June 9, 2021 Many employers face higher state unemployment insurance tax costs due to COVID-19 The information in this Tax Alert has been updated. Please see our Special Report attached to Tax Alert 2021-1623. In this alert we examine the impact the COVID-19 emergency has had on state unemployment insurance (SUI) costs and actions jurisdictions have taken to lessen the financial impact on employers while also maintaining adequate funds for the ongoing payment of unemployment insurance (UI) benefits. Background Since 2014, as state unemployment insurance (SUI) trust funds began to recover from the financial collapse of 2008/2009, employers have generally enjoyed consistency, even decreases, in their SUI tax rates. For example, the range of SUI tax rates between 2014 and 2021 dropped in more than 15 states, with 2016 being the most favorable with 26 states moving to lower SUI tax rating schedules. This favorable trend in employer SUI costs abruptly ended in 2021 as unemployment insurance (UI) trust funds in every jurisdiction faced sharp increases in UI benefit payouts because of the COVID-19 emergency that began in March 2020. To help replenish SUI trust funds hard hit by COVID-19 benefit claims, 23 jurisdictions moved to a higher base SUI tax rating schedule in 2021 compared to just six that increased their range of base SUI tax rates in 2020. In addition to the base SUI tax rate, some states also impose surcharges, and a few of these increased in 2021 as well. The extent of the 2021 SUI cost impact on employers depends largely on steps jurisdictions took to shield businesses from the rise in tax rates that are automatically triggered by individual employer experience and/or falling UI trust fund levels. Figure 1: SUI cost trends 2014 – 2021 Impact of COVID-19 UI benefits on individual employer 2021 SUI experience rates As previously reported (See EY Tax Alert 2021-0869), UI benefits made available from the following federal programs have no impact on the jurisdictions' UI trust funds nor an individual employer's SUI experience rate:
Additionally, under federal law, states have the option effective March 18, 2020, and through September 6, 2021, to relieve employer accounts of regular UI benefits paid in connection with COVID-19. How jurisdictions have been approaching the charging of COVID-19 regular UI benefits to the accounts of experience-rated employers vary considerably. (For more information see EY Tax Alert 2021-1091.) Hence, although federal law seeks to lessen the financial impact of COVID-19 UI benefits, employers cannot assume that they are shielded completely from any direct impact of regular COVID-19 UI benefit claims. Impact of COVID-19 on jurisdictional base 2021 SUI tax rate schedules To maintain the solvency, jurisdictions compute the range of base SUI tax rates that will apply for the upcoming rating year based on the balance of their UI trust funds. Generally, if UI benefit claims have increased overall for a jurisdiction, employers can expect that jurisdiction will move to a higher base SUI tax schedule in future years. In 2020, all jurisdictions faced declines in their SUI trust fund balances; however, for the 2021 rating year, all but 15 jurisdictions (as of May 26, 2021) took action to cushion employers from financial impact, as follows.
