Severance: Trending Toward a BalanceThe Solution to the Common Severance Plan
The TSI Program
Integration of State
Unemployment Benefits
The first element of the TSI Program is the integration of State Unemployment Insurance (UI) benefits into the company-provided separation award. To receive payments under a SUB Plan, a displaced employee must apply for UI benefits in his or her work state. The benefit paid by the employer is then reduced by the amount of the benefit paid by the state. As part of its services, TSI manages this integration process.
The total income a displaced employee receives from a combination of SUB payments from the employer and UI Benefits from the state is equal to his/her pre-displacement wage, thus ensuring income stability during a period of unemployment.
Tax-Advantaged
Structure
Under a SUB Plan, companies that integrate State Unemployment Insurance benefits into separation benefit payments are awarded a significant tax advantage. Separation payments made through a SUB Plan are characterized as “benefits” rather than as “wages,” thus eliminating FICA and FUTA tax obligations on SUB payments. This same tax benefit is provided to individuals who receive benefits under a SUB Plan, effectively enhancing their unemployment income.Management of
Unemployment Duration
The third critical component of the TSI Program is the management of benefit payments during a displaced employee’s unemployment period. State Unemployment Insurance benefits cease when a former employee finds a new job. Because a SUB Plan requires the integration of UI benefits into the separation benefit, company-provided payments under a SUB Plan also cease when new employment is found. This creates another opportunity for savings referred to as “duration savings.”
Duration savings may be utilized in a variety of ways by the employer. Some employers use the savings to fund a “re-employment bonus,” an award consisting of some portion of the remaining benefit provided as a taxable bonus to the displaced employee. A reemployment bonus incents a displaced employee to actively search for new employment and rewards them for having found it, while still creating savings for the employer.
As part of its services, TSI manages the unemployment duration by requiring benefit recipients to validate their unemployment status on a weekly basis in order to receive their benefits. This is critical to best comply with IRS regulations.