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Helping out when laying off: Supplemental unemployment plans

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in Employee Benefits Program,Firing,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

Layoffs are difficult for employees and employers alike. For workers, layoffs mean economic hardship, even if they’re receiving unemployment benefits. For employers, there’s always the threat that they’ll lose valuable employees who feel they can’t afford to wait to be called back—and instead go out and find other jobs.

In these tough economic times, some employers are trying to help employees during layoffs and help prevent the permanent loss of good employees by implementing supplemental unemployment benefit plans.

Extra pay, beyond unemployment

Supplemental unemployment benefit plans are a unique type of severance plan designed to assist employees following an involuntary termination or layoff. Supplemental plans allow a company to pay cash benefits to employees while they are laid off, without reducing their state unemployment benefits. They also minimize tax withholding.

That’s different from most severance pay plans. Usually, severance pay is taxed as regular compensation, remains subject to full tax withholding and reduces the amount of the unemployment benefits paid by the state.

In North Carolina, supplemental unemployment benefit plans must comply with state employment security law, as well as the federal tax laws.

Basic plan requirements

In order to prevent benefit payments from reducing the employee’s state unemployment benefits, a supplemental plan must be approved by the chief counsel of the North Carolina Employment Security Commission’s Legal Services Division.

There are several requirements in order to receive Employment Security Commission (ESC) approval. The supplemental plan must:

  • Be in writing
  • Define the class of eligible employees
  • Define the amount of the benefit and duration
  • Limit the total payment to an employee (supplemental plan benefits, plus unemployment benefits) to an amount less than the employee’s former weekly straight-time wages.

For the supplemental plan to be effective, the employer must receive written approval from the chief counsel. This review and approval process generally takes seven to 14 days.

The supplemental plan must also comply with federal tax laws to receive certain tax exemptions. If handled correctly, the benefit payments will not be classified as wages for the following tax withholdings: Social Security, Medicare and Federal Unemployment Tax Act (FUTA).

Structuring supplemental plans

To qualify, the benefits must meet the following requirements:

  • Benefits are paid only to unemployed former employees who have been laid off.
  • Eligibility for benefits depends on meeting prescribed conditions after termination.
  • The amount of weekly benefits payable is based upon state unemployment benefits, other compensation allowable under state law and the amount of regular weekly pay.
  • The right to benefits does not accrue until a prescribed period after termination.
  • Benefits are not attributable to the performance of particular services.
  • No employee has any right to the benefits until qualified and eligible to receive benefits.
  • Benefits may not be paid in a lump sum.

Even though a supplemental plan meets all those requirements, the employer must still withhold federal income tax from the payments.

North Carolina income tax rules are more complicated, and the company may or may not be required to withhold state income tax depending on the circumstances of each case.

Supplemental plans can create a win-win situation for companies and employees during difficult economic times. However, the supplemental plan must be properly drafted to comply with federal tax laws and the North Carolina Employment Security Law.

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