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SUB Plan: The Severance Alternative

A Supplemental Unemployment Benefits Plan (SUB Plan) is an IRS approved, tax exempt vehicle used by employers to provide income replacement benefits to permanently or temporarily displaced employees, while generating considerable cost savings for the organization when compared to traditional severance.

How it Works

Savings attained by a SUB Plan are generated from three sources:

  • Elimination of Payroll Tax: Separation payments are treated as “benefits” rather than as “wages,” and are thus exempt from the payment of payroll taxes (FICA , FUTA, and SUI) for both the company and the benefit recipient.
  • Integration with State Unemployment Benefits: The displaced employee’s income is maintained, but now comes from two sources, the state UI benefit and the employer SUB-pay, thus reducing the benefit cost for the employer on a dollar-for-dollar basis
  • Duration Management: Because the payment of SUB Benefits is tied to the eligibility for State Unemployment compensation, payments cease when a displaced employee obtains new employment. An employee may receive a “reemployment bonus” of some percent of the remaining benefit allotment.

Typically, organizations that implement a SUB Plan will save 25-45% when compared to traditional severance plans. These savings may be used in a variety of ways, including supplementing other, better-directed unemployment benefits, enhancing benefits offered to retained workers, or growing the bottom line to improve shareholder returns