**UPDATED 2/20/13; this was signed into law February 19, 2013.**
On Feb 13th, the North Carolina Senate passed HB 4, which was passed by the state's House of Representatives (77-42) on February 5th. The Governor Pat McCrory has indicated that he will sign the legislation, and may do so either today or tomorrow. The text of the bill can be viewed here.
According to an email from Doug Holmes, President of UWC (National Foundation for Unemployment Compensation & Workers' Compensation), the HB 4 legislation was largely based on a study recently commissioned by the North Carolina Chamber of Commerce Foundation, entitled "North Carolina UI Solvency Study Observations and Recommendations." Published on May 18, 2012, the study was written by Tony Fiore, an attorney with Kegler Brown Hill and Ritter and consultants including Doug Holmes. The full study is available here.
HB 4 (Unemployment Insurance Reform) Awaits NC Governor Approval
image credit: Hans
One of the problems this legislation aims to address is the amount of interest continually accruing on federal loans taken out by the state of North Carolina to fulfill its UI obligations. The interest alone is estimated at approximately $150 million over the past two years (Source: Charlotte Chamber of Commerce).
North Carolina currently owes approximately $2.4 billion to the federal government for UI loans, the third highest debt burden behind New York and California. Without the new HB 4 legislation, it is estimated North Carolina employers will pay over $500 million in interest between 2011 and 2019 to fulfill the debt obligation (Source: The Charlotte Observer).
If (or when) enacted, HB 4 will speed up the debt repayment process to an accelerated 3-year repayment plan, which will reduce the overall burden of interest payments on the state's employers. In order to accomplish that, employers will face an increased burden over the next three years to cover payments on the principal balance, and the unemployed will share the burden through reduced benefit amounts and shortened eligibility periods.
HB 4, called the "Unemployment Insurance Fund Solvency & Program Changes," will make the following changes to North Carolina UI law:
Immediate Impact on Employers
- Increase NC employer SUI rates beginning January 1, 2014 (all other changes effective July 1, 2013.)
- The minimum base SUI tax rate would increase from 0% to .06%
- The maximum base SUI tax rate would increase from 5.7% to 5.76%
- SUI tax rates would be computed based on a formula rather than a table
- Establish a new trigger for collection and suspension of the surtax, equal to 20% of an employer's SUI liability.
- Require a 1% reserve from all government and nonprofit employers that elect to finance benefits through reimbursement, and disallow refunds.
Immediate Impact on Unemployed
- Reduce the maximum number of UI benefit weeks from 26 to 20 weeks.
- Tie the number of benefit weeks available to the seasonally-adjusted unemployment rate (between 12 and 20 weeks).
- Reduce the maximum weekly benefit amount from $535 to $350.
- The new cuts would impact jobless claims filed starting July 1st, 2013.
- Change the calculation of maximum weekly benefit amount from a formula based on the high quarter wage in the claimant's base period to the average of the last two quarters of that period.
- The bill would restrict the optional triggers for the availability of extended benefits to those times when the benefits would be 100% federally funded. It would not change the mandatory trigger for extended benefits.
- Reforms programs to renew focus on re-employment and enforcement of "actively seeking work" requirements.
- Program changes:
- Requires a waiting week for each new benefit claim;
- Repeals "substantial fault";
- Eliminates most "good cause" provisions for leaving work;
- Redefines "suitable work" as any work paying 120% of weekly benefit amount after 10 weeks of benefits.
- The bill would transfer $16.6 million from various funds to the UI fund to pay down principal on the debt.
- The bill would restrict the use of revenues in the Employment Security Commission Reserve Fund and the Special Employment Security Administration Fund.
- Establishes a Joint Legislative Oversight Committee on Unemployment Insurance.
A Slam-Dunk, or Cause for the Governor to Reconsider?
The Department of Labor Secretary Seth Harris has issued a press release regarding the impact of HB 4. Specifically, it will automatically halt federally-funded Emergency Unemployment Compensation otherwise available to the unemployed after 26 weeks of unemployment. In order to qualify for the federally-funded benefit weeks after week 26, the state must provide unemployment benefits through the 26th week.
Harris estimates 170,000 North Carolina families will be impacted by this loss in benefits; a total loss of $780 million in federal funds to the state's economy. His release goes on to highlight the economic benefits of unemployment payments which are immediately reinvested in the local economy, and, he says, particularly "vital" to the economy during periods of high unemployment such as currently experienced in North Carolina. (North Carolina's unemployment rate is 9.2% - the fifth highest in the country, compared to the national average of 7.9%).
Will the DOL's press release give Governor McCrory pause? It's unclear whether the state legislators were aware that enacting HB 4 would trigger this major loss in free money from the federal government. It also appears that North Carolina would be the first state to reject federal dollars in order to slash benefits, and they would be the deepest benefit cuts made by a state yet (Source: Huffington Post).
**UPDATED 2/20/13, according to an email from Doug Holmes, President of UWC, North Carolina is seeking an amendment to the "no reduction" condition on federal EUC funding. The "no reduction" condition was put in place to discourage states from reducing the maximum period of unemployment benefit weeks.**
North Carolina is not alone in taking drastic steps to restore balance to their state UI funds; for example, Florida and Georgia have also recently reduced their benefit week ranges, though not as severely (to between 12 and 23 weeks and 14 to 20 weeks, respectively) (Source: Huffington Post). One of the "solutions" offered by HB 4 and touted in an email sent by the Charlotte, NC Chamber of Commerce to its members was that it would "align benefit duration and amount with surrounding states to make North Carolina more competitive." While not explicitly mentioned, one may surmise they were making reference to Georgia and Florida.
If approved, this legislation will make North Carolina the eighth state to reduce unemployment benefit weeks during the latest recession, following Arkansas, Florida, Georgia, Illinois, Michigan, Missouri, and South Carolina.
ETS will update this post as more information becomes available regarding the outcome of this legislation. Although HB 4 enjoys the support of business interests and the Republican-controlled legislature, anything that results in higher SUI taxes is difficult to see as a great victory for employers. If you are an employer in North Carolina, what are your thoughts about this?
Use this quick guide to evaluate whether your Unemployment Claims Administration process is broken. Broken UCM processes create compliance issues, generate excess taxation, and drain your HR and Payroll departments.
The Beaufort Observer. "House passes unemployment insurance fix to reduce the debt." February 7, 2013.
The Charlotte Observer. "Both employers and workers must help fix unemployment fund." Jan. 31, 2013.
Department of Labor. ETA News Release 13-0260-NAT. "Statement by acting Secretary Seth D. Harris regarding proposed Unemployment Insurance legislation in North Carolina." February 11, 2013.
The Huffington Post. "North Carolina Unemployment Insurance Bill A 'Grievous Blow' To Families: Labor Secretary.
The New York Times. "North Carolina Approves Steep Benefit Cuts for Jobless in Bid to Reduce Debt." February 13, 2013.
Disclaimer: This article is general in nature and is not intended to replace the guidance of an employment tax expert and/or legal professional with regards to an appropriate course of action in your particular circumstances. Please consult with a professional for appropriate advice in your case. Pursuant to IRS "Circular 230" rules, any information included herewithin is not intended or written to be used for the purpose of avoiding penalties under the federal Internal Revenue Code.