TAX MANAGEMENT
COMPENSATION PLANNING
JOURNAL
Reproduced with permission from Tax Management
Compensation Planning Journal, Vol. 37, No. 6,
06/05/2009. Copyright 姝 2009 by The Bureau of Na-
tional Affairs, Inc. (800-372-1033) http://www.bna.com
SUB Plans Resurface in
Tough Economic Times
by Thomas W. Meagher and Clara J. Kim1
INTRODUCTION
With the recent economic climate affecting
virtually all businesses and industries, employ-
ers are called upon to continually review their
organizations to be certain that they are appro-
priately sized based on current business condi-
tions.
Although many employers have attempted to
maintain existing workforces in anticipation of
business returning to more normal levels, over
time, there may be a need to restructure the
workforce to more closely track the current
level of business. Although employers would
prefer to rely on normal attrition to adjust the
size of their workforce, many times, attrition
alone will not accomplish an employer’s em-
ployment level objectives. As employers begin
1
Thomas W. Meagher is a Senior Vice President and
Practice Leader, and Clara J. Kim is a Vice President of
Aon Consulting’s National Tax & ERISA Practice with
offices throughout the United States.
TAX MANAGEMENT INC.
to evaluate alternative approaches for reducing
the size of their workforce, consideration may
be given to a number of different approaches
including, for example, early retirement win-
dows, asset sales or spinoffs of certain busi-
nesses, and the use of severance plans or simi-
lar programs.
To the extent that the employer is consider-
ing implementing a severance plan, the related
costs can oftentimes be quite significant. Al-
though severance plans may prove to be the
most direct and effective program to reduce
workforce size, employers should not assume
that all severance plans are alike, or that the
employer must bear the full cost of its sever-
ance programs. To the contrary, employers
have been increasingly looking to supplemen-
tal unemployment benefit plans (‘‘SUB plans’’)
to permit the employer to offset a portion of the
cost associated with its severance plans by
amounts payable under state unemployment
compensation laws. In addition to permitting
an offset for state unemployment compensa-
tion, these SUB plans, if properly structured,
can yield significant tax and financial advan-
tages to employers and their employees.
Although SUB plans have been used for
many years, they have traditionally been found
in such industries as automotive, manufactur-
ing and steel. Although these industries are no
strangers to the need to downsize in response
to tough economic times, their use of SUB
plans has proven to be quite effective in that they help
employers direct their severance payments to those
employees who are out of work and who need income
to bridge them over during a period of unemploy-
ment; the SUB plan can also be designed to avoid
paying severance to those individuals who gain new
employment prior to completion of the severance pe-
riod.
With the current focus on the economy and em-
ployers’ employment-related expenses, the use of
SUB plans has caught the attention of employers in
virtually all industries as they attempt to come to grips
with the need to reduce the size of their workforce in
the most cost efficient and tax effective manner pos-
sible.
SUB PLANS — BACKGROUND
SUB plans take their name from the very purpose
for which they were designed — they are intended to
supplement unemployment compensation payments to
former employees who were involuntarily terminated.
SUB plans were first established in the 1950s as a
means for employers to supplement the state unem-
ployment compensation received by their employees
who lost their jobs as a result of workforce reductions.
They have historically been deployed in the context of
large, industrial employers, through collective bar-
gaining with their unions to supplement the state un-
employment compensation benefits received by
laid-off workers. These industries were typically the
most susceptible to economic and seasonal down-
turns. The current applicability of SUB plans, how-
ever, extends well beyond the old-line industries and
traditional union environment.
SUB PLANS TODAY
Today, SUB plans are intended to align with a
state’s unemployment compensation laws so that the
unemployment compensation and SUB plan payments
will generally be paid at the same time and under the
same circumstances. Depending on the state unem-
ployment compensation laws, a properly designed
SUB plan will permit both the employer and the em-
ployee to avoid taxation of such SUB plan payments
under the Federal Insurance Contributions Act (FICA)
or Federal Unemployment Tax Act (FUTA), while at
the same time permitting the employer to reduce its
severance payments by the amount of state unemploy-
ment compensation payable to the former employee.
