UNEMPLOYMENT INSURANCE: ENHANCING COMPLIANCE, REDUCING COSTS

Transcription

1 UNEMPLOYMENT INSURANCE: ENHANCING COMPLIANCE, REDUCING COSTS Howard Perlman, CPP Sept. 8, 2016 AGENDA Examining differences among federal and state unemployment insurance systems Elaborating upon state experience rating requirements for unemployment insurance Acquiring broader understanding of electronic solutions for unemployment tax form filing and payment Exploring ways to reduce unemployment tax costs Especially the State Information Data Exchange System Understanding specifics of the above as they relate to payroll in D.C., Maryland and Virginia / / 2 1

2 FEDERAL UNEMPLOYMENT INSURANCE TAX FEDERAL UNEMPLOYMENT INSURANCE TAX THE TAX FIGURES Federal unemployment tax authorized through Federal Unemployment Tax Act) Annual taxable wage base is $7,000 Tax rate is 6 percent, but maximum credit is 5.4 percent, for a general effective rate of 0.6 percent Maximum credit can be acquired only under certain (commonly achieved) conditions FUTA Credit reductions can be in effect This is an employer-only tax on employee wages. Regardless of how many states an employee works in, the employee s first $7,000 in wages nationwide for the year is taxable. / / 4 2

3 FEDERAL UNEMPLOYMENT INSURANCE TAX CREDIT REDUCTIONS Can be assessed on employers in states with a federal unemployment loan balance on Jan. 1 of at least two consecutive years and that have a federal unemployment loan balance on Nov. 10. The standard FUTA credit reduction percentage is 0.3 percent per year, cumulative (e.g., in the second year of applicability, the basic FUTA credit reduction would be 0.6 percent, for a total FUTA rate of 1.2 percent). Extra credit reductions: For the third and fourth years of credit reduction assessment for employers in a state, a 2.7 add-on could be added to the basic FUTA credit reduction > Additional rate = 2.7% x ($7,000/U.S. estimated average annual wage for year credit reduction would apply) state s average UI tax rate for the previous year Starting with the fifth year of credit reduction assessment for employers in a state, a benefit-cost rate (BCR) add-on could be added > Additional rate = (Higher of 2.7 % or the state s average benefit cost for the previous period of five years as a % of taxable wages) state s average UI tax rate for previous year / / 5 FEDERAL UNEMPLOYMENT INSURANCE TAX REPORTING AND PAYING Use Form 940 (annual form) to report FUTA paid, due Jan. 31 after the reported year, but can have 10 additional days if timely and fully paid taxes For credit reduction reporting for multistate employers, Schedule A of Form 940 is used Federal unemployment tax must be paid quarterly by last day of month following paid quarter However, if amount to deposit for a quarter is less than $500, do not need to deposit amount for quarter; the amount carries over to the next quarter s total amount to be deposited Deposited amounts can be submitted through Electronic Federal Tax Payer System (EFTPS) / / 6 3

4 STATE UNEMPLOYMENT TAX SYSTEMS AN EXPERIENCE OF EXPERIENCE IT S INSURANCE; EXPERIENCE RATING IS APPLICABLE Unlike federal unemployment tax, state unemployment tax systems have an experience-rating component Experience-rating component exists because employers vary with regard to degree to which their activities result in unemployment benefits being paid by states Each employer has an experience-rating account (unemployment account) with each state where it operates If employer does not have sufficient unemployment program experience as of the state s computation date, employer pays new-employer rate for the next year (employer pays new-employer rate until it has sufficient experience) If employer has sufficient experience as of computation date, employer pays new-employer rate for the next year There is wide variation among states regarding minimum and maximum experience-based rates, number of experience rate groups, number and range of new employer rates / / 8 4

