November 18, 2020
Virgin Islands is the only jurisdiction subject to a FUTA credit reduction in 2020
According to the US Department of Labor (USDOL), the Virgin Islands continues to have a federal unemployment tax (FUTA) credit reduction for calendar year 2020. Virgin Islands' employers will pay FUTA taxes for calendar year 2020 at a net rate of 3.6%, composed of a FUTA credit reduction rate of 3.0% and the 0.6% minimum FUTA rate. (US Department of Labor website.)Employers in the Virgin Islands will pay their FUTA taxes for calendar year 2020 at a higher FUTA tax rate than employers in other jurisdictions because it failed to repay its outstanding federal unemployment insurance (UI) loans by November 10, 2020. These additional FUTA taxes are used to pay down Virgin Islands' federal unemployment insurance loan balance.
The increased 2020 FUTA taxes are due from Virgin Islands' employers with their fourth quarter 2020 Form 940 tax deposit, due February 1, 2021. The Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, once updated for 2020, will be available here.
Virgin Islands again received waiver of the BCR for 2020
The Virgin Islands again requested a waiver of the Benefit Cost Rate (BCR) for 2020, which was approved by the USDOL, removing the potential of an additional FUTA credit reduction of 0.7%. Had the request not been approved, Virgin Islands' employers would have paid 2020 FUTA taxes of 4.3%. (EY Tax Alert 2020-2101, 8-19-2020.)
As of November 11, 2020, the US Department of Treasury shows the Virgin Islands' outstanding UI loan balance was $80,108,748.15.
The 2020 FUTA credit reduction, which applies only to the Virgin Islands, is shown below.
1 - BCR of 0.7% waived by the USDOL. The 2.7 (not a percentage) add-on could have applied because the BCR add-on was waived; however, this was not the case for 2020.
2 - Total FUTA rate includes the FUTA credit reduction and 0.6% minimum net FUTA rate.
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 received in 2020 is still outstanding after two years, 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. For the states that began borrowing in 2020, and still have an outstanding loan balance as of November 10, 2022, a FUTA credit reduction of 0.3% would go into effect in 2022.
As of November 13, 2020, 22 jurisdictions (California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Texas, Virginia, the Virgin Islands and West Virginia) have applied for, and been approved to receive federal UI loans. Of these states, only Maryland has not yet taken out a federal loan. (Title XII Advance Activities Schedule, UI Department of Treasury website.)
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 UI 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 was triggered 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 than 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 UI 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. The 2.7 add-on penalty rate cannot be avoided or waived once activated.
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