Reduce Termination Payroll Taxes with a SUB Plan
A supplemental unemployment benefit plan (SUB) involves a payout of termination benefits from a trust to employees in order to avoid the payment of wage-related taxes. By using a trust as the vehicle for payments, an employer avoids paying Social Security, Medicare, and federal and state unemployment taxes. This is useful for the employee as well, since payments made to the employee from the trust are not subject to Social Security withholding.
To achieve these savings, the SUB plan must be formalized by filing IRS Form 1024 before a layoff takes place. The plan must specify the amount of payments to be made, as well as the duration and eligibility requirements of those payments. It must also be nondiscriminatory, so that highly compensated employees do not receive excessive payouts under the plan. If the plan is terminated, any residual assets are usually distributed to employees. The plan is essentially a trust, into which the company contributes payments that are based on a certain percentage of employee hourly pay. Payments from the trust can be made in a lump sum or in installments. The IRS provides an excellent summary of SUB plan requirements in section 18.104.22.168 of the Internal Revenue manual.
The plan applies to employees impacted by a reduction in force or a temporary layoff. Payments can include relocation benefits paid to employees who are involuntarily terminated in one city, but offered employment in another. The plan can also apply if employee work weeks have been shortened. It does not apply to anyone who leaves a company voluntarily, or who is terminated for cause.
Though the tax benefits realized from the use of a SUB plan are substantial, there is a cost associated with creating the plan, as well as funding it and coordinating payments from it. Consequently, a SUB plan is only cost-effective for larger employers who have a recurring history of layoffs, or who anticipate such events in the near future.
- Steven M. Bragg