Supplemental unemployment benefits, or SUB plans, are employer-funded programs that help employees out when they’re laid off or temporarily out of work. The goal? To top up what someone gets from regular state unemployment insurance so they don’t take such a big financial hit. These aren’t the same as severance pay. SUB plans are structured to work alongside unemployment benefits, not replace them.
They’re most common in industries with predictable slowdowns or layoffs, like manufacturing or construction. But really, any employer can offer one if they meet the rules.
How do supplemental unemployment benefit (SUB) plans work?
It’s pretty straightforward. An employer sets up a plan that pays laid-off employees a set amount, which is coordinated with whatever unemployment benefits the person is getting from the state. The payments kick in during a period of temporary unemployment that’s beyond the employee’s control—think plant closures or seasonal slowdowns.
The amount paid varies, but the idea is to make up part of the wage gap. These payments don’t disqualify someone from receiving state unemployment benefits, which is a key reason why they need to follow certain IRS and Department of Labor guidelines.
Are supplemental unemployment benefits taxable?
Yes. SUB payments are considered taxable income. They’re subject to federal income tax, and depending on where you live, possibly state income tax too. The upside is that they’re not subject to FICA taxes (Social Security and Medicare), assuming the plan is structured correctly under IRS rules.
It’s important that employers handle the tax side right—missteps can mean extra taxes or compliance headaches down the line.
What are the advantages of SUB plans for employers and employees?
For employees, it’s obvious. More money while you’re out of work. It can help cover bills, avoid debt, and reduce stress during a rough patch. It’s a financial cushion, which can make all the difference.
For employers, it’s a solid retention tool. When workers know they’ll be supported during layoffs, they’re more likely to come back when business picks up. It shows the company cares about its people, which helps morale and loyalty. Plus, SUB plans can be more cost-effective than severance packages and can align better with state unemployment systems.
How can employers set up a supplemental unemployment benefit plan?
It takes a little planning. Employers need to draft a formal plan that lays out eligibility rules, payment formulas, and coordination with state unemployment benefits. It should be clearly documented and follow IRS guidelines if the company wants the tax advantages.
Once the plan is in place, employers typically fund it through a trust or other separate account. It’s also smart to talk with a tax advisor or legal team to make sure everything’s set up properly. And if the company has a union workforce, it may need to negotiate the plan terms as part of a collective bargaining agreement.
Bottom line? SUB plans aren’t just helpful—they’re strategic. With a bit of structure and planning, they can support employees and give businesses more flexibility during uncertain times.
