Even though there are certain business needs where it might make sense to implement a supplemental unemployment benefits (SUB) plan, you should be aware of the potential financial nuances that could come with them — especially if you have contractors that work on prevailing wage projects. Tax implications, annualization requirements, and limited usage of these plans are all factors your business should consider before investing in one.
Required taxes for recipients
Even though contributions into the trust are tax-exempt for employers, laid off employees will need to pay federal and state taxes on any payments made to them — similar to payments made from state unemployment benefits. However, many SUB plans are exempt from FICA and FUTA taxes.
Beware of the annualization requirement
As of October 2015, the United States Department of Labor’s Wage and Hour Division (WHD) determined that SUB plans are subject to annualization for contractors that work on jobs with prevailing wage requirements (public projects/jobs). While it can be beneficial that funds paid into your SUB plan can count towards meeting your fringe benefit requirements, annualization will only allow you to take a credit based on the percentage of the hours worked on public projects.
For example, if you put $5,000/year into your SUB plan for an employee that works 25% (520/2080 hours) on prevailing jobs, you can only take $1,250 of credit. If you increased the contribution to $10,000/year, you would just increase the disallowed credit from $3,750 to $7,500. Since SUB plans are annualized, you should also be aware that all contributions to the plan must be made for all hours worked on both public and private jobs in any year.
Employers who do not abide by the annualization requirement may be responsible for back wages if investigated by the WHD. When selecting your benefits options to meet prevailing wage requirements, you may consider avoiding benefits that are subject to annualization, such as SUB plans.
Funds have limited use
It’s also important to note that funds contributed to a SUB plan can only be accessed by employees in the circumstance of their employment being terminated. This leaves very little flexibility in how these funds can be accessed once an employer allocates funds into the plan’s trust.
Better options to meet fringe requirements
Depending on your business’s needs, you might consider setting up a multi-purpose trust with Section 125, cash fund, and 401(k) components. All of these benefits are exempt from annualization, provide large company tax savings, and give each employee a configurable mix of retirement, tax-reduced spending, and available cash as they need it.
Understanding your best benefit options for your business and your employees can be difficult. Fortunately, we’re here to help our clients navigate these complexities to ensure our clients’ employee benefits are set up optimally.
Contact an eBacon representative today to find out how we can help set up your employee benefits more favorably for your business.
The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.