5 THE FIVE TYPES OF STATE UNEMPLOYMENT TAX SYSTEMS The types are differentiated by experience-based tax rate calculation method: Reserve-ratio method (most common) Benefit-ratio method Benefit-wage ratio method Payroll-variation method (least common) Fusion of reserve-ratio and benefit-ratio methods District of Columbia uses reserve-ratio method Maryland and Virginia use benefit-ratio method Regardless of method used, states widely vary regarding their unemploymenttaxable wage bases. D.C., Maryland and Virginia have some of the lowest UI wage bases in the nation. Definitions of taxable wages vary among states. / / 9 RESERVE-RATIO METHOD An employer s reserve ratio is calculated, then is further used in a calculation to determine its experience-based tax rate Oftentimes, the state has a series of rate groups, each of which is associated with a range of reserve ratios and an applicable unemployment tax rate; the employer would be assigned to the group that includes its reserve ratio. Other methods exist Reserve ratio = (Total unemployment tax paid to state total unemployment benefits charged by state)/applicable taxable wages over a period; the higher, the better The totals of tax and benefits sometimes refer to all years, and sometimes refer to all since a specific date The applicable taxable wages sometimes refer to total unemployment-taxable wages over a period and sometimes refer to average 12-month taxable wages over a period While different rate groups can exist, there also can be different rate tables/schedules, each of which has its own set of rate groups; the table or schedule in effect for a year often is determined by the balance of the state s unemployment trust fund as of a certain date / / 10 5

6 RESERVE-RATIO METHOD USED BY D.C. For the District of Columbia, all tax and benefits experience since July 1, 1939, is applicable D.C. s computation date is June 30 Applicable taxable wages are the average 12-month taxable payroll for the 36- month period that ended March 31 before the computation date D.C. has six unemployment tax rate tables, each of which has 12 tax rate groups for positive-rated employers and five tax rate groups for negative-rated employers; each group has range of reserve ratios that do not overlap those of other groups. The higher the table number, the higher the rates. Employer reserve ratio matched with rate group that contains it within range Only one rate for new employers Tax rate notice sent by March 31 of applicable year; appeals allowed within 30 days of date notice was mailed 2016: D.C. s taxable wage base is $9, : Basic tax rates determined with Table 5, range from 1.6 percent to 4.2 percent for positive-rated experienced employers, 5.8 percent to 7 percent for negative-rated experienced employers. New-employer rate is 2.7 percent. 2016: Administrative funding assessment of 0.2 percent. Penalty tax rate of 7 percent. / / 11 RESERVE-RATIO METHOD USED BY D.C. (EXAMPLE) / / 12 6

7 BENEFIT-RATIO METHOD An employer s benefit ratio is calculated, then is further used in a calculation to determine its experience-based tax rate Oftentimes, the state has a series of rate groups, each of which is associated with a range of benefit ratios and an applicable unemployment tax rate; the employer would be assigned to the group that includes its benefit ratio. Some benefit-ratio states list all employers in order of ascending benefit ratio, with equal percentages of the set assigned a tax rate (so no pre-set benefit ratio ranges per tax rate) Still other methods exist Benefit ratio = (Unemployment benefits charged by state over a period)/applicable taxable wages over a period; the lower the better The period for unemployment benefits charged almost always is the same period as that of applicable taxable wages (which almost always are total taxable wages) Usually, the period is from three to five years While different rate groups can exist, there also can be different rate tables/schedules, each of which has its own set of rate groups; the table or schedule in effect for a year often is determined by the balance of the state s unemployment trust fund as of a certain date / / 13 BENEFIT-RATIO METHOD USED BY MARYLAND For Maryland benefits experience for the 36 months ending on the June 30 before the computation date is used Maryland s computation date is July 1 Applicable taxable wages are the total taxable payroll for the 36-month period that ended June 30 Maryland has six unemployment tax rate tables (A, B, C, D, E, F); the number of rate groups varies among the tables from 25 to 37. The closer to the start of the alphabet the table letter, the lower the rates. Employer benefit ratio matched with rate group that contains it within range Two rates for new employers Tax rate notice sent by January of applicable year; appeals allowed within 15 days of date notice was mailed 2016: Maryland s taxable wage base is $8, : Basic tax rates determined with Table A, range from 0.3 percent to 7.5 percent. Standard new-employer rate is 2.6 percent; rate for new construction employers headquartered in another state is 7.5 percent. 2016: No surtaxes in effect / / 14 7

