How Severely will COVID-19 Impact SUI Tax Rates?

Tom Towson

estimate SUI COVID19

Last updated: September 11, 2020

Unemployment claims anticipated to be filed during this record surge are expected to have a negative impact on SUI tax rates.

In this article:

 

The COVID-19 pandemic has created an unprecedented surge in initial state unemployment insurance (“SUI”) claims. During the 25 weeks ended September 5, 2020, there were over 60 million initial unemployment claims filed.1  The COVID-19 virus continues to impact the number of initial claims and continued unemployment.  The past 25 weeks mark the highest weekly levels of seasonally adjusted initial claims in the history of the seasonally adjusted series. The previous high during any single week was 695,000 in October of 1982.1

Seasonally Adjusted U.S. Weekly Unemployment Claims2

 

As shown in the above graphic, the Great Recession caused a slow increase in initial unemployment claims. In contrast, there has been a sharp spike in claims due to COVID-19. It’s not just the sharp spike in claims that are concerning, it’s the volume of continued weekly claims. Months of unprecedented initial claims, and continued claims, will have a compounding effect and put stress on the SUI system.

Impact on 2020 SUI Tax Rates

Average U.S. SUI tax rates declined over the past eight years (from 3.48% in 2012 to 1.88% in 20203). Any increase in unemployment claims associated with COVID-19 should not have an impact on already established 2020 calendar year rates.

No matter the severity of the COVID-19 pandemic, employers should not experience higher SUI tax costs until January of 2021.

However, there could be an impact on rates in those states that provide for rate changes mid-year or use a fiscal year to determine SUI tax rates.

Impact of Computation Dates on SUI Tax Rates

For a majority of states, the computation date used to determine SUI tax rates for the upcoming calendar year is June 30. For these states, the computation date for calendar year 2021 is June 30, 2020. Typically, three or four months does not leave much time for the accumulation of charges to have a material impact on 2021 rates; the impact is likely to be felt more in 2022. However, because of the unprecedented volume of initial claims, the accumulation of benefits could materially impact calendar year 2021 rates.

The primary cause for the surge in initial unemployment claims is a reduction in workforce. This causes a reduction in taxable wages used in the calculation of SUI tax rates. An immediate reduction in taxable payroll can exacerbate the negative impact of benefits, depending on the state.

SUI Tax Rating Methodologies

Each state has the legal authority to set the type of experience rating methodology to apply in the formulation of employers’ tax rates.  No matter the state in which an employer operates, fiscal year increases in benefit charges will almost always have a negative impact on SUI tax ratings.  However, the same cannot be said for decreases in taxable payroll.  In the 31 states that use a “reserve ratio” calculation methodology to determine SUI tax rates, sizable decreases in taxable payroll during the rate computation period will likely cause tax rates to decrease (all other factors being equal). In the 19 states that use a “benefit ratio” calculation methodology, sizable decreases in taxable payroll will likely cause tax rates to increase (all other factors being equal).

There historically has been a lag between when economic downturns impact SUI tax rates. This is because rating calculations take into consideration more than just a single year of experience. This can be demonstrated using our most recent recession, which lasted from December 2007 to June 2009.5  In the case of COVID-19, the lag period has been compressed.

Historical Average SUI Tax Rates3

As you can see from the above graphic, the average SUI tax rate in 2020 is below those experienced at the beginning of the Great Recession.  The somewhat good news is that any future increase in rates will be coming off a 15-year low (the average U.S. SUI tax rate in 2002 was 1.80%,3 not shown above).

Solvency of the SUI System

Trust funds are used by state workforce agencies to pay benefits to claimants.  The solvencies of these trust funds are assessed based on an index known as the Average High Cost Multiple (“AHCM”), a standard measure of trust fund solvency used by the U.S. Department of Labor.  A multiple of 1.00 indicates a state trust fund is deemed sufficiently solvent and able to pay one year of benefits associated with an average recessionary period.  Despite improving trust fund balances, 22 states were still not considered adequately funded as of January 1, 2020.5

Average High Cost Multiples as of January 1, 2020

New AHCM Graphic

The amount of unemployment benefits expected to be paid out in a relatively short period is not likely to bode well for the system. This may require legislatures and state workforce agencies tasked with ensuring the sufficiency of trust funds to increase SUI tax rates in 2021. The states have time to observe the severity of the crisis before implementing any such increase to 2021 rating calculations.