SUB PLAN DESIGNS
In order for an employer to avail itself of the ben-
efits of a SUB plan, the employer’s severance plan
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must be designed so as to integrate with a state’s un-
employment compensation laws. In developing a SUB
plan, careful attention must be paid to establishing ap-
propriate parameters. SUB plans are intended to be
available to provide supplemental unemployment
compensation payments to those employees who have
been involuntarily terminated from employment by
reason of a layoff, reduction in force, discontinuance
of a plant or operation, or other similar conditions.2
The SUB plan may not provide for separation benefits
in the event that the employee was terminated for
cause or other disciplinary reasons, or if he or she vol-
untarily left the workforce. The SUB plan must also
be structured so that benefits are not payments for past
services.3 Thus, the SUB plan should provide com-
pensation that is intended to be a source of income to
the involuntarily-terminated employee during the pe-
riod of his or her unemployment; to the extent that the
payment represents compensation for periods during
which the employee worked for the employer (e.g.,
payments that may represent accrued vacation pay or
a final paycheck), such payments would not be treated
as supplemental unemployment compensation.
Although many employer severance plans may
typically pay severance amounts in a single lump
sum, the SUB plan requires that payments be made
weekly or in periodic installments so that the sever-
ance payments would largely track the payment pe-
riod during which unemployment payments are made
by the state. Although SUB plans are not required to
be funded by a trust, trust arrangements often are es-
tablished in conjunction with a SUB plan. To the ex-
tent funded, SUB plans utilize a voluntary employees’
beneficiary association established under §501(c)(9)
or a supplemental unemployment benefits trust under
§501(c)(17).4
In any comparison of alternative reduction in force
strategies, the SUB plan, if properly designed and co-
ordinated with state unemployment compensation
2
In the context of a supplemental unemployment benefit trust,
‘‘other similar conditions’’ will include involuntary separation
from the employer resulting from cyclical, seasonal or technologi-
cal causes. Regs. §1.501(c)(17)-1(b)(4). All section references
herein are to the Internal Revenue Code of 1986, as amended, and
the regulations thereunder, unless otherwise stated.
3
See, e.g., NYSA-ILA Container Royalty Fund v. Comr., 847
F.2d 50 (2d Cir. 1988) (wherein the court noted that benefits were
not SUB benefits where they were paid equally to all eligible
workers, including those who were fully employed).
4
To the extent that a §501(c)(17) trust is established in connec-
tion with a SUB plan, the trust must be solely for the purpose of
providing supplemental unemployment compensation benefits,
and may provide sick and accident benefits to the extent that they
are subordinate to the supplemental unemployment compensation.
Nondiscrimination rules will apply to both the §501(c)(17) trust
and §501(c)(9) trust. §§501(c)(9), 501(c)(17) and 505(b); Regs.
§§1.501(c)(9)-1, -2 and 1.501(c)(17)-1(a)(5).
laws, invariably proves to be one of the more finan-
cially efficient programs available to employers today.
From an employer’s perspective, a SUB plan is at-
tractive in that it can permit the employer to obtain
the financial benefits associated with state unemploy-
ment compensation laws. In operation, an employer
will establish or modify its existing severance plan so
as to coordinate with the unemployment compensa-
tion laws applicable to employees in a particular state.
Thus, at the outset, the SUB plan must be designed to
only provide for payments upon an involuntary termi-
nation of employment. This involuntary termination
can take place through reductions in force, layoffs
(permanent or temporary), plant closings or other ter-
mination programs. The design of the SUB plan is
very important insofar as the employer will want to be
certain that the plan will properly coordinate with ap-
plicable state unemployment laws. State unemploy-
ment compensation laws can vary significantly, and a
number of states will preclude payment of unemploy-
ment compensation if the employee is receiving
employer-provided severance payments. Once prop-
erly designed (and subject to applicable state unem-
ployment compensation laws), SUB plans can yield
several financial benefits for employers, as follows.
• No Former Employee Windfall. SUB plans may
be particularly attractive to employers today in
that they can be designed so that they preclude
terminated employees from receiving a windfall
in the event that they obtain other employment
prior to the unemployment compensation being
exhausted. For example, a properly designed SUB
plan should provide for the payment of supple-
mental unemployment compensation payments on
a weekly basis to correspond with the state unem-
ployment benefit schedule. To the extent that the
former employee is eligible for up to a certain
number of weeks of employer-provided pay-
ments, those payments can be terminated once the
former employee is employed by another em-
ployer, similar to the treatment that would be ac-
corded the former employee under state unem-
ployment compensation laws. Thus, the employer
will be able to terminate supplemental unemploy-
ment compensation payments when the former
employee gains new employment, and will not be
paying former employees for periods of time dur-
ing which they have found other employment.
