually paid whether the worker files for unemployment and often comes as a single payment
Tax treatment	Can avoid Federal Insurance Contributions Act and Federal Unemployment Tax Act taxes when the plan meets strict IRS tests	Treated as wages subject to full payroll taxes and withholding
Form of payment	Periodic payments only, never a lump sum	Often a lump sum or short series of payments based on years of service
Impact on state benefits	Designed so the worker can still collect state unemployment compensation	May reduce or delay state unemployment benefits in many states
Employer goal	Support weekly income during unemployment while seeking cost savings and tax advantages	Provide a one-time package to ease the transition after termination

How does supplemental unemployment benefits work?

SUB plans provide compensation to employees in addition to state unemployment insurance during periods of layoff and are financed by employer for contributions to a trust fund.

• The employer creates a written plan that lists eligibility requirements and benefit levels before any payments begin.

• Workers who face involuntary separation due to reduction in force or plant closure may qualify if they meet the plan's rules and collect state unemployment benefits.

• The employee applies for state unemployment compensation first and then submits proof to the fund office or third-party administrator for SUB payments.

• Payments continue on a weekly or biweekly schedule only while the former employee remains unemployed and meets ongoing conditions.

• When the worker finds new employment or exhausts the benefit period, the SUB pays stops.

• Employers often use a voluntary employees beneficiary association or trust to hold the money and keep the plan tax compliant.

CompAnalyst® can provide a consolidated view of compensation, including base pay, bonuses, benefits, and taxes. This can help employers communicate the value of compensation programs before or after workforce changes.

Eligibility, taxes, and compliance for SUB plans

Based on IRS rules for section 501(c)(17) organizations, a supplemental unemployment benefits plan must meet clear standards to stay tax exempt and protect the employer from extra payroll taxes.

• Only involuntary separation from protected employment due to a reduction in force or similar situation will qualify for benefits.

• A plan must be a written, permanent plan with objective criteria. No preference may be given to high-paid employees.

• SUBs are exempt from the Federal Unemployment Tax Act and the Federal Insurance Contributions Act if they are related to the receipt of state unemployment benefits and are not in lump sum form.

• The employee is subject to income tax. The employer may be required to withhold federal income tax.

• Use of a fund or third-party administrator is encouraged to record, and process claims and maintain records available to the IRS.

• Collective bargaining agreements may influence the plan. However, the plan must still meet the federal requirements.

CompAnalyst® helps employers create, edit, share, and schedule compensation reports. These reporting capabilities can support internal review of compensation information during workforce planning.

Types of supplemental unemployment benefits

The Social Security Administration shows several common forms that employers can build into a SUB plan.

• Ordinary weekly SUBs paid in addition to state unemployment and providing the employee with a defined share of previous earnings.

• Partial layoffs and part-time work for retention of skilled labor.

• Relocation benefits to aid in the relocation of displaced employees to other facilities and prevent separation.

• Accident or ill health benefits that are less important than unemployment insurance.

• Plans resulting from a collective agreement covering specific employee groups.

• Voluntary employees' beneficiary plans or employee trust funds funded only by the employer.

How are SUB payments calculated?

With IRS and SSA standards, the weekly amount under a SUB plan is based on the worker's regular pay and the state unemployment benefit already received.

• Begin with the employee's usual weekly pay from employment covered by the plan up to the date of termination.

• Less the state unemployment benefits the employee actually receives during the week.

• Plus, any other benefits which the state allows and which do not exceed the plan.

• Times a factor determined by the plan (usually multiple of the previous pay).

• Cease or reduce benefits if the former employee becomes employed again or ceases to qualify for benefits.

• Never pay as a lump sum, since this would constitute ordinary pay and would also violate the tax rules.

FAQs

Here are some FAQs for better understanding.

Are Supplemental unemployment benefits taxable?

Federal income tax is imposed on SUB paid as compensation to a former employee. Income tax may be required to be withheld even if the benefits are exempt from Medicare and Social Security taxes.

IRS rules require that benefits be free from tax under the Federal Unemployment Tax Act and the Federal Insurance Contributions Act if the plan is structured properly. The benefits must be reported as wages on the employee's returns.

Are unemployment benefits supplemental security income?

Unemployment insurance and supplemental security income are not related to programs. SUB and state unemployment benefits are provided to unemployed workers who are able to work. Supplemental security income is a need based federal program for the disabled, blind or aged and low income and low resources.

In most cases, receiving one or the other does not have an automatic impact on the other. SUB payments should not be associated with supplemental security income by employers.

What are the main causes of unemployment?

Unemployment can stem from permanent unemployment, temporary unemployment, the end of a temporary position, voluntary separation from employment, re enterers into the labor force, and new entrants.

Millions of workers have experienced unemployment, and job losers represent a significant portion of unemployment according to data from the Bureau of Labor Statistics. A significant number of these unemployment cases are caused by business closures or reduction in force.