Three Ways the American Rescue Plan Act Changed Severance and Separation Benefits

Posted by Lana Mellis on May 24, 2021 3:37:00 PM

The American Rescue Plan Act (ARPA) was passed into law on March 11, 2021, to provide additional relief to address the continued impact of COVID-19 on the economy, public health, state and local governments, individuals, and businesses.

The $1.9 trillion piece of legislation provides funding for a wide variety of programs and initiatives but has specific benefits aimed at individuals who have experienced job loss in the last year.

Here are three ways ARPA has changed severance and separation benefits in the United States:

Extended Enhanced Unemployment Insurance

One of the most prominent features of ARPA is the extension of enhanced unemployment benefits until September 6, 2021, paying a weekly $300 federal bonus on top of state benefits. While that’s down from the $400 weekly bonus originally proposed and from the original $600 per week from last year’s CARES Act, it is still a significant boost to unemployment insurance. The 25-week extension could add up to an extra $7,500 in federal unemployment insurance per claimant.

Unemployment Compensation Tax Burden Relief

If an individual received unemployment benefits in 2020, the first $10,200 of unemployment benefits will be tax-free for people with incomes less than $150,000. This provides significant relief to individuals who experienced job loss because of COVID-19 by eliminating a significant tax burden and potentially setting a precedent for 2021 tax policy as it relates to unemployment benefits.

COBRA Coverage

The American Rescue Plan provides a 100% federal continuation health coverage (COBRA) subsidy through September 1, ensuring that those who lose their jobs or lose their health care due to reduced hours don’t lose their health care. ARPA will also lower or eliminate health insurance premiums for millions of lower and middle-income families enrolled in health insurance marketplaces. This will help well over a million uninsured Americans gain coverage.

These new changes will have ripple effects in the labor market, especially as it relates to severance and separation benefits. Given this effect, does it make sense for businesses to turn to supplemental unemployment benefits (SUB) plans? Let’s start with some questions first:

What is a SUB plan?

A Supplemental Unemployment Benefits Plan (SUB Plan) is smart alternative to traditional severance. It is an IRS approved, tax-exempt vehicle used by employers to maintain weekly income for permanently or temporarily displaced employees while generating considerable cost savings for the organization.

How do SUB plans work?

Under a SUB Plan, the employer pays separated employees the difference between the regular weekly wage and the amount of State Unemployment the employee is eligible to receive. Displaced employees maintain their pre-displacement wage, while employers save 30-50% compared to traditional severance.

An employer using a SUB Plan may achieve cost savings via three mechanisms:

  • FICA-tax exemption: This reduces the benefit costs for the employer while ensuring slightly increased take-home pay for the displaced employee.
  • Integration with State Unemployment Insurance (UI): The displaced employee’s income is maintained, but now comes from two sources, employer-paid SUB and state UI benefits, thus reducing the cost for the employer on a dollar-for-dollar basis.
  • Duration management: SUB Pay acts as a bridge to a released employee’s next opportunity. Because SUB pay is tied to the employee’s eligibility for State UI, payments cease when a displaced employee obtains new employment. Companies may choose to pay a “reemployment bonus” of some percent of the remaining benefit allotment as a taxable bonus. Reemployment bonuses reward displaced employees for finding new work prior to the expiration of their benefit period while still creating savings for the employer.

 What are the benefits of a SUB plan?

  • Legal protection: As with severance, payments under a SUB Plan serve as consideration in exchange for a Release and Waiver. Employers can, therefore, have the same level of risk mitigation as with severance and provide terminated employees with income protection while unemployed, while achieving considerable cost savings.
  • Benefit equity: A SUB Plan creates benefit equity for the entire employee population across multiple states. About half of the states allow individuals to collect state unemployment benefits alongside company-sponsored severance payments. The other half do not. For employers operating across multiple states, there can exist a high level of inequity for total take-home pay during the unemployment benefit period.
  • Income protection: SUB Plan payments are designed to meet the primary need of the displaced employee – income protection. The terminated employee’s pre-displacement wage is maintained during the unemployment period or the benefit period, whichever is less.
  • FICA non-taxable: SUB Plan payments are classified as benefits, not wages, and therefore are FICA non-taxable for both the employer and the employee.

Are there any downsides to SUB plans?

  • Compliance: A SUB Plan must comply with the IRS guidelines as well as state regulations concerning SUB Plans and State Unemployment in the state in which it operates; many states require plans to be filed or approved prior to implementation. Keeping close track of state regulations to ensure Plan compliance is critical.
  • Administrative: A key requirement of a SUB Plan is that each individual paid under the Plan file and be eligible for state unemployment. To accomplish this, weekly communication with released employees to determine eligibility for state unemployment benefits must occur. While this may be manageable for some organizations, others will benefit from outsourcing SUB-Pay Plan administration.

How are SUB plans funded?

SUB Plan payments may be made from a company’s general assets.

What states allow SUB plans?

All 50 states allow SUB Plans.

How do you get started?

Click here to fill out a form on our landing page to set up an introductory call.