As we approach the end of the year, human resources (HR) professionals find themselves in the familiar position of planning for the year ahead. It is a critical juncture. It marks the perfect time to review and recalibrate HR policies and programs to ensure they are not only competitive and aligned with employee and organization goals, but also compliant with evolving regulations and strategically positioned to attract, retain, and support employees.
While benefits plans, training programs, and recruitment strategies are typically at the forefront of these discussions, severance programs often get overlooked. This is a missed opportunity for HR to optimize resources and provide valuable support to employees during their transition.
Traditionally, severance packages have been perceived as a one-size-fits-all approach, offering departing employees a lump sum or continued salary for a fixed duration after separation. While these packages have their merits, they often do not align with the financial realities and individual needs of departing employees. This can result in suboptimal outcomes for both employees and employers.
Supplemental unemployment benefits (SUB) offer a more strategic approach to separation pay. Unlike traditional severance packages, SUB plans are designed to provide employees with a stable source of income.
Here's why HR professionals should consider this alternative:
- Tax advantaged: The IRS considers SUB to be a benefit, rather than a wage. Therefore, payments made from a SUB plan are not subject to payroll taxes for either the employee or employer.
- Integration with state unemployment: Employers often imagine that if an employee receives severance, then they will not file for unemployment benefits. This is almost never the case and results in employees collecting both their severance and unemployment benefits in the many states that allow it. Integrating these benefits increases efficiency with separation pay.
- Optimized cash flow: SUB payments are made weekly to former employees, rather than as a lump sum. This grants individuals the benefit of pay continuation while not being overly burdensome on company cash flow, as in the case of severance.
- Cost savings: One of the most significant advantages of SUB plans is cost savings for employers. By providing targeted financial support rather than lump-sum payouts, employers can reduce their financial outlay, often by as much as 50%, without taking away support from departing employees.
- Financial stability: SUB plans help employees maintain their weekly income and therefore financial stability during periods of unemployment. This support ensures they can cover essential expenses while looking for new employment.
- Enhanced employee relations: A well-structured SUB program demonstrates an organization's commitment to supporting its workforce even during challenging times. This can boost employee morale, even among those facing separation. Savings from a SUB plan can be utilized for retention programs, thus further strengthening employee relations.
- Flexibility and compliance: SUB plans are allowed in all 50 states and have enormous flexibility with plan design, including the ability to implement for a subset of the employee population based on location, division or level.
It is well worth evaluating the use of a SUB plan as part of your HR strategy for 2024. Here's a step-by-step guide to help you get started:
- Begin by evaluating your current severance program and identifying its strengths and weaknesses.
- Design a SUB plan to align with your organization's culture, values, and financial capabilities.
- Clearly communicate the SUB program to employees, emphasizing its benefits and how it works.
- Ensure your SUB plan complies with IRS and state regulations.
- Roll out the SUB program, including the necessary administrative and financial mechanisms.
- Consider partnering with a third-party administrator of SUB plans to design, implement, administer and ensure compliance for your SUB plan.
As HR professionals embark on their year-end planning for 2024, it's crucial to cast a strategic eye on every aspect of their HR programs, including severance. Supplemental unemployment benefits represent a more efficient and employee-centric approach to separation pay. By customizing support, maintaining financial stability, and realizing cost savings, SUB plans can be a win-win solution for both employees and employers. It's time for HR to rethink severance and make it an integral part of their strategic planning process for the year ahead.