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August 19, 2020
2020-2101

FUTA credit reduction outlook for 2020 and beyond

The U.S. Department of Labor (USDOL) recently released an updated federal unemployment tax (FUTA) credit reduction estimate for calendar year 2020. The estimate shows a potential 2020 FUTA credit reduction for Virgin Islands employers, should the territory still have a balance remaining from its 2009 federal unemployment insurance (UI) loan balance on November 10, 2020. The Virgin Islands is the only state/territory that has the potential of a FUTA credit reduction for 2020. (Email response to inquiry, US DOL website.)

If the territory's federal UI loan is still outstanding on November 10, 2020, Virgin Islands employers will pay at a minimum a FUTA rate for calendar year 2020 of 3.6%, composed of a FUTA credit reduction rate of 3.0% and the 0.6% minimum FUTA rate.

Virgin Island employers also have the potential of an additional FUTA credit reduction for 2020, the Benefit Cost Rate (BCR). The territory again has requested that the USDOL waive the BCR for 2020. If approved (as has been the case for several years), an additional potential FUTA credit reduction of 0.7% will be avoided. If the territory's waiver request is not approved, Virgin Islands' employers will potentially pay their 2020 FUTA taxes at a rate of 4.3%.

The additional FUTA taxes would be used to pay down Virgin Islands' federal UI loan balance. The increased 2020 FUTA taxes would be due from Virgin Islands employers with their fourth quarter 2020 federal unemployment tax deposit (Form 940), due February 1, 2021.

State

First year ofloan

2019 FUTA credit reduction

Net 2019 FUTA rate

Projected 2020 FUTA credit reduction

2020 Benefit Cost Rate (BCR) add-on 1

Final 2020 FUTA rate (projected)

Virgin Islands

2009

2.4%

3.0%

3.6%

0.7%

4.3%

Legend

1 BCR courtesy of the USDOL. The 2.7 (not a percentage) add-on could apply if the BCR add-on is waived; however, this was not the case for 2019.

COVID-19 and the FUTA credit reduction impact

State UI benefit payouts in connection with COVID-19 have been substantial, placing an unprecedented strain on the state UI trust funds. As in the financial collapse of 2008–2009, several states have needed to request and receive federal UI loans to meet the demand.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, federal UI loans taken in 2020 are interest free if repaid by the end of 2020. Interest begins to accrue in 2021.

Under federal law, if all or a portion of a federal UI loan paid in 2020 is still outstanding after two years (November 10, 2022), employers in those states are required to make payments toward the outstanding federal UI loan balance in the form of a FUTA credit reduction that increases the FUTA taxes employers pay.

As of August 14, 2020, 19 jurisdictions (California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Kentucky, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Texas, Virginia, Virgin Islands and West Virginia) have applied for, and been approved to receive federal UI loans. (Title XII Advance Activities Schedule, UI Department of Treasury website.)

As of August 13, 2020, California, Hawaii, Illinois, Kentucky, Massachusetts, Minnesota, New York, Ohio, Texas, and West Virginia have outstanding federal UI loan balances for loans paid to them in 2020. As previously mentioned, the Virgin Islands continues to carry a balance on the federal UI loan that it received in 2009. (USDOLUI trust fund loans.)

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Contact Information
For additional information concerning this Alert, please contact:
 
Workforce Tax Services - Employment Tax Advisory Services
   • Debera Salam (debera.salam@ey.com)
   • Kristie Lowery (kristie.lowery@ey.com)
   • Kenneth Hausser (kenneth.hausser@ey.com)
   • Peter Berard (peter.berard@ey.com)

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