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Supplemental Unemployment Benefit (top-up) plan reporting

We set up a Supplemental Unemployment Benefit (SUB) plan in the last year (also known as a top-up plan). How do I report the payments our employees received under the plan in 2011?

Before answering this question, let’s clarify a couple of terms. To qualify as a SUB plan under the federal Income Tax Act, the plan has to have these following elements:

  • The employer has to contribute to the plan
  • The plan has to pay benefits to employees who are laid-off (not terminated)
  • The benefits paid have to be funded
  • The benefits have to be periodic (they can’t be lump-sum payments)
  • The fund has to be administered by a trust

Benefit plans are usually considered to be funded if the contributions paid into the plan are meant to cover more than just the benefits payable within the next 30 days. In a funded plan, contributions are usually set based on an estimate, including an actuarial estimate, of future employee claims.

There are three basic variants on SUB plans:

  • Plans that are not registered with the CRA or approved by Service Canada
  • Plans that are registered with the CRA, but not approved by Service Canada
  • Plans that are both registered with the CRA and approved by Service Canada

The difference is based on the type of benefits that may be offered and how these are treated for income tax and Employment Insurance purposes:

  • Plans must be approved by Service Canada, otherwise any SUB plan benefits paid may reduce the EI benefits otherwise payable to employees
  • Plans approved by Service Canada may only pay benefits for absences due to: accident, disability, quarantine, sickness, training or temporary layoff caused by a stoppage of work
  • Plans that just pay benefits to employees on maternity, parental or compassionate care leave do not have to be submitted for approval by Service Canada
  • Employers may not deduct their SUB plan contributions for corporate income tax, and the SUB plan trust will itself be subject to corporate income tax, unless the plan is registered with the CRA

The purpose of a SUB plan is to top up the EI benefits that employees receive when they are unable to work. For plans approved by Service Canada, the combination of top-up and an employee’s weekly EI benefit rate is limited to 95 percent of the employee’s normal weekly gross earnings .However, payments for maternity, parental or compassionate care benefits may reach 100% of an employee’s normal weekly earnings. Further, payments for maternity, parental or compassionate care benefits can’t reduce an employee’s entitlement to sick leave, vacation pay, payments on separation or any other banked time or dollars owing to the employee.

Whether or not a SUB plan is registered with the CRA or approved by Service Canada:

  • The employer payment of contributions into the plan is not a taxable benefit
  • Any benefits paid out of the plan are taxable income, although not employment income on which CPP contributions are paid

However, where approval is required by Service Canada and has not been given , SUB plan benefits paid to employees are subject to EI source deductions.

Sometimes the term “SUB plan” is used to describe informal arrangements that don’t qualify as SUB plans under the above requirements. For example, sometimes employers top up an employee’s weekly EI benefit rate, with the employer making top-up payments directly to employees and recording the payment as part of ordinary operating expenses. Any payments to employees under such informal arrangements are ordinary salary and wages on which the employer must withhold income tax, CPP and EI. Similarly, any benefits received by employees under such informal arrangements may reduce the amount of EI to which they are entitled.

Now we can answer the question asked, about the employer’s reporting obligations related to employee SUB plan benefits.

If the plan qualifies as a SUB plan under the federal Income Tax Act, as described above, it’s the SUB plan trustee who has to report the amount of any benefits paid to employees, using Other Information code 152, “SUBP qualified under the Income Tax Act”, on the T4A. Employers have no reporting obligations to the CRA under a SUB plan.

If, on the other hand, the plan does not meet the requirements described above, the employer has to report the amount of any such informal top-up payments in Box 14 on the T4.

Alan McEwen & Associates

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Alan McEwen

Payroll consultant at Alan McEwen & Associates
Alan R. McEwen‘s involvement in payroll spans over 20 years. As a practitioner, he has implemented and managed outsourced payroll operations for both large and small employers. As a consultant, he has worked with many organizations, public and private, on HR/payroll process re-engineering, strategic systems decisions and forensic payroll audits. Read more
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2 thoughts on “Supplemental Unemployment Benefit (top-up) plan reporting
  • Alan McEwen says:

    First of all, the commissions you describe, payable only when the related sales invoices are paid, are not payments out of a SUB plan. In other words, a SUB plan is one thing and the commissions you describe are something else, so they are not related.

    However, I assume you are aware that if your SUB plan top ups the pay of employees who are on maternity leave, this means the SUB plan doesn’t meet the conditions for approval by Service Canada. As such, any payments to any employee will reduce the EI benefits employees would otherwise be entitled to.

    But the good news is that the commissions you describe – payable because the client has paid the employer – do not reduce this employee’s EI benefits during her maternity and/or parental leaves. When you pay the commissions, you have to amend the ROE issued when the employee first went on maternity. Allocate these commissions as insurable earnings on the amended ROE to weeks when the employee performed the related sales activities. For example, if the sales commissions are $10,000 and the related sales effort took 6 months, you have to allocate the $10,000 over the Sunday to Saturday weeks in these 6 months. If anything, if the employee is not already at the maximum, this will only increase her weekly EI benefit rate. Make sure you put in the comments on the amended ROE – “Commissions arising out of a transaction allocated under section 36(6.1)”. Note, this treatment is not dependent on when the commissions are paid, so there is no point in delaying the payment till after she returns.

    Alan McEwen.

  • Allan MacKenzie says:

    What you recommend for a sales employee who is going on maternity leave and still has commissions from work they have completed before starting their mat leave, but have not yet received. The company policy is to pay commissions to the sales staff only after the company receives payment from the vendor.