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According to the Congressional Research Service report released August 20, 2021, “the COVID-19 pandemic has had a significant effect on labor market metrics for every state, economic sector, and major demographic group in the United States”. Over the last 18 months, unemployment claims volume reached unprecedented levels in every state.  The federal government passed several stimulus bills, including the American Recovery and CARES Acts, in an effort to control the impact on the state unemployment funds. Unfortunately, many state unemployment trust fund balances were depleted, resulting in Title XII loans being taken out.

(Current loan totals as of August 24, 2021 courtesy of Treasury Direct)

In order to maintain trust fund balances during a recession, state unemployment insurance programs may borrow from the United States Treasury via a Title XII loan.  The first state ever to borrow in this manner was Alaska in 1953 (Alternative Strategies for Financing State Unemployment Trust Fund Deficits, Urban Institute, Feb 2021).  After the Great Recession of 2007 to 2009, there were 36 states which used this vehicle to maintain their unemployment trust funds.

Today, there are 16 states which have an outstanding advance balance totaling over $54 billion.  California has borrowed the most at $23 billion.  If a state has outstanding loan balances on January 1 for two consecutive years and does not repay the amount in full by November 10 of the second year, the FUTA credit rate for employers in that state may be reduced until the loan is paid in full.

The FUTA tax levies a federal tax on employers covered by a state’s unemployment insurance program.  The standard FUTA tax rate is 6.0% on the first $7,000 earned.  Employers may receive a credit of 5.4% when they file Form 940, assuming certain criteria are met, which leaves an effective tax rate of 0.6%.  The reduction schedule mentioned above is 0.3% for the first year; the state is a credit reduction state, another 0.3% for the next year, and an additional 0.3% for each year it does not have its loan paid in full thereafter.  (https://www.irs.gov/businesses/small-businesses-self-employed/futa-credit-reduction)

By way of example, an employer in a state that has not repaid its loans as mentioned would compute its FUTA tax by reducing the 6.0% FUTA tax rate by a credit of only 5.1%, which is the standard 5.4% minus the 0.3% credit reduction.  The effective FUTA tax rate would be 0.9% for the year rather than the normal 0.6%.

We would all like to hope we are nearing the end of this pandemic, but unfortunately, we have a long way to go. The truth is we don’t yet know what is still to come, but we can confidently assess that employer’s unemployment taxes will continue to increase for several years to come. As your only controllable tax, employers must control the factors they can to combat those that they cannot, and failure to do so could negatively impact their bottom line at a rate that we have not seen in this lifetime.

While many states did not charge employers outright for claims related to the COVID-19 pandemic, thereby eliminating any impact on an individual employer’s annual tax rate, the effects of paying the claims out of the state trust fund balances may have an impact on rates moving forward for all employers.  Each state has a trust fund balance from which it pays unemployment benefits to eligible claimants.

The trust fund is financed by employers who pay quarterly taxes based on an annual tax rate calculated by the state unemployment agency.  State statutes determine what rate schedule and other surcharges are used to calculate employers’ tax rates each year.  The lower a state’s trust fund balance is as of a certain date, generally means a higher rate schedule and added or higher surcharges for upcoming years.

Most states do not publish the factors used to calculate the next year’s tax rate notice until just before mailing it to employers.  The majority of states’ tax rates are effective on a calendar year basis, so they will begin mailing them out to employers in the fourth quarter of each year, at the earliest.  However, based on what data is known today, an educated guess can be made to try to determine what rate schedules and other factors may be used for the 2022 unemployment tax rates.

As of this writing, we anticipate most states will have no changes to their rate factors.   As mentioned, this is based on current trust fund levels as well as any pending legislation of which we are aware.  However, about 21% of the states could have increases in their factors which would increase rates for employers.  Some states just didn’t have a plan like other states to replenish their trust fund balances.  In those cases, the employer bears the brunt.  A handful of states may actually reduce their rate schedules for the coming year, so employers in those states would see a decrease in their overall tax rate.

Since the pandemic really stretched the resources of state unemployment agencies and their trust funds, it may take years before any sense of normalcy returns to employers’ tax rates.

Experian has made substantial investments in our unemployment management program and will continue to do so. For large employers, the potential gamble could be millions of dollars that are either lost or saved based on the next twelve months. Partnering with Experian Employer Services is the best way for employers to plan, predict and control their unemployment taxes; contact your Experian Employer Services for more information on how we can assist your organization.


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