The US Department of Labor (USDOL) recently released an updated federal unemployment tax (FUTA) credit reduction estimate for calendar year 2019. The estimate shows the potential 2019 FUTA credit reduction for Virgin Islands employers should the territory still have a federal loan balance on November 10, 2019. (Email response to inquiry, US Department of Labor website.) 

The Virgin Islands has had a federal loan balance since 2009 and is the only state/territory that has the potential of a FUTA credit reduction for 2019.

If the territory’s federal loan is still outstanding as of November 10, 2019, Virgin Islands employers will see at minimum a FUTA rate for calendar year 2019 of 3.3%, composed of a FUTA credit reduction rate of 2.7% and the 0.6% minimum FUTA rate. 

Virgin Island employers also have the potential of an additional 2019 FUTA credit reduction, called the Benefit Cost Rate (BCR). As in prior years, the territory has requested that the USDOL waive the BCR for 2019.  If approved (as was the case for several years), an additional potential FUTA credit reduction of 1.2% will be avoided. If the territory’s waiver request is not approved, Virgin Islands employers will potentially pay their 2019 FUTA taxes at a rate of 4.5%.

The additional FUTA taxes from the FUTA credit reduction are used to pay down the Virgin Islands’ federal unemployment loan balance.

Any additional FUTA tax owed as a result of the FUTA credit reduction are paid by Virgin Islands employers with their fourth quarter 2019 federal unemployment insurance tax deposit, due January 31, 2020.

Background

The Social Security Act requires a reduction in the FUTA tax credit when a jurisdiction has an outstanding federal unemployment insurance loan balance on January 1 of the second consecutive year. The reduction in the FUTA tax credit is 0.3% for the first year and an additional 0.3% (or more) for each succeeding year until the loan is repaid.

Federal law discourages states from carrying their federal unemployment insurance loan balances over several years by further reducing the FUTA credit beginning in the fifth year of the loan. This add-on to the FUTA credit reduction is referred to as the Benefit Cost Rate (BCR).

The BCR triggered on again this year for the Virgin Islands, which began borrowing in 2009 and still had a federal unemployment insurance loan balance as of January 1, 2019. The BCR penalty may be waived if the jurisdiction’s governor submits an application to the US Secretary of Labor no later July 1 of the penalty year, and the jurisdiction takes no action (legislative, judicial, or administrative) during the 12-month period ending September 30 that would reduce unemployment insurance trust fund solvency during that same time period.

Should the BCR add-on be waived, as is normally the case if the conditions are met, another penalty, referred to as the 2.7 add-on can apply if the jurisdiction’s average unemployment insurance tax rate is inadequate. This penalty rate cannot be avoided or waived once activated. According to the USDOL, the 2.7 add-on is not in effect for 2019.

As of September 4, 2019, the USDOL shows the Virgin Islands’ outstanding federal loan balance is $63,408,971.

The standard FUTA credit reduction and projected BCR add-on rate are shown on the following chart.

2019 potential FUTA credit reduction (2)

Legend 

1. BCR courtesy of the US Department of Labor. The 2.7 add-on could apply in certain cases if the BCR add-on is waived; however, the USDOL indicates that this will not be the case for 2019.
2. The final FUTA credit reduction amount is determined based on the loan balance as of November 10, 2019, when the final FUTA tax rate is announced.

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