SUB-Pay Plans Could Ease Employer Severance Costs
The plan is a tax-exempt trust account set up by employers to offset state unemployment insurance.
Beyond the increased workload on employees who remain on staff, the strain of layoffs has other effects on an organization.
Severance packages — and the taxes that piggyback on them — can stress a company’s cash reserves. But a supplemental unemployment benefit plan, also known as a SUB-pay plan, can be a great way to lay off workers in a fair way financially and help companies lower severance costs, experts say.
Because these plans fall under a federal law that governs benefit plans, SUB-pay plans are not considered salaries or wages. It’s a tax-exempt trust account set up by employers to offset state unemployment insurance. Many companies that serve as administrators to SUB-pay plans say employers can save 30 percent or more compared with handing out taxable severance packages to laid-off workers.
“Today many of our clients are struggling to provide former employees with a typical severance package,” said John Lihzis, president and CEO of Total Management Solutions, a company that serves as administrator to SUB-pay plans, based in Norton, Massachusetts. “With a SUB-pay plan, companies are taking advantage of their paid-in asset [of state unemployment taxes] to supplement payment to individuals.”
SUB-pay programs have been around since the 1950s and were typically used for union-based workforces Lihzis said. Workers would rely on supplemental pay and unemployment benefits when companies had to lay off workers.
It works similarly today, Lihzis said. Several requirements must be met for the plan to work. First, workers need to be eligible for state unemployment benefits. Next, payments have to be periodic — like paychecks — not lump sums.
Many workers who are laid off at PNC Financial Services Group don’t get a traditional severance package. If they qualify for unemployment benefits, these workers can take advantage of PNC’s supplemental unemployment benefits and take home their regular pay, plus the money they would have paid in certain state and federal taxes.
“Employees like it because it is helping them. It’s a larger payment that goes to them,” says Jim Popp, PNC’s director of employee relations. “There are advantages to both the employer and the employee.”
Plans can be structured differently to fit the needs of the company and to comply with state unemployment rules, said Elizabeth Corley, senior vice president for Transition Services Inc., which is based in Stamford, Connecticut. In some cases, plans can be used as an incentive, encouraging displaced workers to find new jobs. For example, if a former worker finds a job before benefits run out, the employer can claim the savings or reward some or all of it to the worker for finding something earlier than expected.
“We work with companies to design how they want the SUB-pay plan to operate,” Corley said. “Bridging people to the next employment opportunity is a fair benefit.”
Again, because of the plan’s benefit-vs.-wage status, workers don’t pay federal or state taxes on the money they get from the SUB-pay plan. That can be key, especially in situations where employees get bumped to higher tax brackets when receiving lump-sum severance packages, Corley said.
“The big savings for everyone is the taxes,” Corley said. “It can really add up, and for some people, they can wind up taking home more than their weekly wage.”
SUB-pay plans remain unpopular mostly because of misconceptions, Corley and Lihzis said. Administrative obstacles, communication issues and the general stigma of a benefit being linked to a state unemployment program steer many employers away from using the program.
“Many companies are not properly educated about the benefits of SUB-pay plans,” Lihzis said. “But it can actually provide companies with a lot of flexibility to achieve objectives and goals. It may also mean fewer layoffs in the future.”
PNC’s Popp agrees that the details can be difficult for some companies to handle. PNC manages the plan in-house; HR and payroll are in constant communication, making sure employee status changes are handled correctly.
“Communication to [former] employees is most critical too,” Popp says, adding the importance of identifying and notifying past workers of changes in their status.Beyond the increased workload on employees who remain on staff, the strain of layoffs has other effects on an organization.
Typical plans can take a few weeks to install and must be in line with state requirements and in place before triggering layoffs. And even though July’s unemployment numbers dropped slightly to 7.4 percent, the continued tepid economic recovery could encourage continued cuts from payrolls, Lihzis said.
“Employers should take a step back and look” at the plan’s benefits, Lihzis said. “If they are going to lay folks off, why not save as much money as possible and do something with the savings?”