This can be a significant savings to employers that
do not want to pay severance for periods when the
former employee has begun employment with a
new employer or a competitor.
• Severance Payment Savings to Employer. Supple-
mental unemployment compensation payments, if
properly designed, can permit an employer to re-
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duce its severance payments. The SUB plan per-
mits the employer to offset normal severance pay-
ments (that would be made in the absence of a
SUB plan) by the amount that the involuntarily-
terminated employee will receive from the state
unemployment compensation agency. Employers
can save significant amounts of severance in those
states that will permit an employee to receive both
unemployment compensation and severance or
supplemental unemployment compensation pay-
ments.5
• Exemption from FICA and FUTA Taxation. In or-
der for a SUB plan payment to be exempt from
FICA and FUTA taxation, the payments must be
paid to an individual who is involuntarily termi-
nated, and such plan payments must be designed
to supplement receipt of state unemployment
compensation.
For FICA and FUTA purposes, ‘‘wages’’ means all
remuneration for employment, including the cash
value of all remuneration (including benefits) paid in
any medium other than cash, with certain exceptions.6
SUB plan payments may be exempt from FICA and
FUTA taxation based on a series of revenue rulings,
private letter rulings and case law. The leading author-
ity in this area is Rev. Rul. 90-72.7 In developing a
tax-effective SUB plan strategy, any design should at-
tempt to closely track the basic framework established
under this ruling.8
In Rev. Rul. 90-72, the Internal Revenue Service
(IRS) ruled that an arrangement meeting the follow-
ing requirements was not subject to FICA and FUTA
taxation:
• Individuals must be former employees involun-
tarily terminated from the employer due to plant
closing, layoff or reduction in force.
• Eligibility for benefits under the plan depends
upon a former employee meeting certain pre-
5
Although there are a number of states (e.g., New Jersey) that
will not disqualify an employee from receiving state unemploy-
ment benefits due to the receipt of severance payments from a
former employer, it is critically important that the state unemploy-
ment laws be carefully reviewed. Several states (e.g., Nevada)
will expressly preclude an employee from receiving state unem-
ployment compensation benefits during the time he or she is re-
ceiving severance benefits (which would include supplemental un-
employment compensation).
6
§§3121, 3306. (There are a number of exceptions to the defi-
nition of ‘‘wages’’ for FICA and FUTA purposes that are intended
to exclude specifically identified ‘‘non-wage’’ payments.)
7
1990-2 C.B. 211.
8
Rev. Rul. 90-72 was issued as an update to Rev. Rul. 56-249,
1956-1 C.B. 488, which was the first in a series of IRS guidance
on supplemental unemployment compensation plans and their ex-
emption from FICA/FUTA taxation.
3
 scribed conditions following separation from em-
ployment with the company.
• Former employees must be unemployed and meet
the requirements to receive state unemployment
compensation benefits, except if their ineligibility
is due to: (i) insufficient wage credits under state
law; (ii) exhaustion of benefits under state law; or
(iii) failure to satisfy the waiting period required
under state law for unemployment compensation.
• Benefits are paid weekly and not payable in the
form of a lump sum.
• The duration of benefits depends in part on the
fund level and the employee’s seniority, and ben-
efits are not attributable to the rendering of any
particular services.
• No employee has any right, title or interest in the
trust-funded SUB plan benefits until such em-
ployee is qualified and eligible to receive benefits.
