Recently enacted legislation (HB 252 and HB 487) will, effective third quarter 2018, divert 0.075% of employers' state unemployment insurance (SUI) to a new service capacity upgrade fund (SCUF) if the state SUI trust fund exceeds the trust fund balance as of December 31, 2017.

According to the Kentucky Office of Employment & Training website, beginning third quarter 2018, 0.075% of all employers' SUI tax rates will be diverted to the new fund, resulting in neither an increase nor a decrease in SUI contributions that employers will pay for 2018. For example, for an employer assigned an SUI rate of 2.3% for calendar year 2018, 2.225% will be deposited into the state UI trust fund and 0.075% will be deposited into the SCUF.

Employers will not receive credit for the 0.075% diversion to their reserve accounts and, while in effect, the SCUF contribution will not be used in the computation of future SUI tax rates.

Employers also should not use the 0.075%, beginning third quarter 2018, to determine the SUI rate when completing the 2018 federal Form 940 worksheet (see the agency's website for a breakdown of the 2018 SUI rate schedule). This means that employers that complete the Form 940 worksheet will show two tax rates for 2018.

The SCUF surcharge will be shown separately on the Kentucky quarterly SUI tax return (Form UI-3). (Email response to inquiry, June 7, 2018.)

Employers and third-party payroll service companies uploading files electronically must, effective third quarter 2018, update the "T" record of their electronic file to show the SCUF separately (see the revised format).

Tax rates will automatically adjust for small employers manually entering their report data online.

The agency estimates that the SCUF will be in effect for the next five years or until the fund reaches $60 million.

Electronic filing may be required for all employers

According the agency's electronic filing website, the agency plans in the coming months to phase out the mailing of paper Form UI-3, Employer's Quarterly Unemployment Wage and Tax Report, and payment coupons in order to advance an electronic reporting and payment submission process for all filers.

Currently employers with fewer than 10 employees are allowed to file on paper. The agency representative confirmed that in the future, all employers will be required to file and pay electronically, but at this time an effective date has not been determined.

For more on Kentucky SUI taxes, see the agency's website. See also EY Payroll NewsFlash Vol. 18, #205 (12-7-2017) for information on the 2018 SUI tax rates.

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EY Payroll News Flash