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Monthly Archives

June 2018

FIRST LOOK: Unemployment Tax Rates in 2019

It is hard to believe that we are approaching the end of the second quarter of 2018 and soon employers will receive unemployment tax rates for 2019.  Each year, the unemployment agencies calculate tax rates based on employers’ prior experience.  Experience is made up of multiple factors; taxable payroll, taxes paid, benefit payments for claims lost and reserve balance, to name a few.  While most states mail tax rates starting in November of any given year, a handful of states do so on a different time frame.

Fiscal Year States

Four states (New Hampshire, New Jersey, Tennessee, and Vermont) mail tax rates in the middle of a calendar year and are effective from July 1 through June 30.  These are referred to as being Fiscal Year states, meaning their tax rates are in effect during what is typically called a fiscal year as opposed to a calendar year.  Of these four states, only New Jersey offers employers the option to buy down rates for the upcoming year.  There are very strict deadlines for protesting or in the case of New Jersey, making the voluntary contribution so once past, the opportunity is missed.  Your dedicated UI Tax Analyst is skilled in the verification of tax rates on your behalf and will make certain you are made aware of all possible tax reductions.

California Pays its Title XII Loan

In May, California paid off its Title XII Loan for the first time in over a decade.  If the state retains its zero balance until November 10, 2018, the state’s employers should see a return to the minimum Federal Unemployment Insurance Act or FUTA rate of 0.60%.  At this time, estimates indicate California will be successful in this endeavor so employers should see their FUTA taxes return to the minimum allowed for the calendar year.  Currently, no other states have a Title XII loan.

As always, if there are any questions please do not hesitate to contact us.

The Impact of Unemployment Claims on State Employment Taxes

It is difficult to observe – let alone quantify – the impact of unemployment claims on a company’s state unemployment taxes. This can cause a person to question whether the effort involved in processing unemployment claims is cost-effective.  This is an attempt to clarify the cause and effect relationship (there is indeed such a relationship) between claims and taxes.

First, benefits paid to a UI claimant are taken into account in the UI tax rate calculation in every state except Alaska. This process is referred to as “experience rating” or “merit rating.”  Employers whose workers make the greatest use of the UI system inevitably are assigned the highest UI tax rates.  Such employers may be in seasonal industries, declining industries, cyclical industries, or high turnover work environments.

UI tax rates are reassigned on an annual basis, taking into account annually updated information regarding an employer’s UI benefit charges, payroll, and other factors. In every state except four (NH, NJ, TN, and VT) tax rates are assigned on a calendar year basis.  However, a comparison of your tax rate(s) from one year to the next is not an accurate measure of the cause and effect relationship between claims and taxes.

Changes in your payroll also impact your tax rate in every state. The ratio of your benefit charges to payroll (“benefit ratio”) or your reserve account balance to payroll (“reserve ratio”) is the basis of your rate.1  Increases or decreases in your taxable payroll can partially or completely offset the effect of changes in benefit charges. The benefit charges must be isolated to avoid a mistaken conclusion.

In the short term, the claims/tax relationship can also be obscured by changes in tax rate tables or state-wide adjustment factors used in the tax rate calculation. State tax laws contain mechanisms to increase or decrease tax rates depending on the solvency of the state UI trust fund.

There can be a multi-year delay between the payment of benefits and the tax impact. The delay is partially caused by the lag between the computation date (the cut-off date for gathering the relevant data) and the effective date of the next tax rate.  Most states use a computation date of June 30 to compute the employer tax rates for the following calendar year.  UI benefit charges incurred after the computation date do not affect the tax rate calculation for the following rate year, but such charges will be included in the calculate for future rate years.

For example, assume an employee in Missouri is terminated for lack of work in October of 2017, files a claim, and begins receiving UI benefits chargeable to the employer that terminated him. The employer’s tax rate for 2017 is already established and does not change as a result of the claim.  Further, Missouri uses a computation date of June 30, so the benefits paid to this employee will not be used in the 2018 tax rate calculation.  However, the benefit charges will be used in the 2019 rate calculation and future rate calculations.

Finally, tax brackets also muddle the connection between claims and taxes in the short term. In about half the states, a range of reserve ratios results in the same tax rate for any given rate year. A claim resulting in benefit charges of $10,000 may not result in a higher tax rate for the following rate year because it does not immediately push the employer into a higher tax bracket.  For another employer, whose tax rate is right on the upper edge of the tax bracket, benefit charges of $100, or even less, can move the needle, resulting in a tax increase that greatly exceeds the $100 in benefit charges.

Because of all the moving parts in an annual tax rate calculation, the most meaningful way to analyze this cost is to take a different approach. First, consider that UI taxes must at least be sufficient to fund all UI benefit payments on a continuing, prospective basis for the UI program to sustain itself in its current form as an employer-financed program.  Collecting the “right” amount of UI taxes from employers is problematic, because the amount of UI benefits paid can vary significantly from one year to the next.