In ruling that the arrangement described above is
not subject to FICA and FUTA taxation, the IRS noted
that Rev. Rul. 90-72 restores the ‘‘distinction between
[supplemental unemployment compensation benefit
payments] SUB pay and dismissal pay by re-
establishing the link between SUB pay and state un-
employment compensation set forth in Rev. Rul. 56-
249.’’ 9 From Rev. Rul. 90-72, it is clear that the foun-
dation for a FICA/FUTA exemption lies with
establishing that SUB plan payments are intended to
coordinate and supplement the applicable state unem-
ployment compensation laws.10
Following the issuance of Rev. Rul. 90-72 and the
potentially significant FICA/FUTA savings to em-
ployers (and employees), there have been several pri-
vate letter rulings that have served to guide employ-
ers. These private letter rulings have further clarified
the application of FICA and FUTA taxation to SUB
plans.11 In PLR 200322012, for example, the IRS
more fully describes the required link between state
unemployment benefits and SUB plan benefit pay-
ments for purposes of obtaining the FICA/FUTA ex-
emption. More specifically, the IRS concluded that a
plan that provided regular benefits that were contin-
gent on actual receipt of state unemployment compen-
sation (an employee applying for regular benefits was
required to bring in the employee’s state unemploy-
9
Rev. Rul. 90-72.
10
It is noteworthy that although employers should strive to
structure the SUB plan so as to avoid the imposition of FICA and
FUTA taxation, generally, SUB plan payments to employees will
nonetheless continue to be subject to federal income tax withhold-
ing. §3402(o).
11
See, e.g., PLRs 200709056, 9734035 and 9546005.
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ment compensation check to confirm actual receipt of
state benefits), or that were contingent on receipt of
state unemployment compensation but for the fact that
the employee did not have sufficient employment to
be covered under the state unemployment compensa-
tion system, had exhausted state unemployment ben-
efits or was serving a waiting week under the state un-
employment compensation system, were sufficiently
linked to state unemployment payments and, thus,
were exempt from FICA/FUTA taxation.
SUB PLANS AND STATE
UNEMPLOYMENT COMPENSATION
To the extent that an employer wants to offset its
severance payments by state unemployment compen-
sation benefits and avoid the imposition of FICA/
FUTA taxation on such severance payments, it is criti-
cal that the employer first evaluate the state unem-
ployment compensation laws of the states in which it
intends to reduce its employee workforce. In order to
be treated as a SUB plan, the plan must be carefully
designed and the state unemployment compensation
laws carefully analyzed so as to properly identify
those states that permit unemployment compensation
to be paid to employees who are involuntarily termi-
nated and eligible to receive severance payments from
their employer.
In TAM 9416003,12 for example, the IRS stated
that, as the benefit recipients were disqualified from
receiving government unemployment benefits, this
finding was material to the determination of whether
the payments were supplemental unemployment com-
pensation. To the extent that the plan’s benefits dis-
qualify the recipients from government unemploy-
ment benefits, they would cause the plan benefits to
be taxed as dismissal payments (not supplemental un-
employment compensation) and, thus, prevent the
plan from meeting the requirements for a SUB-pay
plan for purposes of the FICA/FUTA exemption.13
We have examined two state unemployment com-
pensation laws to illustrate the importance of such
laws to an employer’s ability to offset its severance
payments, and for being able to obtain favorable
FICA/FUTA tax treatment. In the State of New Jersey,
for example, receipt of severance pay is not a bar to
12
This Technical Advice Memorandum revoked an earlier pri-
vate letter ruling issued to CSX Corporation that became the sub-
ject of ongoing litigation described more fully below.
13
The court in CSX Corp. v. U.S., 518 F.3d 1328, 1351 (Fed.
Cir. 2008), stated ‘‘[i]n any event, the payments disqualified the
recipients from receiving state unemployment benefits; the plan
was thus different in that respect from the plans at issue in both
Rev. Rul. 77-347 and Rev. Rul. 56-249 [and thus were not SUB
plan payments].’’
an employee’s receipt of unemployment benefits.14
An employer having New Jersey-based employees
contemplating a SUB plan for such employees would
be able to institute a SUB plan, provided that the plan
clearly linked the ‘‘severance’’ payments to the receipt
of New Jersey state unemployment benefits. In devel-
oping a SUB plan, the employer should also consider
whether the former employee will be receiving any
other disqualifying income, and the impact of such
other payments under the relevant state’s unemploy-
ment statutes.15
In contrast, the State of Nevada will not allow an
individual to receive severance pay and state unem-
ployment benefits in the same week. Nevada unem-
ployment laws state that an individual is disqualified
for unemployment benefits for any week with respect
to which he or she receives either wages in lieu of no-
tice or severance pay.16 Thus, under Nevada state un-
employment laws (and based on TAM 9416003), a
SUB plan intending to offset state unemployment ben-
efits does not appear feasible in Nevada.
