SUCAP, the State Unemployment Compensation Advisory Program, has released a 2011 legislative advisory report including a state-by-state overview of unemployment trust fund solvency across the country and a state-by-state summary of loans, UI rates, revenues, and benefits paid.
Employers and service-providers in the employment tax arena have been closely following recent developments regarding the status of states’ UI funds and states’ ability to pay back federal loans taken out to cover UI fund shortages. Unfavorable economic conditions have resulted in a majority of states having to turn to the federal government for loans to help them meet their unemployment insurance (UI) benefit obligations. Where those states have been unable to pay the required interest on those loans, the states’ employers have been subject to higher tax rates on the $7,000 FUTA tax base (6.0% versus 0.6-0.8%).
The Virgin Islands were the lone territory unable to pay the required interest before the Sept. 30th, 2011 deadline last year, and it ended up costing them $32,952 in penalties. One of the reasons the Virgin Islands was the lone “violator” is that the other states and territories were able to take advantage of a variety of options available to them to minimize or avoid paying the interest or other federal penalties stemming from non-payment of interest.
Some of these options include:
- The state may repay the loan principal by certain dates under certain conditions to avoid having to repay interest and/or penalties.
- When states maintain a loan balance for a certain length of time, it subjects the state’s employers to a FUTA credit reduction (0.3% for each year of the loan, or $21 per employee in the first year of credit reduction, $42 per employee in the second year, etc.) States may avoid this credit reduction by meeting three conditions: 1) repaying all loans for the most recent year ending Nov. 9th, in addition to the additional taxes that would have been imposed that year; 2) alter state law to increase the net solvency of the state’s UTF account; and 3) have enough funds in their UTF to pay all compensation for the last calendar quarter of the year without borrowing additional funds from the federal government. South Carolina used this credit reduction avoidance strategy successfully in 2011.
- States may apply for a credit reduction cap if it meets four criteria: 1) there is no state legislative or administrative action to decrease the state unemployment tax effort in the preceding 12 months from Sept. 30; 2) there is no state legislative or administrative action to decrease the state UTF’s net solvency; 3) the average state UI tax rate on total wages must exceed the five-year average benefit cost rate on total wages; and 4) the loan balance on Sept. 30th must not exceed the balance three years before.
- The 100% reimbursement of the federal share of extended benefits has been temporarily extended under HR 3630, the Middle Tax Relief and Job Creation Act of 2011. This extension includes relaxed trigger provisions which enable states to have more flexibility with their Insured Unemployment Rate Triggers and also allows more states to continue to be triggered “ON” for extended benefits through the first two months of 2012. While 34 states are currently triggered “ON,” many are expected to trigger “OFF” sometime in the next year unless Congress acts to provide a revised look-back provision and the states continue with the relaxed trigger provisions in 2012.
Source: SUCAP 2011 Legislative Advisory Report