The TMS Team

The TMS Team

Friday, 20 September 2013 03:51

SUB-Pay Plan Basics

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.

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