Supplemental unemployment benefits (SUB) have received increased attention recently due to the economic uncertainty created by COVID-19. As a tool for providing income after a job loss, SUB plans can be beneficial. They can also provide some tax advantages for employers, but in many situations, SUB plans aren’t actually the best option. This is especially true for contractors that work on prevailing wage projects. In fact, SUB plans have some serious downsides that you will want to understand before you consider investing in one.

Limited access to funds  

SUB plans are essentially insurance policies that provides income for those that lose their job. These plans can be funded by an employer as part of a benefits package, purchased by employees themselves or a mix of both. If someone has a SUB plan, becomes unemployed and meets pre-determined eligibility requirements, they can receive supplemental unemployment insurance payments. This is separate from, and in addition to, state unemployment benefits.

In most states, SUB Plans will not impact the ability to receive state unemployment benefits. This makes SUB plans interesting to those that want to protect themselves from economic uncertainty. However, if you lose your eligibility for state unemployment, you often lose your SUB plan eligibility as well. This can be particularly frustrating for employees that contribute to a plan only to find themselves unable to fully access benefits.

SUB Plans and annualization

The United States Department of Labor’s Wage and Hour Division (WHD) ruled that SUB plans are subject to annualization for contractors that do prevailing wage work. So if you’re government contractor, you can use a SUB plan to help fulfill your fringe benefits obligations. The catch is, however, that you can’t actually take full credit for your contributions to the plan.

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 try to claim the entire amount toward meeting your fringe obligation, you could be investigated by the WHD and face serious legal and financial trouble.  You can read the actual ruling on SUB plan annualization here.

Alternatives to Supplemental Unemployment Benefit Plans

Companies working on prevailing wage projects should look closely at more favorable options for handling fringe. Fortunately, there are ways you can legally maximize the fringe benefit credits you claim and not worry about annualization. For instance, Bona fide trusts such as 401(k)s, section 125 cafeteria plans, or health savings accounts (HSA)s can be used to meet fringe requirements. Contributions to these types of financial instructions are exempt from annualization, workers’ compensation, federal and state unemployment taxes.

And while you can pay fringe in cash, take full credit and not worry about annualization, you will end up paying more in workers’ comp and general liability than other SUB alternatives. So while cash is administratively simple way to manage fringe, it’s more expensive. It’s also important to note that annualization-exempt benefits do vary by state, so be sure to check with a professional familiar with your laws.

The takeaway

SUB plans can be helpful in some situations, but really aren’t a great tool for prevailing wage contractors. This is largely because the WHD ruled that SUB plans are subject to annualization, making them an inefficient way to manage fringe benefits. Construction companies using a SUB plan as a fringe benefit should consider alternative tools and make sure you’re annualizing your contributions. If you have not been correctly annualizing, you are most likely liable for back wages and vulnerable to action by the Department of Labor.

Lean more about annualization and how you can use trusts to save money on fringe benefit payments.


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.

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