Your UI tax payments must include a solvency factor, over and above the cost of benefits paid, to avoid the necessity of borrowing funds or increasing employer taxes during recessionary periods when tax increases can least be afforded.2  State tax laws are designed to generate revenue that exceeds normal benefit payouts by some cushion to account for fund solvency even though it is usually not identified on your tax rate notice.

Another “surcharge” is factored into your tax rate because certain UI benefit payments are incurred that are not charged to any specific employer, and these costs also have to be recovered. For example, let’s assume the Missouri employer mentioned above went out of business, and a total of 150 employees were laid off.  UI claims filed by these individuals are chargeable to the defunct employer’s tax account, but such charges will not generate any addition tax payments. The employer’s tax rate for the current year is already established.  The tax rate for next year is of no consequence because the employer is out of business and will report no payroll and pay no UI tax.  Benefits paid to these 150 people will have to be funded collectively by the other, active employers in Missouri.  This is an example of a “socialized cost.”

Other socialized costs include benefits paid to claimants but not charged to a specific employer’s tax account, and benefits paid to a claimant and charged to the account of an employer that already has the maximum tax rate (referred to as ineffectively charged benefits).

Nationally, twenty-nine percent of all UI benefit payments are not directly charged to an active employer or are ineffectively charged; therefore not affecting any particular employer’s UI tax rate.3  Nevertheless, the assignment of employer tax rates must account for and recover these payments.  By the way, the percentage of socialized costs has gradually increased in recent years.  Benefit eligibility has expanded to include such situations as a quit because of domestic abuse in many states.  While the claim is approved, the employer is generally granted relief from charges, resulting in expanded socialized costs.

Adjustments for fund solvency and socialized costs can and do vary widely from state to state and from year to year. For example, last year the socialized costs were 18% of all benefit payments in Michigan and 56% of all benefit payments in Mississippi.

The bottom line is that the following tax consequences will likely result from a chargeable claim:

  • 100% of the employer’s benefit charges will be built into the tax rate calculation.
  • 29% of the employer’s benefit charges will be added to the tax rate calculation to fund socialized costs.
  • 10% of the employer’s benefit charges will be added to the tax rate calculation to provide a cushion for periods of high benefit charges.

For a multi-state employer, it would be reasonable to assume that every dollar of UI benefits paid to one of your former employees and charged to your tax account will result in $1.39 in future UI taxes. If UI benefits are paid erroneously or improperly, the real cost to the employer will sooner or later exceed such payments by a wide margin.  You may never notice it because it is a “stealth expense,” incurred over an indeterminate period and masked by other variables.

If you ever find yourself questioning the relevancy of an effective unemployment claims management process, rest assured that your efforts are protecting your company from a cost that is often hidden, but real and significant.

As always, if there are any questions please do not hesitate to contact us.

1 The ratio is slightly different in Delaware and Oklahoma, which use a benefit-wage ratio formula, but this formula also takes claims into account.
2 State unemployment agencies have access to credit (federal loans and/or bonds) to fund shortfalls, but such funds must be paid back ultimately by means of employer UI taxes.
3 U.S. Department of Labor, Significant Measures of State Unemployment Insurance Tax Systems, Page 64, August 2015.

Massachusetts Increases Hourly Minimum Wage

The Massachusetts Legislature passed House Bill 4640 to provide paid leave and raise the state’s hourly minimum wage on May 20, 2018. HB 4640 has now been sent to Gov. Charlie Baker (R) to sign or veto.

Under the measure, HB 4640 would raise the state’s hourly minimum wage to $15 by 2023 from the current $11. The measure also would phase out the rule that employees who work on Sunday must be paid time and one-half.

In addition, Massachusetts workers could take up to 12 weeks of paid leave to care for sick family members or a new baby and up to 20 weeks of paid leave to tend to one’s own medical needs.

As always, if there are any questions please do not hesitate to contact us or visit our website.

Unemployment Weekly Claims Report For The W/E June 16, 2018

The Unemployment Insurance Weekly Claims report for the week ending June 16, 2018 has been released by the Department of Labor.

  • Seasonally adjusted initial claims: 218,000
  • 4 week moving average: 221,000
  • Seasonally adjusted insured unemployment rate: 1.2%
  • Seasonally adjusted insured unemployment number: 1,723,000
  • Number of unadjusted claims: 205,583
  • Unadjusted insured unemployment rate: 1.1%
  • Unadjusted number claiming UI benefits: 1,585,437

The full news release report can be downloaded here.