RECENT FICA/FUTA COURT
DECISIONS INVOLVING SUB
PLAN PAYMENTS
Although the IRS’s position on SUB plan payments
and FICA/FUTA exemptions seems fairly well settled,
the courts have been wrestling with a few notable
cases involving these issues. The issue that has been
recently before the courts relates to whether supple-
mental unemployment compensation benefits 17
should be treated as wages for FICA/FUTA purposes.
Sections 3401 and 3402 address the withholding of
income tax with respect to all payments of wages un-
14
N.J. Admin. Code §§12:17-8.7 and 12:17-8.8; See also Em-
ployer Handbook, New Jersey’s Unemployment & Disability In-
surance Programs 2008; Unemployment Rights: Your Rights and
Responsibilities (New Jersey Dep’t of Labor and Workforce De-
velopment).
15
In New Jersey, for example, an individual is not eligible for
state unemployment benefits during the time he or she receives
salary continuation payments made by an employer; other states
indicate that the receipt of retirement plan payments would result
in the individual being ineligible to receive state unemployment
benefits.
16
Nev. Rev. Stat. Ann. §612.420; Unemployment Insurance
Claim Filing System Frequently Asked Questions, Nevada Dep’t
of Employment, Training & Rehabilitation.
17
For purposes of §3402(o), ‘‘supplemental unemployment
compensation benefits’’ means amounts which are paid to an em-
ployee pursuant to a plan to which the employer is a party, be-
cause of an employee’s involuntary separation from employment
(whether or not such separation is temporary), resulting directly
from a reduction in force, the discontinuance of a plant or opera-
tion, or other similar conditions, but only to the extent such ben-
efits are includible in the employee’s gross income.
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less otherwise provided. Section 3402(o) indicates
that supplemental unemployment compensation paid
to an individual ‘‘shall be treated as if it were a pay-
ment of wages by an employer’’ (emphasis added)
and, thus, subject to federal income tax withholding.
The legal analysis relates to whether Congress in-
tended supplemental unemployment compensation to
constitute wages for purposes of FICA/FUTA taxa-
tion, or whether the implication of the phrase ‘‘shall
be treated as if it were a payment of wages’’ under
§3402(o) is intended to suggest that supplemental un-
employment compensation benefits are not wages but
are simply treated as wages for federal income tax
withholding purposes (but not FICA or FUTA pur-
poses). The legislative history to §3402(o) regarding
withholding on supplemental unemployment compen-
sation benefits states that, although these benefits are
not wages, as they are generally taxable payments,
they should be subject to withholding to avoid the ad-
verse tax consequence for employees.18
Although Rev. Rul. 90-72 continues to be the pri-
mary guide for employers, two cases in particular are
worth studying to appreciate the potentially more ex-
pansive interpretation of the FICA/FUTA exemption
that may be available to employers.
In CSX Corp. v. U.S.,19 the court observed that, dur-
ing the 1980s, CSX reduced the number of employees
through a variety of programs. The programs paid dif-
ferent levels of benefits for different categories of em-
ployees. Unlike the required coordination with state
unemployment compensation benefits in Rev. Rul. 90-
72, the CSX benefits were not dependent on a former
employee’s receipt of state unemployment benefits.
Although there was no state unemployment law coor-
dination, the lower court held in favor of CSX when
it concluded that payments that qualified as supple-
mental unemployment benefit payments under
§3402(o) were not ‘‘wages’’ subject to FICA.20 The
Court of Appeals for the Federal Circuit subsequently
reversed the lower court and held, in part, that such
payments did not satisfy the IRS’s requirements set
18
§3402(o); S. Rep. No. 552, 91st Cong., 1st Sess. (1969).
19
518 F.3d 1328 (Fed. Cir. 2008).
20
In CSX Corp. v. U.S., 52 Fed. Cl. 208 (2002), rev’d in part,
518 F.3d 1328 (Fed. Cir. 2008), the lower court held that pay-
ments that were supplemental unemployment benefits, as that
term was defined under §3402(o), were not subject to taxation un-
der FICA. The lower court stated that the ‘‘fundamental definition
of wages under FICA and income-tax withholding statutes are to
be understood as identical.’’ As a result, payments that satisfied
the definition of supplemental unemployment compensation pay-
ments under §3402(o) were not wages and, thus, were not subject
to FICA. The lower court’s view was contrary to the IRS’s posi-
tion that none of the payments made by CSX qualified as supple-
mental unemployment compensation benefits as they did not meet
the criteria of Rev. Rul. 56-249 (Rev. Rul. 90-72’s predecessor).
