ALERT: Why You Need a Construction Supplemental Unemployment Benefit Plan Now

Supplemental Unemployment Benefit (SUB) plans can provide a vital financial safety net for construction workers facing layoffs due to the industry’s seasonal nature. This blog post dives deep into SUB plans, explaining their workings, and how they benefit both workers and employers, and explores alternative fringe benefit options in the wake of recent regulations.

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Who Needs Supplemental Unemployment Benefit Plans?

Anyone seeking additional financial security during unemployment periods can benefit from individual SUB plans. However, in the construction industry, SUB plans are often offered as part of a company’s fringe benefit package. This is particularly attractive for:

• Construction workers: SUB plans offer crucial income supplementation alongside regular state unemployment benefits during layoffs.
• Contractors with prevailing wage projects: These employers can leverage SUB plans to partially fulfill fringe benefit requirements for workers on Davis-Bacon and similar projects.

How Do SUB Plans Work?

Here’s a breakdown of the eligibility and benefits of SUB plans:

• Eligibility: Workers must be laid off involuntarily and qualify for state unemployment benefits to receive SUB payments.
• Benefit amount: The amount varies depending on the specific SUB plan’s formula and factors like worker seniority.
• Duration: Benefits are paid only during unemployment periods and stop upon returning to work.

Important Note: Since 2015, the U.S. Department of Labor has required SUB plans to be annualized. This means employers must contribute throughout the year, impacting the fringe benefit tax credits they can claim.

The Impact of Annualization on Supplemental Unemployment Benefit Plans

The Department of Labor’s annualization rule significantly affects how employers utilize SUB plans for fringe benefits:

• Reduced Employer Benefits: Annualization will reduce the amount of fringe benefit credits an employer can claim for SUB plan contributions.
• Calculating Annualization: This method essentially calculates the hourly rate of contributions based on a yearly term, lowering the overall fringe credit value.

Example:

• An employer contributes $5,000 annually to a worker’s SUB plan, with 25% of the worker’s hours on prevailing wage jobs (520 of 2080 total hours).
• Under annualization, the employer can only claim $1,250 in fringe credit, leaving $3,750 in disallowed credits.
• Increasing contributions doesn’t significantly improve the situation. For instance, a $10,000 contribution would only result in a $2,500 credit.

Takeaway: Annualization makes SUB plans less attractive for employers seeking to maximize fringe benefit tax credits.

Alternative Fringe Benefit Options

Fortunately, several alternative fringe benefit options are exempt from annualization, allowing employers to claim full credit on their costs. These options vary by state but often include:

• Section 125 Cafeteria Plans: These tax-advantaged plans allow employees to choose benefits like pre-tax contributions to Health Savings Accounts (HSAs) with limitations based on family plans.
• Hourly Retirement Contributions: Contributions to employee 401(k) plans or other retirement savings vehicles can be counted as fringe benefits.
• Multi-Purpose Bona Fide Trusts: These trusts combine Section 125 features, cash funds, and 401(k) components, offering employees a customizable mix of retirement savings, tax-advantaged spending accounts, and readily available cash.

Supplemental Unemployment Benefit Key Considerations

• Compliance with Annualization: Failing to comply with annualization rules can lead to investigations by the Department of Labor and potential back-wage payments.
• Reviewing Existing SUB Plans: Companies currently using SUB plans to meet fringe benefit obligations should analyze them to ensure they’re not claiming more credit than allowed.

Seeking Further Information:

For a deeper understanding of annualization and how trusts can help manage fringe benefit costs in construction, consult with a qualified financial advisor specializing in the industry.

By understanding SUB plans, their limitations under annualization, and alternative fringe benefit options, construction companies can create a more secure financial safety net for their workers while optimizing their tax benefits.

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.