As companies enter year-end planning season, many finance and HR leaders are taking a hard look at workforce costs — including severance. Whether prompted by restructuring, strategic realignment, or ongoing cost optimization, one thing is clear: traditional severance is expensive, inefficient, and often misaligned with both employer and employee goals.
A Supplemental Unemployment Benefit (SUB) Plan offers a modern, compliant alternative that helps organizations reduce costs, improve cash flow, and support employees through transition — without the downsides of lump-sum severance.
What Is a SUB Plan?
A SUB Plan is an employer-funded program designed to supplement state unemployment insurance (UI) benefits when employees are involuntarily separated. Unlike severance, which is treated as wages, SUB payments are classified as benefits, meaning they are not subject to payroll taxes and are paid in coordination with UI with the regular pay cycle.
Employees must remain eligible for state UI benefits to receive SUB payments — ensuring the benefit only goes to those who are unemployed and actively seeking work.
Why Companies Are Replacing Severance with SUB
- Immediate Cost Savings
SUB payments are offset dollar-for-dollar by the amount of UI employees receive from the state. That means the total payout can be reduced by as much as 40% compared to severance, while employees maintain their income level during the benefit period. In addition, payroll tax elimination reduces employer cost and increases employee income by roughly 7.65%.
- Improved Cash Flow and Predictability
Traditional severance requires large lump-sum payouts at separation. SUB Plans spread payments weekly over a defined duration, allowing organizations to smooth out cash flow and align expenses with budgeting cycles — a significant advantage during volatile markets or lean quarters.
- Support for Employees and Brand Reputation
Unlike a one-time severance check, SUB Plans provide regular payments over time while employees look for new work. This structure encourages reemployment, improves financial stability, and reflects positively on the employer’s brand as a responsible corporate citizen.
- Flexibility in Plan Design
Employers can customize the plan to fit their workforce strategy — defining eligibility criteria, benefit formulas, and duration. Plans can also include reemployment incentives or extended coverage, depending on the circumstances and company goals.
- Compliance and Administration Simplified
When administered by an experienced third-party, such as Transition Services, Inc., SUB Plans are fully compliant with IRS, ERISA, and state UI regulations. TSI assists with plan drafting, state filings, trust setup, and weekly claims processing across all 50 states — ensuring accuracy, confidentiality, and seamless employee experience.
Why Now: The Year-End Advantage
Year-end is the optimal time to evaluate your severance strategy. Budgets are being finalized, HR policies are reviewed, and workforce planning for the next fiscal year is underway. Implementing a SUB Plan now allows you to:
- Lock in 2026 savings early through reduced severance liabilities
- Integrate with existing payroll systems before Q1 workforce actions
- Communicate employee support programs as part of next year’s talent strategy
- Free up capital for growth and retention initiatives
A Smarter, More Sustainable Approach
SUB Plans turn a traditional cost center into a strategic advantage — reducing expenses while improving the employee experience. For companies facing change, this is a year-end opportunity that pays off for everyone involved.
About Transition Services, Inc.
Transition Services, Inc. (TSI) is the nation’s leading third-party administrator of Supplemental Unemployment Benefit Plans, managing programs in all 50 states. TSI partners with employers to navigate state regulations, streamline filings, and deliver compliant, cost-efficient benefit programs that support employees through transition.