UI Forum (ADP Unemployment Group)
UI at 75—A Look at an Important and Effective Social Program
This year marks the 75th anniversary of the Unemployment Insurance (UI) Program. Despite the challenges of the recent economic recession, the UI program continues to be one of the most successful social insurance programs created. The following is a brief overview of this complex, yet effective system.
The UI program was created in 1935 as part of the Social Security Act. The UI system is a “federal-state program,” meaning it is jointly financed through federal and state employer payroll taxes. Generally, employers pay both a federal unemployment tax (FUTA) and a state unemployment tax. (SUI). Only three states – Alaska, New Jersey and Pennsylvania – collect nominal contributions from workers.
Under the Federal Unemployment Tax Act (FUTA), the Internal Revenue Service is authorized to collect the federal employer tax via the annual Form 940 filing. FUTA taxes are deposited into three federal UI accounts: Employment Security Administration Account (ESAA), Extended Unemployment Compensation Account (EUCA), and Federal Unemployment Account (FUA). The costs that each individual state incurs in administering unemployment and job service programs are funded from ESAA. In periods of high unemployment, extended UI benefits are often triggered, so funding for the federal portion of these extensions comes from EUCA. FUA provides loans to states when state UI trust funds become insolvent during times of economic recession.
The primary purpose of the UI Program is to provide unemployment benefits to eligible workers who become unemployed through no fault of their own, and is intended to be temporary financial assistance to unemployed persons who meet earnings and other requirements.
Employer paid SUI taxes go to state unemployment agencies to be used solely for the payment of UI benefits to eligible unemployed workers.
Each state administers its own separate UI Program and laws, within federally established guidelines. An unemployed worker’s eligibility for benefits is determined by state UI law provisions. An employer’s chargeability for any benefits paid to former workers and the amount of SUI taxes a business pays is determined by state law, as well.
To establish UI benefit eligibility, an unemployed worker must file a claim with the state unemployment agency. Claims in the majority of states are now filed by telephone or through the Internet. Individuals filing or “claimants” will need to provide certain information about themselves, their work history, and the reason why they are currently unemployed. The unemployment agency will also gather information about a worker’s separation from the employer. It generally takes up to three weeks from the claim filing date for the agency to determine if a claimant will be allowed or denied UI benefits. Both parties, the claimant and the employer, have the right, in accordance with UI law, to appeal if they disagree with the determination.
If determined eligible, the amount of UI benefits paid are based on a percentage of an individual's earnings over a recent 52-week period, up to a state maximum amount. UI benefits are subject to federal income taxes and must be reported on a person’s federal income tax return. A claimant may elect to have the tax withheld by the state unemployment insurance agency.
Each state’s UI laws provides for a system of “experience rating.” This means an employer’s tax rate can vary based on their UI history, i.e., payroll and benefit charges. There are four experience rating systems: Reserve Ratio, Benefit Ratio, Benefit Wage Ratio and Payroll Decline, although a few states have combination systems. State law provisions on experience rating are complex and vary greatly, especially in the formulas used to determine an employer’s tax rate. Since there can be major differences in payroll and unemployment benefit costs among employers, the experience rating system can offer “incentives’ through lower tax rates for businesses with stable employment environments and it can also help allocate the cost of unemployment.
The UI program is unique, because there is some element of control over the amount of payroll taxes paid. Since any unemployment claim can potentially impact an employer’s rates, sound claims and tax administration practices are essential to managing UI tax costs.
Restructuring of South Carolina UI Agency Underway
Newly enacted legislation restructures the South Carolina Employment Security Commission (ESC). The intent of overhauling the state’s unemployment and job service agency is to improve accountability and better connect the unemployed to job opportunities.
In a press release dated March 30, 2010, it was announced the Workforce Investment Act program, previously under the Department of Commerce, will be transferred to the ESC, which will become the Department of Employment and Workforce. This new agency will be part of the governor’s Cabinet. The governor will have authority to appoint a Director of the new Department of Employment and Workforce.
The ESC is currently being lead by an interim Executive Director, who will continue to serve in this capacity until the governor makes an appointment and that person is vetted by a legislative panel.
Additional highlights of changes resulting from the new law are as follows:
- The agency will be required to undergo regular audits.
- The agency will be required to provide periodic updates of employment trends and the Unemployment Insurance Trust Fund balance.
- The three-member Commission, previously over the ESC, will now serve in an appellate role, hearing unemployment cases.
- Benefit eligibility reviews will increase and instances of fraud must be referred to the attorney general for investigation.
- Benefit disqualification provisions will be tightened for persons discharged for gross misconduct, including damage to employer property, theft, and insubordination.
