Supplemental unemployment benefit plans (SUB plans) provide compensation to employees in addition to state unemployment insurance during layoff periods. When designed correctly, they can ease financial stress, generate worker loyalty and offer significant tax advantages.
SUB plans are particularly well suited for contractors subject to prevailing wage rules and regulations since the plans can be funded with fringe benefit contributions required under the Davis-Bacon Act or state prevailing wage laws.
Construction companies that contract with government entities — local, state or federal — are subject to special requirements that dictate mandatory wage and fringe benefit payments commonly referred to as “prevailing wage regulations.”
Requirements
With limited exceptions, to be exempt from wages and, therefore, Federal Insurance Contribution Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, SUB plans must be substantially similar or identical to those described in the IRS’ Rev. Rul. 56-249, as modified by Rev. Rul. 90-72. These rulings require SUB plans to supplement state unemployment benefits and link them to the receipt of state unemployment compensation.
Definition of Layoffs
Benefits are paid only to unemployed former employees laid off by the employer. IRC § 3402(o)(2)(A) defines a layoff for purposes of a SUB plan as an involuntary separation from employment, whether temporary or not, resulting directly from a seasonal layoff, reduction in force, discontinuance of a plant or operation, or other similar condition. The definition of a layoff does not include an employee terminated for cause or who voluntarily resigns.
If permitted by state unemployment law, the definition can be further expanded to include a reduction of hours of service that renders the employee eligible to collect state unemployment benefits. It is also important to note benefits must cease to be payable as of the date the employee returns to work for any employer.
Prescribed Conditions
Eligibility for supplemental unemployment benefits depends upon meeting prescribed conditions after termination. The primary condition is that an employee must be eligible for state unemployment benefits.
Limited exceptions to this rule that were established by Rev. Rul. 90-72, which permits an employee to receive benefits even if they are ineligible for state unemployment, are determined when an employee does not have sufficient employment to be covered under the state system, has exhausted the duration of state unemployment benefits or has not met the requisite waiting period.
Amount of Weekly Benefits
The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state laws and the amount of regular weekly pay. This broad requirement allows room for creative benefit formulas which are explained below.
Rendering of Services
Supplemental unemployment benefits are not contingent upon the recipient providing services during the unemployment period. Employers may not demand any work from employees in return for unemployment compensation.
Frequency of Payments
Supplemental unemployment benefits cannot be paid as a lump sum. They must be linked to state unemployment benefits, which are paid out over time. A lump sum payment would provide the same amount of money regardless of the unemployment duration, violating the requirement to align with state-specific unemployment benefits.
Advantages & Requirements of Using a Trust
Most employers elect to provide SUB plans through a trust fund rather than directly through the company.
A trust fund that meets the necessary qualification requirements is tax exempt and, therefore, the contributions made by the employer to fund SUB plans are deductible at the time of contribution. Any earnings on the corpus, or assets, of the trust are also tax exempt. The requirements of a tax-exempt supplemental unemployment benefit trust is explained under IRC § 501(c)(17) or IRC § 501(c)(9).
Advantages & Strategies for Prevailing Wage Contractors
The fringe benefit portion of the prevailing wage regulations are particularly complicated and often misapplied by contractors, especially those not subject to a collective bargaining agreement already containing bona fide fringe benefits. The fringe benefit portion of prevailing wage regulations typically require a contractor to provide a certain dollar level of bona fide fringe benefits for each hour worked or provide an equivalent amount in additional wages.
Bona fide benefits include health and welfare benefits and retirement benefits. In addition to supplemental unemployment benefits, other permitted benefits include:
- Pension or retirement plan
- Medical insurance
- Dental insurance
- Life insurance
- Disability insurance
- Vacation, holiday and/or sick pay
- Apprenticeship and safety training
SUB plans are particularly well suited for contractors that commonly have interruptions in their work that might cause a reduced need for labor, such as seasonal shutdowns, weather conditions and material supply problems.
These interruptions cannot always be effectively handled with a temporary layoff. Acquiring and keeping skilled workers has become a critical factor in most contractors’ growth potential. Laying off valuable workers during an interruption can have unintended consequences, such as morale issues resulting from reduced income or even employees finding work elsewhere with a competitor.
The construction industry is no stranger to these situations, and as a result, companies often keep workers busy on other tasks (i.e., “shop work”) rather than risk employees not being available when needed.
However, SUB plans alleviate the risks associated with temporary layoffs for several reasons:
- Payments from the SUB plan can provide the additional income necessary to equalize or even exceed the wages the employee receives while working.
- Depending on state rules, employees can receive payments for short work weeks (fewer than 40 hours worked) where their hours were interrupted by weather or some other short-term factor.
- The payments received by employees are not subject to FICA taxes (7.65%).
- SUB plans can be funded with fringe benefit payments already required under prevailing wage regulations and therefore do not create an additional company expense or liability.
Plan Design Strategies
Although SUB plans can be beneficial for contractors subject to prevailing wage regulations, care must be taken in the design of the plan to ensure maximum effectiveness.
Trust or Funded Plans
SUB plans work best when administered through a trust. Irrevocable contributions of fringe benefit dollars paid to a trustee pursuant to a bona fide fringe benefit trust fund, plan or program on a regular basis by contractors engaged in public works qualify as a “funded plan” under 29 CFR § 5.26-5.27. Contributions to funded plans can be credited toward meeting the prevailing fringe benefit requirements of the Davis-Bacon Act and state prevailing wage laws. They also do not need U.S. Department of Labor approval, though state rules vary.
Contribution Formulas
The contribution formula of the plan dictates the amount of money the employer is obligated to fund to the employee’s benefit account. If the intent is to fund the plan solely with fringe benefit dollars obligated under prevailing wage regulations, then the contribution formula must clearly express this intent.
A properly written contribution formula limits an employee to receiving only the amount that has been credited to his or her benefit account and protects the employer from any obligation to make additional payments to the plan.
Benefit Formulas
The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state laws, and regular weekly pay amounts.
A common yet incorrect assumption regarding this requirement is that the SUB plan weekly benefit cannot exceed what would have normally been earned as regular weekly pay when combined with the state’s unemployment benefits. This is incorrect, because “based upon” means just that: It provides flexible variables in how to calculate benefits.
Although SUB plans can be beneficial for contractors subject to prevailing wage regulations, care must be taken in the design of the plan to ensure maximum effectiveness. Leaders must make sure they understand state and federal requirements before implementing new methods. If company leaders take the appropriate steps to protect their company, SUB plans can help shield a firm from risk, boosting morale and financial benefits in the process.
