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Differences Between SUB-pay and Traditional Severance Pay

The plan is a tax-exempt trust account set up by employers to offset state unemployment insurance.

August 13, 2013
For employers using SUB-pay:
1. Saves 7.65 percent in Federal Insurance Contributions Act tax, and are exempt from federal and state unemployment taxes.
2. Reduces stress on cash flow. Payouts are made on periodic basis, not lump-sum.
 
For employers using traditional severance:
1. Payment is considered a wage, so is taxable.
2. Employer can decide to use lump sum or periodic payment.
3. Typically less administrative work.
 
For employees eligible for SUB-pay:
1. Typically receives the 7.65 percent of salary that would pay FICA tax.
2. Collects unemployment benefit and SUB-pay simultaneously.
3. SUB-pay tax benefit stops when worker finds a new job.
 
For employees receiving traditional severance:
1. Severance is considered a wage, so is taxable.
2. Workers can get bumped into higher tax bracket when receiving lump sum.
 
Source: Total Management Solutions, Inc.