8 BENEFIT-RATIO METHOD USED BY VIRGINIA For Virginia, benefits experience for the 48 months ending on the computation date is used Virginia s computation date is June 30 Applicable taxable wages are the total taxable payroll for the 48-month period that ended June 30 Virginia has one tax rate table with 63 columns used for determining the applicable tax rate when matching an employer s benefit ratio with the state fund-balance factor, which is a measure of solvency of the state unemployment trust fund Rate at intersection of benefit ratio and fund-balance factor is employer s rate Two rates for new employers Tax rate notice sent by December of previous year; appeals allowed within 30 days of date notice was mailed 2016: Virginia s taxable wage base is $8, : Basic tax rates range from 0.1 percent to 6.2 percent. Standard newemployer rate is 2.5 percent; rate for new contractor employers headquartered in another state and engaged in construction or highway work is 6.2 percent. 2016: Pool-cost charge of 0.07 percent added to rates / / 15 BENEFIT-RATIO METHOD USED BY VIRGINIA (EXAMPLE) / / 16 8

9 BENEFIT-WAGE RATIO METHOD An employer s benefit-wage ratio is calculated, then is further used in a calculation to determine its experience-based tax rate Benefit-wage ratio = (Total wages paid to former employees and partially unemployed employees in their base periods during the overall 36-month period ending on the computation date)/taxable payroll over the 36-month period that ended on the computation date Base period the period examined for determining whether an individual s wages over a period demonstrate to a sufficient degree that the individual is attached to the workforce to be eligible for unemployment benefits. Usually, the base period is the first four of the last five completed calendar quarters before the Sunday of the week when an individual filed a valid unemployment benefits claim The state experience factor is determined, which is the total amount of unemployment benefits paid by the state over the 36-month period divided by total wages paid to those who successfully claimed UI benefits during their base periods A tax rate table is selected based on matching an applicable state experience factor s set of rates with the employer s benefit-wage ratio; each benefit-wage ratio is associated with a rate in a range specified by the table in effect when that state experience factor applies Only used by Delaware and Oklahoma / / 17 PAYROLL-VARIATION METHOD (PAYROLL-DECLINE METHOD) Unlike all other methods, does not involve examining unemployment benefits paid or wages that directly influenced unemployment benefits payments For each time that an employer's gross wages paid to employees declined from one quarter to the next quarter over its experience period, the percentage of the decline is calculated by subtracting the gross wages paid in the latter quarter from the gross wages paid in the earlier quarter, then dividing the result by the gross wages paid in the earlier quarter. This percentage is the quarterly-decline quotient. The employer s average quarterly decline quotient is calculated for its 12-quarter experience period, after adjustments filed on forms explaining abnormalities in gross wage changes (such as bonuses in one quarter but not the next). Employers are listed in ascending order of average quarterly decline quotient, grouped into relatively equal numbers of employers in each group, ascending rates assigned with each successive group Only used by Alaska / / 18 9

10 FUSION OF RESERVE-RATIO AND BENEFIT-RATIO METHODS Quite simply, the experienced-employer rate calculations involve components of the reserve-ratio and benefit-ratio methods Only used by Michigan, New Mexico and Pennsylvania ADDITIONALLY: Some states allow employers establishing operations there but that have good unemployment experience in other states to transfer their experience for special new-employer rates and eventually lower experienced-employer tax rates For multistate employees, states generally honor tax based on taxable wages paid to other states. However, Louisiana, Minnesota and Montana do not. / / 19 MULTIPLE EMPLOYER SITUATIONS FOR CHARGED BENEFITS States vary regarding their determination of how to charge unemployment benefits when individuals successfully apply for unemployment benefits and they had multiple employers in their base period. Proportional method: Employers pay a portion of the benefits depending on the amount of wages paid to the former employee and that amount's relation to the former employee's total base-period wages. D.C. uses the proportional method; however, only the principal employer whose account is charged this way is notified of the charges. Maryland also use. the proportional method. Some states just charge the benefits to one employer regardless of how many employers employed the individual during the individual s base period. Virginia s benefit charges are attributed to an individual's last employer that employed the individual for at least 30 days / / 20 10