5
forth in Rev. Ruls. 90-72 and 56-249, and thus, the
payments were not exempt from FICA taxation.
(CSX’s primary argument was that if benefit pay-
ments were not ‘‘wages’’ subject to federal income tax
withholding purposes, they should not be ‘‘wages’’ for
FICA purposes.)
Although the Court of Appeals in the CSX case fol-
lowed the IRS’s position in holding that CSX was not
entitled to the FICA tax exemption, the Federal Bank-
ruptcy Court in In re Quality Stores 21 did not feel
similarly constrained. During the bankruptcy process,
Quality Stores made severance payments by reason of
a reduction in force or the discontinuance of a plant
or operation. The severance payments were included
in the involuntarily-terminated employees’ gross in-
comes, and the company paid the applicable FICA
tax. The severance payments were paid in various
methods, (i.e., based on payroll cycle or in a lump
sum), were not connected to the receipt of state un-
employment compensation, and were not attributable
to the rendering of any particular services. Based on
the lower court’s analysis in the CSX case, Quality
Stores claimed a FICA refund, arguing that if the pay-
ments were non-wage supplemental unemployment
benefit payments for federal income tax withholding
requirements, then such amounts were not wages sub-
ject to FICA.22 The Bankruptcy Court held that wages
should be interpreted the same for both FICA and fed-
eral income tax withholding purposes. Because
supplemental unemployment benefits are not wages
for purposes of federal income tax withholding, they
should not be treated as wages for FICA purposes.23
21
In re Quality Stores, Inc. v. U.S., 383 B.R. 67 (Bankr. W.D.
Mich. 2008). In re Quality Stores should not be relied on at this
stage, as the decision of the Bankruptcy Court is presently on ap-
peal with the U.S. District Court for the Western District of Michi-
gan (Southern Division). On Mar. 9, 2009, a brief was filed on be-
half of the U.S. Department of Justice (Tax Division) in an appeal
of the case by the United States Attorney’s Office. The position of
the United States is that ‘‘[n]one of the payments at issue are
linked in any way to the receipt of state unemployment compen-
sation. Because there is no provision akin to §3402(o) in the FICA
tax provisions, and the payments at issue do not fall within any
statutory exception or the description of payments exempt from
FICA taxes set forth in Rev. Rul. 90-72, those payments are sub-
ject to FICA taxes irrespective of their treatment for purposes of
income tax withholding.’’ See Brief for Appellant at 22, In re
Quality Stores, Inc., 383 B.R. 67 (Bankr. W.D. Mich. 2008), ap-
peal docketed, No. 01-10662 (W.D. Mich., Mar. 9, 2009).
22
Federal income tax withholding requirements for non-wage
supplemental unemployment benefit payments are governed by
§3402(o).
23
In view of the pendency of the In re Quality Stores, Inc. ap-
peal, some employers may wish to consider filing protective re-
fund claims for FICA taxes pending the outcome of the appeal.
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SUB PLAN DESIGNS IN 2009 — SOME
HELPFUL HINTS
As employers consider the use of a SUB plan, there
are a number of design and administrative issues that
should be addressed before proceeding further.
• Coordination with State Unemployment Laws. In
developing a SUB plan, a necessary first step is to
confirm the states in which the employees who
are to be involuntarily terminated are located. The
critical questions to ask at this time relate to
whether the particular state permits individuals to
receive unemployment compensation while re-
ceiving employer-provided severance-type pay-
ments.