Despite their actions to reduce the impact of falling SUI trust funds, 15 jurisdictions moved to a higher SUI tax rate schedule, with the increase significant in some cases. In Arizona, for instance, the range of SUI tax rates increased from 0.05%-12.85% in 2020 to 0.08%-20.6% in 2021. Figure 2: 2021 SUI base tax rates for experience-rated employers The challenge of late and reissued 2021 SUI rate notices The process of removing regular COVID-19 UI benefits from employer accounts, legislative/administrative actions to adjust 2021 base SUI tax rate schedules, or both, created delays in the issuance of SUI tax-rate notices in 2021. For calendar year states, SUI rate notices are typically issued in November/December, giving employers enough time to adjust systems that accrue for and compute remittances of SUI tax. In 2021, the issuance of SUI tax notices was not only delayed, but in some cases, retroactively reissued. In the case of Texas, 2021 SUI rate notices are not yet issued. Because of delays/corrections, some states postponed the due date for 2021 first-quarter SUI tax payments (e.g., Florida, New Mexico, Texas); alternatively, employers could estimate their SUI tax payments using their 2020 assigned SUI tax rate. Unlike previous years, employers will need to be diligent in determining their correct 2021 SUI tax rate and take immediate action to apply for refunds if they have paid more SUI taxes than they should have. Figure 3: States that reissued their 2021 SUI tax-rate notices
Underpayments of SUI may also arise due to SUI rate notices that were issued later than normal. These too should be addressed as soon as possible, keeping in mind that some states can impose a higher "penalty" SUI rate for SUI underpayments. Figure 4: States with penalty rates for SUI underpayments/delinquent filings
SUI tax costs in 2022 and beyond Whether base SUI tax rates will increase in 2022 and future years will depend on several factors as follows:
Future SUI tax rates will depend on the speed at which the economy recovers at the jurisdictional level. Although every jurisdiction has seen improvements in their jobless rates compared to May 2020, as of April 2021, 47 jurisdictions continue to have a jobless rate that is higher than it was before the COVID-19 emergency (Bureau of Labor Statistics, April 2021). See Figures 5 and 6. SUI tax costs in 2022 and beyond Whether base SUI tax rates will increase in 2022 and future years will depend on several factors as follows:
Future SUI tax rates will depend on the speed at which the economy recovers at the jurisdictional level. Although every jurisdiction has seen improvements in their jobless rates compared to May 2020, as of April 2021, 47 jurisdictions continue to have a jobless rate that is higher than it was before the COVID-19 emergency (Bureau of Labor Statistics, April 2021). See Figures 5 and 6. Figure 5: Jurisdictions with lower jobless rates in April 2021 compared to May 2019
Figure 6: Jurisdictions with higher jobless rates in April 2021 compared to May 2019
As in 2021, most states will again have the option of transferring federal CRF/FRF dollars to their UI trust funds; however, to do so, legislative/administration action will be necessary in most jurisdictions.
As in 2021, jurisdictions can again take action to hold their base SUI tax rate schedules at the same level as 2020. As of May 26, 2021, the jurisdictions below have already taken this step. Figure 7: State action to lower SUI tax rates in 2022 and later years
Jurisdictions that face an insolvent UI trust fund may be forced to borrow money so they may continue to pay UI benefits. Some jurisdictions may finance this debt on their own, such as through the issuance of bonds. Jurisdictions also have the option of obtaining federal UI loans. Regardless how the debt is financed, jurisdictions often pass the interest cost on to employers through the form of a SUI surcharge. Such surcharges are not treated as SUI contributions for purposes of computing the federal unemployment insurance (FUTA) credit reduction. Federal UI loans taken to pay UI benefits starting in 2020 will begin to accrue interest on September 6, 2021 (extended from December 31, 2020, by HR 133, Pub. Law 116-260 and from March 15, 2021, under Public Law 117-2). As a result, and unless further federal legislation is enacted, the first federal interest payments will come due in the fall of 2021. (See U.S. Department of Labor Program Letter No. 14-21.) In anticipation of interest for UI trust-fund financing, two jurisdictions, Massachusetts and Michigan, are already imposing interest surcharges on employers. Under federal law, if all or a portion of a federal UI loan is still outstanding after two years, employers in those jurisdictions 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 jurisdictions 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.? 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 2018). California anticipates the FUTA credit reduction in connection with COVID-19 will be in place until 2030 or 2031 (10 to 11 years). See Figure 8 for the federal loan balances reported by Treasury Direct. Figure 8: States with outstanding federal UI loan balances as of May 26, 2021
Ernst & Young LLP insights The COVID-19 emergency has had more of an impact on SUI tax costs than the financial collapse of 2008–2009. It is important that businesses take the following steps to proactively respond during this period of rapid change.
For more information on COVID-19 state payroll and employment tax developments see our special report. ———————————————
——————————————— EY Payroll News Flash
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