State Trust Fund Balances

During Q1 2020, net state trust fund balances (i.e., net of Title XII advances, see more below) decreased by $5.13 billion (from $75.62 billion to $70.49 billion).6  It is customary during non-recessionary periods for state trust fund balances to decrease during Q1 of each year. However, the size of this decrease is what is concerning, especially considering the spike in initial unemployment claims did not begin until the week ended March 21, 2020.  First quarter trust fund balances over the past three years (Q1 2017 to Q1 2019) decreased by an average of $2.72 billion.7

Typically we see a replenishment of trust funds in Q2 of each year. This is a direct result of Q1 tax contributions being paid in April. However, this is not the case in 2020.  COVID-19 related claim volumes, and the fact that a number of states allowed employers to defer tax payments, have caused net state trust fund balances to decrease by $39.5 billion (from $70.49 billion to $30.99 billion) from Q1 2020 to Q2 2020.6  Equifax has prepared a State Tax Resource Guide summarizing unemployment tax payment deferrals.

The following graphic compares trust fund balances as of January 1, 2020 to trust fund balances as of March 31, June 30, and August 31, by state.

State Trust Fund Balances6

The depletion of state trust funds can have negative implications not only to future SUI tax rates but also the amount of wages subject to those tax rates. Employers pay SUI tax on wages earned and paid to each employee within a calendar year up to a specified amount, known as the annual taxable wage base. Some states correlate annual taxable wage base adjustments to state trust fund balances.8 Over the past 15 years, taxable wage bases have increased by an average of 2.4% annually. During the height of the Great Recession (from 2008 to 2009 and 2009 to 2010), the average annual increase was 4.8%.

Average Annual Taxable Wage Bases

 

Federal Title XII Advances

The governor of any state may request a loan under Title XII of the Social Security Act.  This is typically done when a state’s reserves are inadequate to pay anticipated future unemployment benefits. If a state has an outstanding loan balance on January 1 of two consecutive years and has not repaid the balance by November 10 of that second year, employers in the state are at risk of losing a portion of their FUTA tax credit for that year.  The FUTA tax credit starts at 5.40% and is reduced by 0.30% (known as the FUTA credit reduction) for each year the loan remains outstanding beyond the second year. The FUTA tax rate is a net 0.60% because of the FUTA tax credit [6.00% (gross FUTA tax rate) – 5.40% (FUTA tax credit) = 0.60%)].9

In the first year of the FUTA tax credit loss, the net FUTA tax rate increases from 0.60% to 0.90%.  The net FUTA tax rate can increase further, in increments of 0.30% per year, if the loan remains outstanding in subsequent years.

As of September 10, 2020, the following states have received Title XII advances or have been granted authorization for future advances (like a line of credit).

 Title XII Advance Activities Schedule7

* Federal Title XII advance existed prior to COVID-19 crisis and continues to be subject to FUTA credit reductions.

Employers in states that accept advances during calendar year 2020 should not be subject to FUTA credit reductions until 2022. The first January 1 will occur on January 1, 2021. The second January 1 will occur on January 1, 2022.  Should a state’s Title XII advances remain outstanding on November 10, 2022, employers in the state will be subject to a 0.30% increase in the FUTA tax rate, from 0.60% to 0.90%, for the entire 2022 calendar year.

Federal Legislative Actions

Families First Coronavirus Response Act

On March 18, 2020, Congress approved and the President signed into law the Families First Coronavirus Response Act (the “FFCRA”).  Included in the FFCRA are a number of provisions aimed at stabilizing unemployment insurance. Five hundred million dollars is reserved for emergency grants to states with at least a 10% increase in claims. Those states would be eligible to receive a grant to assist with the payment of benefits related to COVID-19.

The FFCRA also provides full federal funding of extended unemployment benefits for a limited period. This is for states that experience an increase of 10% or more in unemployment claims over the previous year. Furthermore, this provides 100% federal funding for extended benefits through December 31, 2020. Ordinarily, states must fund 50% of such benefits. When a state has high prolonged unemployment, extended benefits are triggered. The FFCRA will provide up to an additional 26 weeks of unemployment benefits after regular benefits are exhausted; similar to those provided during the Great Recession.  On average, regular benefits are paid for 26 weeks.

U.S. Department of Labor Actions

On March 19, 2020, the U.S. Department of Labor issued Unemployment Insurance Program Letter (“UIPL”) No. 11-20 addressing the Minimum Disaster Unemployment Assistance (“DUA”) Weekly Benefit Amount. To qualify for DUA, a claimant must not be eligible for regular unemployment insurance benefits. The administrative pronouncement mandates that “[i]f an individual’s DUA weekly benefit amount is less than 50 percent of the state’s average weekly payment of unemployment compensation (UC) or if the individual has insufficient wages from employment or insufficient or no net income from self-employment, the state shall determine the DUA weekly amount to equal 50 percent of the average weekly payment of UC in the state.”  The minimum DUA weekly benefit amount is only to apply during the second quarter of 2020.

