Supplemental unemployment insurance is an insurance policy that provides income to workers that become unemployed. Payments from this type of insurance are made in addition to state unemployment. If set up correctly, supplemental unemployment insurance payments do not reduce the amount of state unemployment benefits or eligibility. This makes this type of insurance especially attractive to workers looking to protect themselves against uncertainty.
Who uses supplemental unemployment insurance?
Anyone interested in adding an extra layer of financial security to their life can buy supplemental unemployment insurance. Sometimes companies offer supplement unemployment insurance as part of a Supplemental Unemployment Benefits (SUB) plan. This may be used as a way to provide benefits to employees in place of a traditional severance. Additionally, companies that do prevailing wage work may use a SUB as part of their fringe benefit packages. This is especially common among those working in the construction industry, including general contractors and subcontractors.
How is supplemental unemployment insurance used?
Individuals with supplemental unemployment insurance must first be laid off to qualify for benefits. They must also be eligible for state unemployment benefits to qualify for payments under a SUB plan. Once qualifying conditions are met, payments can be made. The amount of the payments depend upon how the SUB’s benefit formula is written and a variety of other factors. Benefits only last during periods of unemployment, so when the individual returns to work, benefits stop.
Supplemental unemployment insurance as a fringe benefit
Contractors and subcontractors that do Davis-Bacon and other prevailing wage work must also pay their employees fringe benefits. For some time, supplemental unemployment insurance was considered a desirable way of fulfilling fringe benefit obligations. In 2015, however, the U.S. Department of Labor (DOL) Wage and Hour Division declared that supplemental unemployment benefit plans were subject to annualization. This change immediately reduced the employer-side benefits of offering supplemental unemployment insurance as a fringe benefit. For information regarding fringe benefits you can reference the IRS’s Employer’s Tax Guide to Fringe Benefits.
Annualization and Supplemental Unemployment Benefit Plans
The U.S. Department of Labor Prevailing Wage Resource book states that “Annualization is a computational method used to determine the hourly rate of benefit plan contributions that are creditable towards a contractors’ prevailing wage fringe benefit obligation on covered project.” This essentially calculates how much a contribution is when divided by the term of a year. The practice of annualization greatly reduces the amount of fringe credits an employer can actually claim.
You should also be aware that since SUB plans are annualized, contributions must be made for all hours worked annually, including both public and private jobs. So, if an employer places $5,000/year into a SUB plan for an employee that works 25% of their hours on prevailing jobs (520 of 2080 total hours annually), they can only take $1,250 in fringe credit. This leaves the employer with $3,750 in disallowed credits.
Unfortunately, increasing the amount of contribution doesn’t have a large impact on the amount of fringe credit an employer can claim. For example, if that same employer increased their contribution to $10,000/year, they could only claim $2,500 in fringe credit. This leave the employer with $7,500 in disallowed contributions. As you can see, annualization makes SUB plans a less beneficial way to handle fringe benefit payments.
Alternatives to Supplemental Unemployment Benefit Plans
Companies that want to maximize the amount of fringe benefit credits they claim may want to look into more favorable options. Fortunately, there are some benefits that are exempt from annualization and allow you to take 100% credit on your costs.
Although annualization-exempt benefits vary by state, they typically include:
- A Section 125 cafeteria plan, which are exempt from taxes and sometimes workers’ compensation. As an example of this, you can use hourly fringe Health Savings Account contributions, but it’s limited to $7,000/yr for employees with a family HDHP medical plan.
- Hourly fringe 401(k) and other retirement contributions
Often times, a multi-purpose bona fide trust with Section 125, cash fund and 401(k) components provide the largest tax savings while giving employees a configurable mix of retirement, tax-reduced spending, and available cash as they need it.
The takeaway
Since 2015, SUB plans are subject to annualization, reducing the amount of fringe credit employers can take. Companies do have the ability to switch to alternative tools that allow them to take up to 100% credit on their fringe benefit costs. It’s important to note that failing to follow annualization requirements may leave you responsible for paying back wages if investigated by the Department of Labor. So, if you’re currently using a SUB Plan to satisfy fringe obligations, you may want to take a closer look to make sure you’re not claiming more credit than is allowed.
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.
