On Tuesday, November 12th, the Department of Labor (DOL) released a list of FUTA credit reduction states for the 2013 tax year (available here). These states are subject to a FUTA credit reduction because they had Title XII Federal loan balances on January 1, 2013, of at least two consecutive years, and on November 10, 2013, did not qualify for credit reduction avoidance.
Not to be confused with the September 30th deadline by which states must pay interest due on their outstanding loans each year in order to avoid interest assessment, the November 10th deadline is the date by which states must fully repay their loan advances in order to avoid a FUTA credit reduction.* This is one way that the states (and contributory employers) continue to experience the negative financial repercussions of the 2009 economic recession.
The FUTA credit reduction has been projected to cause employers' FUTA tax costs to nearly triple by 2014 from a $42 per employee average to a $124 per employee average.
For the 2012 tax year, nineteen states were subject to a FUTA credit reduction (although South Carolina was given an exemption). Although previous reports pegged the projected total number of FUTA credit reduction states at seventeen or twenty for 2013, the final official list shortens to just fourteen.
2013 FUTA Credit Reduction States
States that were subject to FUTA credit reduction in 2012 but will not be in 2013:
- Arizona (subject to 0.3% reduction in 2012)
- Florida (subject to 0.6% reduction in 2012)
- Nevada (subject to 0.60% reduction in 2012)
- New Jersey (subject to 0.60% reduction in 2012)
- South Carolina (they seem to always wrangle out of their reductions, don't they?)
- Vermont (subject to 0.30% reduction in 2012)
Indiana is in it's fifth consecutive year of non-repayment, a dubious distinction it has shared with South Carolina, which continues to avoid shouldering the full weight of FUTA credit reductions by the skin of its teeth.
Arizona was able to avoid FUTA credit reduction this year due to a bond issuance which you can read about here.
Florida's repayment of its federal UI loan was covered here.
Nevada's bond issuance to cover UI loans was covered here.
New Jersey's repayment of its federal UI loan was covered here.
South Carolina's early repayment towards their federal UI loan was covered here.
Last year, the Virgin Islands were the first to experience the burden of the "2.7% Benefit Cost Rate (BCR) Add-On." Created to encourage states to institute a baseline minimum of employer contributions in order to continue progressing on a path to UI solvency, the 2.7% add-on kicks in when a debtor state or territory carries an average UI loan tax rate than is allowed under a formula provided in the FUTA law.
The BCR add-on penalty is calculated as follows:
BCR add-on = Max [five-year state average cost/taxable wages, 2.7] -Average Annual State Tax Rate on Total Wages
The BCR was projected to trigger on Indiana and South Carolina for 2013, but both have requested waivers.
States that may be subject to the BCR Add-on in 2014 include:
- New Jersey
- New York
- North Carolina
- Rhode Island
- Virgin Islands
FUTA Credit Reduction Waivers and Cap Requests
*A waiver of the FUTA credit reduction, such as those submitted by South Carolina for 2011 and 2012, may also be obtained by:
- Submitting an application from the state's governor to the Secretary of Labor before July 1st of the applicable year.
- Paying the amount that the credit reduction would produce before November 10th of the applicable year.
- Repaying all UI loans received during the 1-year period ending before November 10th of the applicable year.
- Increasing solvency for the applicable tax year through legislative action and by an amount equal or greater to that of the amount of the FUTA credit reduction.
- Not borrowing again before the following January 31st.
States may also request a cap on their FUTA credit reduction in the following ways:
- Submitting an application from the state's governor to the Secretary of Labor no later than July 1st of the applicable year.
- Taking no legislative, judicial, or administrative action during the 12-month period ending September 30th of the applicable year that would reduce taxes or solvency for the same period.
- The state must have an average tax rate on total wages for the taxable year that equals or exceeds the average benefit cost ratio (BCR) for the five year period ending with the preceding calendar year.
- The state must have a loan balance on September 30th of the taxable year that is less than or equal to the loan balance on September 30th of the third preceding year.
The DOL has made available on its site the latest outstanding trust fund loan balances for the states, now totaling $19,641,854,108.82.
As of October 22nd, UI Integrity laws are now in effect in all states. Are you sure your organization is ready to meet the higher UI administration standards? Download the slides from ETS' 9/9/13 webcast.
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.