- Workers of temporary-help firms who complete an assignment will be required to contact the firm for new work before being deemed eligible for benefits.
During this time of transition for the ESC, services provided to employers by the ADP Unemployment Group should continue normally. We will keep you apprised of any new developments.
UI Outlook Challenging Despite Signs of Employment Recovery
The national unemployment rate has stabilized over the past few months, from a high of 10.2% in October 2009 to 9.7% in March 2010. In addition, the four-week moving average in weekly unemployment claims for the week ending March 27, 2010, fell below the 450,000 benchmark to 447,250. Although experts are cautiously optimistic that these two indicators mark the beginning of employment recovery, the unemployment insurance (UI) program faces significant challenges over the next few years.
The balances in individual state unemployment trust funds are still strained and many states are borrowing from the federal government via Title XII loans, so that benefits can continue to be paid to unemployed workers. Currently, 35 states have insolvent UI funds, and borrowing has exceeded $38 billion. The insolvency of state unemployment trust funds is expected to continue, with a potential forecast of approximately $90 billion in loans to 40 states. Also, it is important to note that the interest-free provision of the Title XII loans, passed as part of the American Recovery and Reinvestment Act, is set to expire at the end of 2010.
As states begin to plan for Title XII loan repayments, employers will be challenged with increased unemployment tax costs. Although Florida, Indiana, and Hawaii recently passed legislation to delay substantial employer UI taxes increased for 2010, a December 2009 survey from the National Association of State Workforce Agencies (NASWA) contained the following information:
- 35 states increased UI taxes in 2010
- 24 states increased UI taxable wage bases in 2010
- 10 states are at the highest tier of tax schedules used in calculating UI rates
In addition to state UI tax increases, many employers are also facing federal UI tax increases through FUTA credit reductions, because Title XII loans cannot be repaid timely. When federal Title XII loans are not repaid within established time frames, states that are borrowing lose a portion of the FUTA tax credit, which basically means an increase in FUTA tax costs for all employers in that state.
Michigan employers lost 0.3% of its FUTA credit in 2009. In 2010, Indiana and South Carolina businesses could also lose 0.3% of their FUTA credit, and Michigan will lose another 0.3% for a total FUTA credit reduction of 0.6%.
Employers also need to keep in mind the minimum state UI taxable wage base amount must be equal to the FUTA wage base (currently $7,000). If legislation were passed to increase the FUTA wage base, many states would be required to increase the state wage base to match the federal minimum.
Employers should be prepared for UI tax increases over the next three to five years, based on the current condition of the unemployment tax system. Cost management strategies to help mitigate challenges in the coming years includes effective claims management, tax forecasting, and taking advantage of job creation-tax credit incentive programs.
To aid in economic recovery and job creation, legislation was recently signed to delay employer unemployment tax increases previously enacted. The taxable wage base remains at $7,000 until 2012 when it will increase to $8,500. In addition, rate calculation factors were changed to keep rates lower. Revised employer rate notices were issued in late March.
Governor Lingle recently signed a bill to reduce significant unemployment tax increases scheduled for 2010. The business community rallied for the changes in order that job creation and economic recovery not be impacted. Passage of the legislation means an average employer unemployment tax reduction in 2010 from $1,070 to $630 per employee.
Through recent legislative action, unemployment tax changes that were to be effective this year have been postponed until January 1, 2011. The taxable wage base remains at $7,000, but will increase to $9,500 next year. The planned maximum tax rate increase to 12.0% is delayed and will remain 5.6%, plus rates for certain employers will be 2.5% instead of 2.7%. Rate schedule and fund ratio changes are also pushed back until 2011.
Enacted legislation became effective as of April 1, 2010, regarding sufficient responses to unemployment notices. Complete and timely separation and wage details must be provided on all forms, as requested by the unemployment agency, or the employer may be denied the right to appeal.
The following changes will go into effect in June 1, 2010: 1) A dependents’ allowance of $15 per child under the age of 18, up to a maximum of $50, may be added to the weekly unemployment benefit amount of qualified claimants. Employers’ benefit charge liability will include these allowances; 2) Claimants will not be held ineligible for benefits solely because they seek or accept part-time work only, as long as the part-time work is a minimum of 20 hours weekly; and, 3) An alternative base period of the most recent four completed calendar quarters from the claim filing date may be used to establish an individual’s unemployment claim, if there are insufficient wages in the standard base period (the first four of the last five completed calendar quarters from the claim filing date.)
THE U.I. FORUM® IS PUBLISHED BY ADP UNEMPLOYMENT GROUP, P.O. BOX 66744, ST. LOUIS, MO. 63166. ©ADP, INC. 2010. ALL RIGHTS RESERVED