• Adopt/Amend Severance Plan to Coordinate Pro-
grams. To the extent that the employer is consid-
ering a SUB plan, the employer will need to
amend its existing severance plan (or adopt a new
plan) to directly tie the supplemental unemploy-
ment compensation payments to the involuntary
termination of employment and the receipt of un-
employment compensation. In drafting or amend-
ing its plan, the employer should make certain
that the benefits are characterized as supplemental
unemployment payments tied to a period of un-
employment (as opposed to straight dismissal
payments made without regard to the former em-
ployee’s unemployment status). Because state un-
employment laws can differ, and several states
will not permit the coordination of employer sev-
erance payments with state unemployment com-
pensation, multi-state employers may need to
structure their program benefits in a bifurcated
manner — one payment amount for those who
will be eligible to receive state unemployment
benefits (i.e., an offset for state unemployment
compensation), and a second scheduled amount
for those employees who will not be subject to an
offset. Although this can be somewhat confusing,
the savings to employers can far exceed any ad-
ministrative burdens that may be created in the
short term.
• Develop Administrative Process to Confirm Un-
employed Status. In order for the employer to
monitor the reemployment of its former employ-
ees (so as to terminate the employer-provided
payment upon new employment), it will need to
develop a process for tracking employees’ em-
ployment status after they have left the employ-
er’s employment. Some employers will require
that the former employee submit his or her unem-
ployment payment stub, or choose to rely on the
state’s unemployment compensation organization
to monitor whether employees have become em-
 ployed so as to no longer be eligible for unem-
ployment compensation from the state. Many
times, these monitoring efforts may be undertaken
by the employer’s outsourcing organization.
• SUB Plan Trusts. A SUB plan does not have to be
funded by a trust. The failure to provide for the
accumulation of funds in a trusteed account from
which the supplemental unemployment benefits
contemplated by the plan are to be paid is not a
material or controlling factor in determining
whether the FICA/FUTA tax exemption applies.
Thus, an employer does not need to fund a SUB
plan through a trust to obtain the FICA/FUTA ex-
emption for benefit payments.24 To the extent that
an employer chooses to fund its SUB plan, the
employer may utilize a supplemental unemploy-
ment benefits trust under §501(c)(17), or a volun-
tary employees’ beneficiary association estab-
lished under §501(c)(9). If a trust is established,
the employer must submit Form 1024, Applica-
tion for Recognition of Exemption Under Section
501(a), together with Schedule J. In addition,
each year, the trust must file Form 990 (Return of
Organization Exempt From Income Tax) and, if
applicable, Form 990T (Exempt Organization
Business Income Tax Return).
• De Minimis Exception to the Rule. The FICA/
FUTA exemption for SUB plan payments has also
been extended for de minimis amounts paid under
a SUB plan that may also make benefit payments
to former employees which are not tied to state
unemployment benefits. In a private letter rul-
ing,25 the FICA/FUTA exemption was extended
to the de minimis amount of benefits made to
24
Rev. Rul. 60-330, 1960-2 C.B. 46.
25
PLR 200709056.
Tax Management Compensation Planning Journal
姝 2009 Tax Management Inc., aISSN
subsidiary of The Bureau of National Affairs, Inc.
0747-8607
laid-off employees who were ineligible to receive
state unemployment benefits because the em-
ployee was a full-time student or receiving medi-
cal disability payments. Since the inception of the
plan, the total amount of benefits paid to full-time
students and medical disability recipients ac-
counted for less than one percent of total benefits
paid under the plan and were, therefore, a de
minimis percentage of the total benefits under the
plan.
• SUB Plan Not Limited to Union Employees. An
employer may provide SUB plan benefits which
are unilaterally instituted by the employer and not
union-negotiated.26 Therefore, an employer may
sponsor a SUB plan for non-union employees.
• Miscellaneous Matters. In establishing a SUB
plan, employers will continue to want to obtain
waivers and releases, particularly where, as here,
the employees have been involuntarily termi-
nated.
Although SUB plans have a long history with old-
line employers, they are being evaluated by employ-
ers in all industries with renewed interest in light of
current economic conditions. From an employer’s per-
spective, SUB plans can prove to be quite valuable in
permitting supplemental unemployment compensation
payments to be offset by state unemployment pay-
ments, while at the same time permitting the employer
(and employees) to benefit from FICA/FUTA tax sav-
ings. Although these SUB plans can be quite attrac-
tive, employers must proceed cautiously to ascertain
how the various states will coordinate their state un-
employment compensation payments with an employ-
er’s severance plan.
26
Rev. Rul. 58-128, 1958-1 C.B. 89.
7