With the expiration of Emergency Unemployment Compensation (“EUC”) benefits on December 28, 2013, President Obama had indicated support for an extension of the EUC benefit program. In response, Senate Majority Leader Harry Reid scheduled extension legislation for a cloture vote in the Senate on January 6, 2014. The bill would extend EUC benefits for three months through March 31, 2014.
While the United States Senate did successfully vote 60-37 to avoid cloture on January 7th to further consider the passing of legislation to extend EUC benefits, there were concerns by the Senate that new “pay for” amendments may be necessary to gain approval in the House.
With the signing of the “American Taxpayer Relief Act of 2012” in January 2013, legislation was passed to further extend the Emergency Unemployment Compensation (“EUC”) benefit program through December 28, 2013. EUC benefits allow qualified states to provide up to 47 additional weeks of federally funded unemployment insurance (“UI”) benefits to people who have exhausted their regular state UI benefits.
Since 2002, the ongoing debate about whether severance paid to certain employees should not be considered wages for Federal Insurance Contribution Act (FICA) tax purposes has been extended through District, Federal Circuit and US Appeals courts. The debate has carried over two monumental cases, and on January 14, 2014, the Supreme Court heard opening arguments in the United States v. Quality Stores case. This case will be the ultimate decision maker as to whether severance should be treated as Supplemental Unemployment Benefits (SUB-Pay). A decision should be rendered by summer 2014.
The Quality Stores case will have huge implications regarding the way many companies pay their existing severance packages to former employees. And while Quality Stores, Inc. is seeking about $1 million in FICA tax refunds on severance payments it made in 2001, the government has declared that the Internal Revenue Service (IRS) could owe more than $1 billion in thousands of protective FICA tax refund claims to individuals and businesses.
In recent years, the economic downturn has led to widespread involuntary reductions in workforces across many diverse industries. Because these staff reductions are costly, Fortune 1000 companies have struggled to control severance costs while providing reasonable severance benefits at the same time. Consequently, there has been renewed interest among large companies in an alternative severance program known as a Supplemental Unemployment Benefit (“SUB-Pay”) Plan.
On October 1, 2013, the U.S. Supreme Court agreed to hear arguments in the landmark United States v. Quality Stores, Inc. case to resolve the issue of whether companies and employees must pay FICA taxes on severance payments. The case has implications for many companies that paid FICA taxes on severance to workers laid off in the 2007-2009 recession.
A $1.8 billion pharmaceutical company with 10,000 employees in eight states asked Total Management Solutions (“TMS”) to implement a Supplemental Unemployment Benefit (“SUB-Pay”) plan for its planned staff reduction. The SUB-Pay Plan needed to be implemented within 30 days.
With over 25 years of experience implementing SUB-Pay Plans for Fortune 1000 companies, TMS was able to guide the company through the custom design and implementation of their plan within the required 30 days.
Introduced by the IRS in 1956, a SUB-Pay Plan is a unique type of severance plan designed to assist employees engaging in an involuntary termination due to a reduction in force, job elimination, reorganization, or similar circumstance. SUB-Pay Plans save payroll tax dollars and enable a company to utilize their paid-in asset of state unemployment taxes to supplement state unemployment insurance (“UI”) benefits with separation pay. When combined, these benefits can provide the laid-off worker with up to 100% of their pre-layoff wage.
With the prolonged effects of a troubled economy, a state’s ability to keep its unemployment insurance (“UI”) trust fund solvent is a challenge. When states exhaust their UI trust funds and borrow from the federal government to pay UI benefits, the results can extend to decreased UI benefits, a decreased amount of UI benefit weeks and an increase to the rate by which employers are taxed for federal and state unemployment taxes.
The U.S. unemployment insurance (UI) benefit system serves as the first line of defense for millions of workers and their families when they lose their jobs. When workers become unemployed they often apply for and receive UI benefits. However, the rate and duration of UI benefits varies widely depending on the state in which the employee has worked.
During the mid to late 2000s, record high levels of unemployment coupled with low UI reserve funds have threatened the stability of the federal-state UI tax and benefit system. Since June 2013, 18 states and the U.S. Virgin Islands have exhausted their UI trust funds and are borrowing from the federal government to pay unemployment benefits. Meanwhile, 6 states are currently using employer financed bonds to repay federal loans, and 9 states have positive balances of less than six months of benefits in their state trust funds.
Whether the results of a merger, acquisition, business realignment or economic downturn, U.S. companies have been faced with the hard reality of restructuring, downsizing and staff reductions. In this business environment, many companies are reviewing their severance policies as a top priority, surprisingly; most severance plans have remained essentially unchanged for years. As a result, companies are missing significant cost-saving opportunities.