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COVID-19 Impact on 2022 Tax Rates and Beyond

By September 7, 2021September 21st, 2021COVID-19, News, Tax Implications

Episode One – 9/7/2021

Kicking off our September series regarding the impact of COVID-19 on state unemployment tax rates for 2022, we want to take this opportunity to set the table for what you should expect from this series.

With the unprecedented claims volumes over the past year, state unemployment trust funds have taken a big hit.  Both the federal government and states are doing everything they can to minimize the impact to employers and trying to defer any increases in taxes so employers can invest in recovery efforts.  But at some point, in time, the states will need to take actions to replenish the depleted trust funds in each state.

In most years, state unemployment taxes collected exceed the benefits paid, this obviously was not the case in 2020.  As a result, states will need to find ways to replenish the trust fund while minimizing the impact to employers.

When states encounter a short fall in their trust fund, they now have four options:

  • They can reduce unemployment benefits paid to claimants
  • They can borrow money from the Federal Unemployment Tax (FUTA) Reserves to boost their trust fund balances
  • They can use emergency funding from the American Recovery Plan Act to restore Trust Fund balances to pre-pandemic levels
  • They can increase taxes on employers

All of these options can have an impact on employers, and we suspect that states will be employing one or more of these tactics in the next few years to address the depletion of the state trust funds due to the COVID-19 pandemic.

This is Episode One of a four-part series during the month of September that will delve into each of these options, so you are prepared for 2022 unemployment tax rates.  Tune in next Tuesday (9/14) for Episode 2!

Episode Two – 9/14/2021

As we discussed in Episode 1 last week, state unemployment agencies have four options when they encounter a short fall in their state unemployment trust fund.  Three of those four options will be covered in this week’s Episode:

  • Reducing Unemployment Benefits Paid to Claimants
  • Title XII Loans from the Federal Unemployment Tax (FUTA) Reserves
  • Emergency Funds from the American Recovery Plan Act

Reducing Unemployment Benefits Paid to Claimants

When states are facing a short fall in their trust fund, they have the option to reduce the benefits that are paid to claimants to mitigate the impact of additional claims on the overall trust fund.  While a majority of states will pay out benefits for 26 weeks, some states set the duration of benefits for claimants based on the solvency of the Trust Fund or the state’s overall unemployment rate.    For example, Tennessee recently enacted legislation that will cap the number of weeks a claimant can collect benefits based on the state’s overall unemployment rate. Benefits collected could be as low as 12 weeks and up to 20 weeks if unemployment in the state balloons to over 9%.  Based on historic unemployment rates in TN, most claimants would see their benefits stopped after 13 or 14 weeks.  Lawmakers estimate that this move will save the state up to $24 million per year.

Title XII Loans from the Federal Unemployment Tax (FUTA) Reserves

The Federal Government has had a program in place for states to borrow funds when their trust funds reach certain levels. These Title XII loans are available to states in need and these loans have to be paid back in full or the FUTA taxes paid in that state are offset.  Currently a number of states have an outstanding balance that must be paid by November 10, 2022 in order to avoid a reduction in the employer FUTA credit.  This credit reduction would increase the FUTA taxes paid per employee for 2022 from $42 to $63. For every year this balance is outstanding, employers can pay an additional $21 per employee in FUTA tax. This is another situation that we are monitoring as it could have an impact on your taxes in 2022 and beyond.

Emergency Funds from the American Recovery Plan Act

The American Recovery Plan Act has provided another option for states with $350B in emergency funding provided to state, local, territorial, and tribal governments to directly address negative economic impacts of the COVID-19 public health emergency.  States can allocate their share of the money into 15 different categories, one of those being deposits to the state UI Trust Funds to restore their trust fund balances to pre-pandemic levels.

This is potentially good news for employers.  If the states elect to use some of the allocated funds to replenish their trust funds or pay back the advances on the Title XII loans, the impact on tax rates can either be minimized or eliminated altogether.  Twelve states have enacted legislation to distribute a portion of their ARPA allocation to replenishing the Trust Funds/Title XII Advancements.  The exact level of impact will vary from state to state as some are able to allocate sufficient funds to bring their trust fund back to pre-pandemic levels while others can only make a dent in the deficit.

That’s all for this episode.  Looking forward to next week, we will discuss in detail the fourth option for states to replenish the trust fund and arguably the most important option for employers: Increasing Taxes on Employers.  Tune in next Tuesday (9/21) for Episode 3!

