Total Tax
May - July 2011
Unemployment Financing Crisis –Federal Solvency Provisions
Employers Face Higher Federal Unemployment Taxes in 2011 and 2012
In 2010, employers’ state unemployment insurance (UI) taxes increased by more than 35%, rising to approximately $43 billion according to Labor Department estimates. Businesses face similar state tax increases in 2011 as the states struggle to replenish depleted UI trust funds. In addition to the dramatic increases in state UI taxes, businesses face broad Federal Unemployment Tax Act (FUTA) surtaxes in as many as half the states in 2011. However, Congress is considering an Administration budget proposal that could defer the FUTA surtax and interest assessments for two years. Congress is also looking to make other important changes to the UI program.
FUTA “Credit Reduction” Surtax Applies in Many States in 2011
In addition to state UI taxes, employers pay FUTA taxes of .8% on the first $7,000 of wages paid, capping at $56 per worker annually. Many state unemployment insurance funds have had to borrow from the federal government during the recent economic downturn. When such loans remain unpaid for over two years, a FUTA surtax is activated, increasing employers’ FUTA tax liabilities by over 37%, or $21 per worker, for a total of $77 per worker annually. In 2011, employers in up to 25 states face FUTA “Credit Reduction” surtaxes to repay outstanding federal loans. Many employers remain unaware of these potential surtaxes, because they will not be finalized until November 2011. This additional FUTA tax escalates annually until loans are repaid. For example, Michigan employers owed $77 per worker in FUTA taxes for 2009, $98 per worker for 2010, and potentially $119 per employee for 2011.
Credit Reduction taxes will be due with IRS Form 940 in January 2012 based on wages paid in 2011.
Interest Assessments Are Also Due
Interest is normally due annually on federal loans to state UI trust funds, but the American Recovery and Reinvestment Act of 2009 (ARRA) waived interest payments through 2010. Thirty-three states (including the Virgin Islands) have outstanding federal loans and are preparing employer assessments for interest due in 2011. Outstanding loans exceeded $41 billion in 2010 and may reach $65 billion in 2013; interest could be as much as $1.4 billion in 2011.
Employers can expect separate assessments or surtaxes on their quarterly state UI contribution returns.
The Administration’s Fiscal Year 2012 Budget Proposal Would Defer FUTA Tax Increases and Interest
The President’s Fiscal Year 2012 budget proposal, released on February 14, includes several provisions affecting UI. The major elements would:
- Defer the FUTA Credit Reduction in 2011 and 2012
- Increase the FUTA taxable wage base to $15,000 in 2014, while reducing the net FUTA tax rate to .38%
- States would be required to raise their taxable wage bases to at least $15,000 by 2014
Note: Thirty-two states, plus DC and Puerto Rico, currently have a taxable wage base under $15,000
- Index the taxable wage base after 2014
- Extend the interest waiver for states with outstanding loans for 2011 and 2012
- Extend the .2% FUTA surtax through 2013
- The net FUTA tax rate is scheduled to decrease from .8% to .6% on June 30, 2011
Congress will need to consider and take action to adopt these proposed measures. Employers and other interested organizations will be watching closely since the FUTA Credit Reduction and interest assessments are accruing based on current (2011) wages paid.
Employers may wish to adjust financial forecasts to consider expected state tax increases, FUTA “Credit Reduction” surtaxes, and possible interest assessments.
Legislative Highlights
With the unemployment rate reaching all time highs, it is more important than ever to rely on up-to-date information. ADP UCM is here to help with the legislative updates below.
West Virginia
Enacts Unemployment Insurance (UI) Integrity Law
As a result of insufficient separation information being among the top three reasons for claimant overpayments on a national level, state legislation continues to focus on the integrity of UI payments. West Virginia House Bill 2763 was adopted on March 24, 2011, and affects charges assessed against an employer’s UI account. The law provides that with respect to reimbursable employers, if a reimbursed UI assessment is determined to be an overpayment, the commissioner shall refund the employer for the amount of the overpayment. However, it also indicates that no employer shall be entitled to any repayment unless the employer has responded to all information requests. In addition, adequate separation information must be provided within the required time frame. This bill was effective on the date of passage.
South Carolina
Reduces Employer Response Time
Senate Bill 3286 was signed into law on March 14, 2011, and shortened the response time employers have to return the Request for Separation Information (Form UCB-101/NET-101). Last year, the legislature passed a bill extending the seven calendar day response time to twelve business days. This extension did not allow the agency to make timely determinations within the federal twenty-one day guideline. SB 3286 is a compromise between the old and new deadlines, allowing employers ten calendar days to provide the information to the South Carolina Department of Employment and Workforce. This act was effective immediately upon passage.
Preparing for a UI Hearing
When ADP receives a Notice of an Unemployment Hearing, there are crucial steps that the Hearings Representative will follow in order to be as prepared as possible. Taking these steps will ensure that witnesses are prepared to give testimony and are aware of the points that they would need to include in the testimony. The following scenario is an example of what can happen if the witness is not prepared.
The Preparation
ADP received the Notice of Unemployment Hearing over a month prior to the scheduled hearing. The ADP-UCS Hearings Representative contacted the employer immediately, both by fax and e-mail, in order to notify them of the date and time of the meeting. Over the next several weeks, the Hearings Representative left several voicemails and e-mails for the client to follow-up regarding the hearing and schedule a preparation time to review the case. Unfortunately, the client notified the Hearings Representative that they could only be available to prepare the day before the hearing. Based on this, the Hearings Representative advised the client that they needed to send any supporting documentation immediately to ADP so that the Hearings Representative could review and submit the documents for the hearing and serve copies to the claimant.
On the date and time of the scheduled preparation meeting, the Hearings Representative attempted to contact the client to review the case; however, the client could not be reached. Therefore, the Representative had to submit the documents received without knowing what relevance they had for the hearing. Since the client did not contact the Hearings Representative until just a few minutes before the hearing was to begin, it was not until this time that it was discovered that the client had not sent the most important documents needed. The issue to be discussed at the hearing was the claimant’s termination for falsifying his time records; however, the employer had not sent the claimant’s time records, which showed that the claimant had falsified these documents.
The Hearing
Since the employer was unable to submit the claimant’s time records for the hearing, the judge was unable to have these documents admitted as evidence. The employer could only provide hearsay testimony as to what the documents stated.
The Final Word
The judge did rule in favor of the employer; however, this was only due to the fact that the claimant failed to participate in the hearing. Had the claimant participated, he could simply have denied that he ever falsified his timecard, and the employer would have had insufficient proof to suggest otherwise. Preparation is the key to a favorable outcome for the employer. Not only will the witnesses be more confident with their testimony, but it can be the difference in determining what documents need to be submitted to the judge.
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Unemployment Compensation Services Update is a quarterly update for ADP’s Total Tax clients to address the issues of employee personnel practices, state unemployment tax, and payroll tax filing matters. This publication is distributed with the understanding that the publisher is not engaged in the practice of law. If legal issues arise in the context of your business, independent legal counsel should be consulted.
Submit unemployment-related documents, including your company payroll code, company name, and contact telephone number on all correspondence to:
Automatic Data Processing, Inc., Total Tax Department, P.O. Box 6000, San Dimas, California 91773-9060
Hotline Number: (800) 959-6246
For even more information about our products and services, please visit our Web site at www.adp.com .