Supplemental Unemployment Benefit (SUB) plans provide compensation to employees in addition to state unemployment insurance during periods of layoff. SUB plans, when designed correctly, offer employers a way to provide employees with enhanced income during periods of unemployment without diminishing state unemployment benefits and are not subject to FICA or FUTA taxes.
SUB plans are particularly well suited for the construction industry, especially those that are subject to prevailing wage rules as the plans can be funded with fringe benefit payments required under the Davis-Bacon Act or state prevailing wage regulations.
From an employee perspective, SUB plans ease financial stress faced by employees during periods of layoffs, thereby generating peace of mind and worker loyalty as well as significant tax advantages compared to severance pay.
Essential Requirements of a SUB Plan
With some limited exceptions, all SUB plans seeking to meet the qualifications to be exempt from wages and, therefore, exempt from FICA and FUTA taxes, must be substantially the same or identical to those described in Rev. Rul. 56-249, as modified by Rev. Rul. 90-72. Together, these rulings require SUB plans to supplement state unemployment benefits and to link the benefits to the receipt of state unemployment compensation.
The key elements of a SUB plan are as follows:
- Benefits are paid only to unemployed former employees who are laid off by the employer;
- Eligibility for supplemental unemployment benefits depends upon meeting prescribed conditions after termination of employment;
- The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state laws, and the amount of regular weekly pay;
- No employee has any right, title, or interest in the benefits until such employee is qualified and eligible to receive benefits and the benefits do not accrue until a prescribed period after termination of employment;
- The benefits are not attributable to the rendering of particular services by the recipient during the period of unemployment; and
- Benefits may not be paid in a lump sum.
Advantages & Requirements of using a Trust
Most employers elect to provide SUB plans through a trust fund rather than directly through the company.
A trust fund that meets the necessary qualification requirements is tax exempt and, therefore, the contributions made by the employer to fund SUB benefits are deductible at the time of contribution. Any earnings on the corpus of the trust are also exempt from taxation.
A supplemental unemployment benefit trust organized under IRC 501(c)(17) or 501(c)(9) are the most common types of tax qualified exempt trusts. The necessary requirements are:
Advantages and Strategies for Construction Companies Subject to Prevailing Wage Regulations
The fringe benefit portion of the prevailing wage regulations are particularly complicated and often misapplied by contractors, especially those that are not subject to a collective bargaining agreement that provides bona fide fringe benefits. The fringe benefit portion of prevailing wage regulations typically require a contractor to provide a certain dollar level of bona fide fringe benefits for each hour worked or provide an equivalent amount in additional wages.
Bona fide benefits include both health & welfare benefits (including supplemental unemployment benefits) and retirement benefits.
Supplemental unemployment benefits are particularly well suited for construction companies that commonly have interruptions in their work and therefore, reduced needs for labor during these interruptions. Some examples of possible interruptions may include:
- Seasonal shutdowns
- Weather conditions
- Job scheduling
- Equipment or material supply problems
- Delays caused by engineering or other sub-contractors
Interruptions such as those outlined cannot always be effectively handled with a temporary layoff. Acquiring and keeping skilled workers has become a determining factor in most companies’ ability to grow. Laying off valuable workers during an interruption can have unintended consequences such as morale issues resulting from reduced income or employees finding work with another employer, including a competitor!
These consequences are well understood in the construction industry and often result in companies keeping workers “busy” on other things such as “shop work” rather than risk the workers not being available when they need them.
Supplemental unemployment benefit plans can be the solution to the risks associated with temporary layoff because:
- Payments from the SUB plan can provide the additional income necessary to equalize or even exceed the wages the employee receives while working;
- Depending on state rules, employees can receive payments for short work weeks (less than 40 hours worked), where their hours were interrupted by weather or some other short term factor;
- The payments received by employees are tax advantaged because they are not subject to FICA taxes (7.65%); and
- SUB plans can be funded with fringe benefit payments already required under prevailing wage regulations and therefore do not create an additional company expense or liability.
Providing a supplemental unemployment benefits plan as part of your prevailing wage fringe benefit strategy can be a win-win for your company and your employees. Making a temporary lay-off a welcome respite rather than a time of stress and financial difficulty can help build employee loyalty and secure your valuable workforce.
Funding a plan with prevailing wage fringe contributions is tax efficient and provides an enormous cost advantage over paying fringe contributions as cash wages.
The rules related to Supplemental Unemployment Benefit Plans combined with prevailing wage regulations can be extremely complicated. The strategies to most effectively deal with them in a compliant fashion are best managed by knowledgeable experts with the proper trust accounting and administrative tools to provide flexibility in Plan design, timely and accurate statements and reporting, as well as online portals for you and your workers.
Jeffrey Bennett, M.B.A., is the Co-Founder of DirectAdvisors (formerly Direct Retirement Solutions) in Albany, NY.
Jeff has spent his 25+ year career designing and administering bona fide fringe benefit programs for construction companies subject to the Davis-Bacon Act and state prevailing wage regulations.