Episode Three – 9/21/2021

In Episode 2 last week, we discussed three of the four options that state agencies have to replenish depleted state unemployment trust funds.  In this Episode, we will cover the fourth option and the most significant one affecting employers: Increasing Taxes on Employers.

The most common method for building up the state’s trust fund is to adjust the amount of taxes paid by employers.  States will accomplish this by:

  • Raising the state’s taxable wage base
  • Increase the factors used to set the tax rates (rate tables)
  • Add surcharges and other assessments to build up the trust funds

Taxable Wage Bases – are they where they should be?

The state trust funds are financed through employer payroll taxes and the taxable wage base is the portion of each worker’s wages that are subject to UI taxes.  States are required to have a wage base that is at least as high as the federal taxable wage base of $7,000, which has not significantly increased in nearly a century. There is talk in Congress that a federal policy that raises the minimum unemployment insurance wage base to at least half of the Social Security wage base (currently $142,800) would improve the solvency of the UI system and allow states to have a greater role in financing adequate benefits in the next economic downturn, according to Andrew Stettner, Senior Fellow at The Century Foundation.

In simple terms, UI benefits are based on a rate that currently averages a payout of nearly 50 percent of a worker’s wages, but taxes can only be charged on 25 percent of a worker’s wages. It is not surprising that the U.S. Department of Labor found that most states in 2020 were charging below the minimum financing rate needed to recover benefits and build a trust fund.

States that are more likely to have solvent trust funds or recover quicker are the ones that index their taxable wage bases to the average wages in the state.  States like WA, ID and NJ are among the 19 states that use this type of indexing and are among the states with the highest taxable wage bases in the US.  We expect that if a federal mandated taxable wage base increase does not occur, states will increase their taxable wage bases for the next few years to bring more money into the trust funds.  AZ, CO, CT, and NY have already announced taxable wage base hikes for 2023 and beyond.

State 2021 Taxable Wage Base 2022 Taxable Wage Base Percentage Increase
CO $13,600 $17,000 25%
IA $32,400 $34,800 7%
NV $33,400 $36,600 9.5%
NY $11,800 $12,000 1%
WA $56,500 $62,500 10%

Increasing Tax Rate Tables

In a period of depleting trust funds, it is common for states to increase their tax rates to generate more revenue and thus, replenish their trust funds.  This is obviously not a popular method for employers as it increases their state unemployment expenses via higher taxes.  With the COVID-19 pandemic accelerating the exhaustion of these trust funds, we expect to see states resort to this moving forward.

To date, we have confirmed that at least 2 states whose tax rates are effective on a fiscal year basis (July 1 thru June 30) will be increasing their tax rate tables (New Jersey & Vermont).  We fully expect this trend to continue into the fall and winter as the remaining states are calculating tax rates and issuing notices.

One interesting point to mention is that most states have indexed their tax rate schedules to correlate with the current level of the state trust fund.  This is similar to the indexing of taxable wages to the average wage we mentioned when discussing taxable wage limitations.  By having the tax rate schedule indexed to the trust fund level, it creates an economic trigger that drive these factors up or down rather than arbitrarily increasing and decreasing them via political or public opinion.

Special Assessments

Some states are trying to build back their Trust Fund balances by assessing a special COVID assessment or other assessments that are triggered when certain conditions are met in the state’s Trust Fund. For example:

  • Massachusetts created a COVID-19 Recovery account and moved all COVID related charges to that account. The state will charge all experience rated employers an assessment equal to 10.5% of their corresponding UI rate beginning January 1, 2021. This assessment ranges from $14.85 (0.099%) to $226.35 (1.509%) additional per employee.
  • Minnesota applies a 4% assessment to the amount that is due for a Federal Loan Interest Assessment to pay the interest on the Title XII loans that MN took to replenish their trust fund balance when it reached a certain level.

Many states took actions to keep rates low in 2021 to aid in the recovery efforts but the Trust Fund Balances will need to be replenished.  We expect to see more states use Special Assessments going forward to evenly distribute the replenishment of the Trust Fund balances.

That’s the end of the third episode!  As we wrap up our September series next week, we will summarize this information and answer the lingering question: What can I do as an employer?  Tune in next Tuesday (9/28) for the series finale!

Episode Four – to be posted 9/28/21

Josh Kendall

Author Josh Kendall

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