Coronavirus Aid, Relief, and Economic Security Act 

On March 27, 2020, Congress approved and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The unemployment insurance provisions include:

  • An additional $600 per week payment up to four months (through July 25), above and beyond other unemployment benefits a claimant might receive;
  • Extension of benefits to self-employed workers, independent contractors and those with limited work history;
  • Temporary full funding of the first week of regular unemployment benefits for states with no waiting period (this provision provides incentive for states to suspend their first week waiting period); and
  • Extension of unemployment benefits for an additional 13 weeks through December 31, 2020 after state unemployment benefits end (typically after 26 weeks).

Any additional or supplemented federally funded unemployment benefits should not have an impact on employers’ SUI tax accounts or SUI tax rates.

The CARES Act also contains provisions for reimbursing employers (i.e., non-profits that elect to directly “reimburse” benefits versus paying tax).  One provision relieves reimbursers of 50% of unemployment benefits through December 31, 2020.  This non-charging of benefits relates to all benefits, not just those related to COVID-19 claims.

On August 8, 2020, the President issued an Executive Memorandum (Memorandum on Authorizing the Other Needs Assistance Program for Major Disaster Declarations Related to Coronavirus Disease 2019) authorizing a “Lost Wages Assistance” (LWA) program due to the expiration of the $600 supplement to state unemployment benefits under the CARES Act.

On August 12, 2020, the U.S. Department of Labor issued UIPL No. 27-20 (supplemented by Change 1 on August 17th) addressing the LWA program, which provides in part:

  • LWA funding will come from FEMA (Federal Emergency Management Agency), up to $44 billion, via the agency’s Disaster Relief Fund.
  • For those states that elect to participate in the LWA program, it will be administered by state workforce agencies (outside of state unemployment trust funds used to pay regular unemployment benefits), which must apply for a grant no later than September 10, 2020. Equifax has prepared a State Claims Resource Guide summarizing state participation in the LWA program.
  • LWA provides for a maximum supplemental payment of $400 per week:
    • $300 from “federal contributions” via the FEMA Disaster Relief Fund; and
    • $100 from “state contributions” via state funding sources (including the CARES Act Coronavirus Relief Fund and general revenues, but excluding state unemployment trust funds). States may elect not to participate in the $100 supplemental benefit payment.
  • Eligible claimants (those who provide self-certification that he or she is unemployed due to disruptions caused by COVID-19 and receives at least $100 in state unemployment benefits) can receive weekly LWA payments retroactive to the week of unemployment ending August 1, 2020 through weeks of unemployment ending no later than December 27, 2020.

The LWA program may terminate earlier than December 27, 2020, if:  1) FEMA expends the $44 billion;  or 2) The FEMA Disaster Relief Fund balance reaches a floor of $25 billion; or 3) Congress enacts a new economic stimulus package to include a similar unemployment benefit supplement.

If all states were to participate, given the volume of continued weekly claims, LWA payments could be exhausted quickly.  Once the federal funding is depleted, states are encouraged to continue payment of the $300 federal portion of the benefit supplement.  This is unlikely given that most states have limited funding sources brought on by the pandemic.

Because the LWA program is federally funded through FEMA, or funded from sources other than state unemployment trust funds, there should not be a negative impact on employers’ unemployment accounts, including reimbursing employers, or future SUI tax rates.

Deferral of Employment Tax Payments

In addition, the CARES Act expands payroll tax relief to Social Security tax payments; employers of any size may defer the payment of their share of 2020 Social Security tax payments. Fifty percent (50%) of the payments that would have been required between the date of enactment of the CARES Act and December 31, 2020 can be deferred until December 31, 2021.  Employers can defer the remaining 50% until December 31, 2022.

There is no “election” required, employers just need to “short pay” the deposit amount. The IRS has released a final draft of Form 941, Employer’s Quarterly Federal Tax Return, to accommodate the deferrals. 

On August 8, 2020, the President issued an Executive Memorandum (Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster) allowing employees who make less than $104,000 a year to defer the withholding, deposit, and payment of their share of Social Security tax and federal income tax starting September 1 through the end of 2020.  The memorandum also directs the Secretary of the Treasury to explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.

