March 1, 2021
FUTA credit reduction for Virgin Islands for 2021, the outlook for future years
The U.S. Department of Labor (USDOL) released an updated federal unemployment tax (FUTA) credit reduction estimate for calendar year 2021. The estimate shows a potential 2021 FUTA credit reduction for Virgin Islands employers, should the territory still have a balance remaining from its federal unemployment insurance (UI) loan balance on November 10, 2021. The Virgin Islands is the only state/territory that has the potential of a FUTA credit reduction for 2021. Thus far, almost 20 other states run the risk of a FUTA credit reduction for 2022 if their loans are not repaid by November 10, 2022.
2021 FUTA credit reduction for the U.S. Virgin Islands
If the territory's federal UI loan is still outstanding on November 10, 2021, Virgin Islands employers will pay, at a minimum, a FUTA tax rate for calendar year 2021 of 3.9%, composed of a FUTA credit reduction rate of 3.3% and the 0.6% minimum FUTA tax rate.
Virgin Islands employers also have the potential of an additional FUTA credit reduction for 2021, the Benefit Cost Rate (BCR). As in previous years, the territory will most likely request, and be approved for, a waiver of the BCR for 2021. If approved (as has been the case for several years), an additional potential FUTA credit reduction of 0.4% will be avoided. If the territory's waiver request is not approved, Virgin Islands employers will potentially pay their 2021 FUTA taxes at a rate of 4.3%.
The additional FUTA taxes would be used to pay down the Virgin Islands' federal UI loan balance. The increased 2021 FUTA taxes would be due from Virgin Islands employers with their fourth quarter 2021 federal unemployment tax deposit (Form 940), due February 1, 2022.
1 BCR courtesy of the USDOL.
COVID-19 and the cost of federal loans to shore up state UI trust funds
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 and interest begins to accrue in 2021. However, the Consolidated Appropriations Act, 2021, enacted on December 27, 2020, extends to March 14, 2021 the period through which interest will not accrue. Most states pass the cost of federal loan interest on to employers in their states through surcharges that are added to the regular state unemployment insurance (SUI) tax rate. (See U.S. Department of Labor Program Letter No. 9-21.)
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 February 24, 2021, 23 jurisdictions have applied for, and been approved to receive federal UI loans. A total combined loan amount of $48,694,365,541 is outstanding. Of these states, only the District of Columbia, Indiana, Maryland and Virginia do not currently have an outstanding federal loan balance. (Title XII Advance Activities Schedule, UI Department of Treasury website.)
Federal unemployment insurance loan data as of February 24, 2021
Several states (e.g., Alabama, Arizona, Georgia, Hawaii, Idaho, Iowa, Louisiana, Maine, North Carolina, North Dakota, South Carolina, and Tennessee) chose to use federal CARES Act funds to bolster state UI trust funds to help mitigate employer SUI tax increases for 2021. This is in addition to most states choosing to not charge COVID-19 UI benefits to employer UI accounts for experience rating purposes.
Ernst & Young LLP insights
The last time the nation saw a substantial increase in UI benefit payouts was during the great recession of 2007 and 2008. At that time, most states received federal loans to shore up their trust fund reserves, and at its peak in 2011, 21 states fell subject to the FUTA credit reduction.
Once the FUTA credit reduction is triggered, it can take years for it to go away. California, for instance, began borrowing in 2009 and its federal UI loan balance was not repaid until 2018, subjecting California employers to the FUTA credit reduction for seven years (2011 to 2017). The Virgin Islands has yet to repay its federal loan balance from this period, and for 2020, a FUTA credit reduction of 3.0% applied, for total FUTA tax of 3.6%. (US Department of Labor website.)
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