Vermont New-Employer Unemployment Tax Rates to Decrease

The Vermont Department of Labor released information on June 19, 2018 indicating that unemployment tax rates for new employers in the construction industry are set to decrease effective July 1, 2018.

The general unemployment tax rate for new employers is to remain 1 percent, but new employers in construction industries recognized with codes 236, 237, or 238 in the North American Industry Classification System currently receive higher rates.

The new-employer tax rate for the buildings construction industry (code 236) is to be 4.6 percent, down from 4.8 percent; the new-employer tax rate in the heavy- and civil-engineering construction industry (code 237) is to be 6.1 percent, down from 6.4 percent; and the new-employer tax rate in the special-trade contracting industry (code 238) is to be 5.5 percent, down from 5.8 percent.

Effective July 1, 2018, Vermont’s experienced-employer unemployment tax rates are to be determined with Schedule 3 and are to range from 0.8 percent to 6.5 percent.

The range of rates to take effect July 1 has a lower maximum and minimum than the Schedule 4 range of 1.1 percent to 7.7 percent, which has been in effect since July 1, 2017. Vermont is one of four states that generally determines unemployment tax rates on a fiscal-year basis.

As always, if there are any questions please do not hesitate to contact us.

Social Security Interest Rates Remain Constant for Third Quarter 2018

The Internal Revenue Service has announced that interest rates related to OASDI will remain the same for the calendar quarter beginning July 1, 2018. The interest rates are as follows: five percent for over-payments (four percent in the case of a corporation); five percent for underpayments; seven percent for large corporate underpayments; and two-and-one-half percent for the portion of a corporate over-payment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the over-payment and underpayment rate is the federal short-term rate plus three percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus three percentage points and the over-payment rate is the federal short-term rate plus two percentage points. The rate for large corporate underpayments is the federal short-term rate plus five percentage points. The rate on the portion of a corporate over-payment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half of a percentage point.

These interest rates are computed from the federal short-term rate based on daily compounding determined during April 2018.

As always, if there are any questions please do not hesitate to contact us.

Unemployment Weekly Claims Report for the W/E June 9, 2018

The Unemployment Insurance Weekly Claims report for the week ending June 9, 2018 has been released by the Department of Labor.

  • Seasonally adjusted initial claims: 218,000
  • 4 week moving average: 224,250
  • Seasonally adjusted insured unemployment rate: 1.2%
  • Seasonally adjusted insured unemployment number: 1,697,000
  • Number of unadjusted claims: 213,698
  • Unadjusted insured unemployment rate: 1.1%
  • Unadjusted number claiming UI benefits: 1,555,894

The full news release report can be downloaded here

MAINE: Next Phase of UI Progam

ReEmployMe, a program introduced last December, has been met with a bit of opposition in the state of Maine. The purpose of the online program is for claimants’ easy access to benefits. 

The next phase of the program, which will be geared toward employers, is set to roll out in August with implementation in November. Concerns have been expressed over this, as many feel the first phase rollout was too rushed, with many claimants unable to access their benefits for an extended amount of time. Reports of Mainers getting locked out of their accounts as well as controversy surrounding false claims that the labor department maintained the system in working order has people on edge.  

The Labor Department has responded to accusations stating that new systems are expected to have some difficulty with a portion of the claimant community and that filing online is not their only option. Should they have trouble with the online system, they can always go to a career center for assistance. They listed phone numbers for the Work Search and Technical Support line along with their hours as additional resources.


Kentucky Enacts Service Capacity Upgrade Fund for Third Quarter 2018

During the 2018 Legislation Session, the Kentucky Legislature General Assembly enacted the Service Capacity Upgrade Fund (SCUF), through HB 487, Section 139. Per KRS 341.243, all contribution rates beginning with the 3rd quarter of 2018 shall be reduced by 0.075%, in order to implement SCUF. There is no increase or decrease in the total amount of tax employers will pay. Instead, this reduction will divert 0.075% of the contributions that would have been applied to your employer reserve account, and apply to SCUF. In addition, you will not be able to claim SCUF payments on your Federal Unemployment Tax filings. Below is an example of how your 2018 reporting periods will change:

Kentucky Reporting Period Changes

Each year SCUF is in effect, all contribution rates will be reduced by 0.075%. SCUF is estimated to be in effect for the next 5 years or until the trust fund reaches $60 million.

If you are an employer who files using Option 1 or Option 3, you will need to update your ICESA ‘T’ Record Format for Field positions 145-149 and 150-160. You are an employer who files using Option 2 (Online Form Entry), the rates and adjustments have already been made and require no changes on your part.

Following is a 2018 Contribution Rate Schedule (Schedule B) to illustrate the rate breakdown once SCUF takes effect:

Kentucky Contribution Rate Schedule

As always, if there are any questions please do not hesitate to contact us.