State Legislative Actions

Most states have taken actions in response to the COVID-19 crisis. Some of these actions relate to benefit eligibility and some to SUI tax rates.

Non-Charging of Benefits

The most meaningful of these actions to date is the “non-charging of benefits.”  So far, the following states have some type of non-charging of benefit provision:

States with Non-Charging of Benefit Provisions

The benefits not charged to specific employers will be “socialized” and come out of state trust funds. Any sizable depletion of funds will likely have a negative impact on all employer tax rates in a state; not just those with significant reductions in workforce.  It is more important than ever for employers to audit benefit charge statements to help ensure that benefits that should not be charged, are not charged.  Equifax has prepared a State Claims Resource Guide summarizing certain COVID-19 related claims information, including states with “non-charging of benefit” provisions.

Deferral of Quarterly Unemployment Tax Payments

As with the CARES Act, many states have deferred the payment of state payroll-related taxes.  This includes unemployment quarterly contributions reports. Equifax has prepared a State Tax Resource Guide summarizing unemployment tax payment deferrals.

Other State Actions

Other examples of state actions taken in response to the COVID-19 pandemic include:

  • North Carolina ratified Senate Bill 704, providing employers a credit for Q1 2020 SUI tax contributions.  If an employer remitted the contributions payable with the report due on or before April 30, 2020, the credit will be applied to the contributions payable on the report due on or before July 31, 2020. If the amount of the credit exceeds the amount of contributions due on the report, the excess credit amount is considered an overpayment and will be refunded.
  • Indiana passed HB 1111 providing a new tax rate schedule (Schedule C) that is to remain in effect through 2025.
  • Vermont has taken action to provide relief to employers by moving to rate Schedule I effective July 1, 2020, which decreases the upper and lower tax rate thresholds. The state’s action will also reduce the annual taxable wage base beginning January 1, 2021.
  • Utah enacted SB 5007 providing that if the calculation of the social contribution rate is greater than 0.002, the social contribution rate for 2021 will be 0.002 and the reserve factor may not be more than 1.050.
  • Wisconsin has taken action (Rule DWD 102) to provide relief by assuming that all benefit charges for the period of March 15, 2020 through June 30, 2020 (end of 2021 rate computation period) are related to the public health emergency so that all employer accounts are credited with those benefits.
  • Colorado enacted SB 20-207 providing that for calendar years 2021 and 2022 the solvency surcharge shall not be assessed on any employer.  In addition, the annual taxable wage bases for 2021 and 2022 shall be $13,600 and $17,000, respectively.  The wage base will continue to increase thereafter up to $30,600 by 2026 (indexed thereafter).
  • Iowa has taken action by allocating federal funds received under the CARES Act to Iowa’s unemployment trust fund to help avoid an increase in unemployment tax rates for employers. The move will allow unemployment tax rates to continue to be determined under Table 7 (rates range from 0% to 7.5%) for 2021.
  • New Hampshire has a rating provision that requires an adjustment to tax rates quarterly based on state trust fund levels. As a result, there will be a 0.5% surcharge added to every employer’s rate beginning July 1, 2020 (the first day of the state’s fiscal year rating period). Also, the Inverse Minimum Rate will add 1.5% to tax rates for those negative rated employers paying pursuant to Schedules II and III.
  • New Jersey announced that for the fiscal year beginning July 1, 2020, unemployment tax rates will continue to be determined under Table B, with rates ranging from 0.4% to 3% (for positive-rated employers) and from 4.3% to 5.4% (for negative-rated employers).
    • The New Jersey Department of Labor and Workforce Development (LWD) also announced that it intends to relieve employers of some of the negative impact of COVID-19 unemployment benefits on their accounts before the fiscal year 2022 UI tax rates are calculated.  In a website update, the LWD responded to the question “Will my unemployment insurance tax rate increase due to this emergency?” as follows: We will be taking steps to ease the charging of employers directly impacted by the COVID-19 emergency. Those numbers are calculated at the end of March every year and we will address that process in 2021.
  • New Mexico noted that employers’ experience history will not be included in 2021 unemployment tax rate calculations. The reserve factor that is based on the unemployment trust fund solvency will be the only impacting factor.
  • Mississippi passed SB 3051 providing:
    • The general experience rate for 2021 will be 0% so that charges for the period March 8, 2020 through June 30, 2020 will not impact the employer’s individual experience rating calculations for 2021 and the two subsequent tax rate years;
    • Charges attributed to each employer’s individual experience rate for the period July 1, 2020 through December 31, 2020 will not impact the employer’s individual experience rate calculations for purposes of calculating the total unemployment insurance rate for 2022 and the two subsequent tax rate years; and
    • Contribution collections for the state workforce investment, Mississippi works and Mississippi workforce enhancement training funds shall not be suspended for tax rate year 2021, and the resulting contribution rate of .20% shall be added to the employer’s general and individual experience rate to obtain the total unemployment insurance rate for 2021.
  • Kansas enacted HB 2016 providing that for calendar year 2021, unemployment contribution rates for employers will be limited to the standard rate schedule and prohibits an additional solvency adjustment.
  • Idaho recently approved a $200 million transfer of federal coronavirus (COVID-19) relief dollars to keep its unemployment trust fund solvent and avoid significant unemployment tax rate increases for employers in 2021. According to a press release from the Idaho Office of the Governor, employers would have had to pay nearly double in unemployment taxes in 2021 to keep the trust fund solvent. For 2020, unemployment tax rates for experienced employers range from 0.255% to 0.849% for positive account employers and from 1.527% to 5.40% for negative account employers.