11 METHODS OF UNEMPLOYMENT TAX COST REDUCTION TIMELY REPORTING AND PAYMENT COMPLIANCE Timely submit unemployment tax and wage reports to states to avoid penalties All states now have electronic portals through which unemployment tax or wage data may be filed and all states now have the ability to accept unemployment tax payments electronically For each quarter, unemployment tax and wage reports and unemployment tax are due generally by the last day of the month following the quarter D.C. Employers with at least five employees must file and pay electronically, can file via the Employer Self-Service Portal (ESSP), can electronically pay with ACH debit Maryland Employers are required to file electronically, employers not required to pay electronically, can file with Maryland Unemployment Insurance WebTax, can electronically pay with ACH credit, ACH debit or credit card Virginia Employers with at least 100 employees must use Virginia Tax Web Upload, employers not required to pay electronically, can electronically pay with ACH debit / / 22 11

12 UNEMPLOYMENT INSURANCE INTEGRITY LAWS The Trade Adjustment Assistance Extension Act of 2011 required states to pass laws restricting the ability of employers to contest benefits charges if they have a pattern of failure of failing to timely or otherwise adequately respond to benefitseligibility information requests from states. State implementation of these provisions varied, but in general, a pattern of failure is considered to have been established if an employer or the employer's agent failed to adequately or timely respond in the previous year to at least two requests or at least 2 percent of requests, whichever is greater. Delays in processing because of paper notifications, misdirected notifications could cause an employer that sought full compliance to still lose the ability to contest improper benefits charges. Unnecessary benefits charges could lead to unnecessary increases in employers state unemployment tax rates or could unnecessarily prevent reductions in rates. Employers also could be prevented from relief from improper benefits charges if agents acting on their behalf fail to sufficiently respond. Relief based on good cause for failing to respond sometimes is available. / / 23 UNEMPLOYMENT INSURANCE INTEGRITY LAWS D.C. requires responses to benefits-eligibility information requests to be returned (received by the state) within 7 calendar days; Maryland, 8 calendar days; Virginia, 10 calendar days These deadlines are far stricter than those for benefits appeals after a notice of benefit charges is sent. D.C. s applicable deadline for appealing benefits notices is 15 calendar days; Maryland, 15 calendar days; Virginia, 30 calendar days. D.C. and Maryland have not sufficiently established what would constitute a pattern of failure, so it is advisable to use the general standard. For Virginia, a pattern of failure is considered to have been established if an employer or the employer's agent failed to adequately or timely respond to at least four requests in the 48-month period ending on the June 30 computation date. / / 24 12

13 STATE INFORMATION DATA EXCHANGE SYSTEM (SIDES) One major asset for facing the increased difficulty of being able to fight improper benefit charges is SIDES, an electronic system for receiving and responding to benefits-eligibility information requests SIDES uses standardized question templating to streamline the response process; additional state-specific questions that cannot be simply answered through a standardized template can be attached via portable document files (PDFs) Employers and third-party administrators that expect to receive benefits-eligibility information requests regarding more than 30 former employees each week can use UI SIDES, a version of SIDES that involves upgrades to computer systems. Employers and third-party administrators that expect to receive benefits-eligibility information requests regarding up to 30 former employees each week can use SIDES E-Response, a version of SIDES that involves using an online portal to receive and respond to the requests. / / 25 STATE INFORMATION DATA EXCHANGE SYSTEM (SIDES) Three SIDES exchanges currently are in operation, but not every state currently uses each of these (few states currently use all of them): The Separation Information Exchange allows for the transmission of separation information requests and responses to them. Separation information requests ask for information about how individuals claiming benefits ended work with an employer. D.C., Maryland and Virginia use this exchange. The Earnings Verification Exchange allows for the transmission of earnings verification requests and responses to them. Earnings verification requests ask for information regarding periods when individuals claiming benefits were working and the wages they earned during those periods. D.C., Maryland and Virginia use this exchange. The Monetary and Potential-Charges Exchange allows for the transmission of notifications that inform employers of how wages that employers paid to individuals claiming eligibility for unemployment benefits are being used in calculations of benefits for those individuals. Employers can respond to a monetary and potentialcharges notification by indicating if they perceive elements of the notification to be incorrect and providing desired updates to that information. D.C., Maryland and Virginia do not use this exchange. / / 26 13

