Kentucky Governor Andy Beshear approved SB 129, which, retroactive to January 1 2026, reinstates the unemployment insurance Service Capacity Upgrade Fund (SCUF) surcharge and establishes a new, annually determined SCUF framework beginning in 2027.

Background

Since 2018, Kentucky law has allowed the commonwealth to divert a portion of employers' state unemployment insurance (SUI) contributions into the SCUF to support the cost of system modernization.

Because the SCUF is a diversion from the SUI trust fund, it is not treated as a SUI contribution for federal unemployment tax (FUTA) purposes and is not included in Kentucky contributions reported on Form 940, which may affect the calculation of the FUTA tax credit.

The application of the SCUF has historically fluctuated, with the assessment periodically suspended and reinstated based on statutory conditions tied to the balance of the commonwealth's SUI trust fund. Most recently, the SCUF was suspended for the second, third and fourth quarters of 2025.

SB 129

Under current law, from October 1, 2018, through December 31, 2026, the SCUF diversion is 0.075% when the SUI trust fund balance exceeds the balance as of December 31, 2017.

Beginning January 1, 2027, SB 129 replaces the fixed reduction with a new structure under which rates will be reduced by 0.0115%, and the Secretary of the Education and Labor Cabinet will set the adjustment percentage annually, not to exceed 0.025%. The law also requires that the adjustment be suspended when specified thresholds are not met, including when SUI trust fund balance does not exceed its level as of December 31, 2022.

Ernst & Young LLP insights

SB 129 continues Kentucky's historical approach of tying SCUF assessments to the financial condition of its SUI Trust Fund while introducing a more flexible, annually determined rate beginning in 2027. Employers should expect that SCUF may continue to be applied intermittently and should monitor annual SUI rate notices to determine both whether the adjustment applies and the applicable percentage.

Additionally, employers should confirm that payroll systems can account for both the reduced SUI tax rate and the separate SCUF surcharge obligation so they properly calculate and timely remit the surcharge.