Forecasting the Potential Impact to Employers’ SUI Rates

In order to help identify the risks associated with increased SUI tax costs in 2021, it would be beneficial for employers to prepare SUI tax rate forecasts for accounts that have significant taxable payrolls.  Employers will have to make certain estimates and assumptions to help generate an accurate forecast, including:

  • Benefit charges since the last computation date and expected through the next computation date
  • Benefits that will not be charged to employers
  • Taxable payroll since the last computation date and expected through the next computation date
  • Tax contributions paid since the last computation date and expected through the next computation date

We recommend that forecasts be prepared once employer and state factors are better developed to allow use of more accurate estimates and assumptions, producing more reliable forecasts.

If forecasts are needed sooner, we recommend that they be updated as additional information becomes available throughout 2020. Forecasts assist employers to budget and react to potential increases in SUI tax costs.

Summary

How quickly will the increase in SUI tax costs reach employers? Will the costs slowly ramp up as with recessions of the past? Furthermore, will the costs surge as quickly as the filing of initial unemployment claims?

The COVID-19 crisis has been severe and unprecedented. States continue to take actions to mitigate some of the financial hardship expected on employers in 2021 and beyond.

In summary, federal and state legislatures continue to react to this crisis. In fact, some of the provisions enacted to date attempt to make it easier for claimants to obtain benefits. However, this could negatively impact SUI tax rates. Alternatively, other provisions attempt to mitigate some of the financial hardship expected on employers in 2021 and beyond.

Keep in mind, some of the potential increase in SUI tax costs could be felt in 2021 and some thereafter.  For computation dates that are after June 30 (e.g., September 30 or December 31), 2021 SUI tax rates may be impacted even more severely.

Since the unemployment system is based on an insurance concept, employers will ultimately bear the financial burden associated with COVID-19.

To keep up-to-date, please visit our COVID-19 Resources  page which will be updated as new information becomes available.  Or, reach out to your Equifax unemployment representative to help address potential SUI tax rate impacts from COVID-19.  Not a current client? Please feel free to contact our Employment Tax Consulting Group with any questions.

 

Disclaimer: The information provided herein is subject to change. It is intended as general guidance and not intended to convey specific tax or legal advice. Before taking any actions, employers should consult with internal and/or external counsel.

Sources:

1    Per U.S. Department of Labor Unemployment Insurance Weekly Claims News Releases issued from March 26th to September 11th, 2020. The amount reported for the week ended September 5th represents the advance figures for seasonally adjusted initial claims.

2    Per U.S. Department of Labor, Office of Unemployment Insurance Weekly Claims Data.

3    Per Average Employer Contribution Rates by State issued by the U.S. Department of Labor and Unemployment Insurance Data Summary for 1st Quarter 2020, Employment & Training Administration.

4     Recessionary period according to the Federal Reserve.

5     Per 2020 SUI Trust Fund Solvency Report issued by the U.S. Department of Labor, Office of Unemployment Insurance, Division of Fiscal and Actuarial Services (February 2020).

6    Per data obtained from the TreasuryDirect site (a service offered by the U.S. Department of the Treasury Bureau of the Fiscal Service).

7    Per respective Unemployment Insurance Data Summary reports published by the U.S. Department of Labor.

8     Per Comparison of State Unemployment Insurance Laws 2019 issued by the U.S. Department of Labor, Employment and Training Administration.
9    Per IRC Section 3302 and related U.S. Treasury Regulations.

The post How Severely will COVID-19 Impact SUI Tax Rates? appeared first on Equifax Insights Blog.

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