14 VOLUNTARY CONTRIBUTIONS Some states allow employers to voluntarily pay amounts that are allocated to their state unemployment account and improve the balance of the account, which can enable employers to acquire lower state unemployment tax rates. For reserve-ratio states, an employer's voluntary contributions are credited toward the total unemployment-program financing payments that are used in calculating the employer's reserve ratio. For benefit-ratio states, an employer's voluntary contributions reduce the total amount of unemployment benefits charged to its unemployment account that are used for computing the employer's benefit ratio. Voluntary contributions would cause a reserve ratio to increase and a benefit ratio to decrease. Both types of adjustments could cause an employer to acquire a lower tax rate. D.C., Maryland and Virginia do not permit voluntary contributions to reduce state unemployment tax rates. / / 27 JOINT ACCOUNTS In some states, employers that pay unemployment tax can jointly apply with other employers to combine their unemployment-program experience with that of the other employers through the establishment and maintenance of a joint account. When the joint account is established, the employers associated with the account are assigned a new unemployment tax rate based on their combined unemployment-program experience. After the establishment of the joint account, the evolving unemployment-program experience of each employer would affect the singular tax rate assigned to all the employers associated with the joint account. It could be economical for a group of employers to establish a joint account if the group's total unemployment tax cost would be lower with the establishment of a joint account. Employers in the group that would pay more with the joint account but that are helping the group attain a net lower cost could be reimbursed by employers that would pay less with the joint account. D.C., Maryland and Virginia do not permit employers to establish joint accounts. / / 28 14

15 COMMON PAYMASTERS Some states allow related employers that concurrently employ individuals to designate one of the employers as a common paymaster for the concurrently employed individuals with regard to unemployment tax. A common paymaster would be responsible for compensating the concurrently employed individuals and would have an unemployment account for unemployment tax on wages paid to the concurrently employed individuals. The common paymaster would pay unemployment tax on wages paid to concurrently employed individuals up to the applicable state's unemploymenttaxable wage base, instead of each employer that employs the individuals needing to pay unemployment tax on wages up to the wage base, which prevents doubletaxation. The related employers would retain their own unemployment accounts for unemployment tax on wages paid to employees who are not concurrently employed. Maryland permits common paymasters to be established, while D.C. and Virginia do not. / / 29 SHARED-WORK PLANS Employers in some states can establish shared-work plans that allow them to reduce hours and wages of selected employees by a predetermined percentage as an alternative to layoffs. Shared-work benefits are available to employees whose hours and wages were reduced under a shared-work plan, and like full-time unemployment benefits, these generally are charged to employers state unemployment accounts and affect their unemployment-program experience. However, because the net cost of shared-work benefits could be lower than the net cost of unemployment benefits that would have been paid to employees who became separated from employment, this could enhance an employer s reserve ratio or benefit ratio. D.C., Maryland and Virginia permit employers to establish shared-work plans. D.C. s permitted hours-wages reduction percentages range from 20 percent to 40 percent; Maryland, 20 percent to 50 percent; Virginia, 10 percent to 60 percent. / / 30 15

16 QUESTIONS? CONTACT: HOWARD PERLMAN, CPP 16