Guide to UI insurance in 2014 - Ernst &...

Ernst & Young LLP’s

Guide to unemployment insurance in 2014

May 15, 2014

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Federal unemployment insurance . . . . . . . . . . . . . . . . . . . . . . .2FUTA credit reduction: the added burden of long-term debt . . . . . . . . . . . . 2

Add-ons to the standard FUTA credit reduction . . . . . . . . . . . . . . . . . . . . . . 4

The 2 .7 add-on to the FUTA credit reduction . . . . . . . . . . . . . . . . . . . . . . . . 4

BCR add-on to the FUTA credit reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Recap of the 2013 FUTA credit reduction states . . . . . . . . . . . . . . . . . . . . . 5

Projected 2014 FUTA credit reduction states . . . . . . . . . . . . . . . . . . . . . . . 6

Employer cost of UI trust fund debt financing . . . . . . . . . . . . . . . . . . . . . . . 7President’s fiscal year 2015 budget would make FUTA changes . . . . . . . . 7

State unemployment insurance . . . . . . . . . . . . . . . . . . . . . . .10State jobless rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Minimum and maximum UI benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

SUI wage base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Rate determination method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

New employers and experience rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Surcharges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Statutory elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Mergers, acquisitions and employee transfers . . . . . . . . . . . . . . . . . . . . . . 14Penalty SUI rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

UI management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16Due diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Lookback review and refund studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Rate review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Rate notices and protests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16UI cost projection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

UI integrity and claims management . . . . . . . . . . . . . . . . . . .18UI integrity law overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Employer consequences of late or inadequate responses to claim notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Avoiding the high cost of UI integrity sanctions . . . . . . . . . . . . . . . . . . . . . 20Teamwork and performance measures are vital . . . . . . . . . . . . . . . . . . . . . 21

Table 1: 2014 state unemployment insurance facts . . . . . . .22

Across the states in 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Contents

1Guide to unemployment insurance in 2014 May 15, 2014 |

Introduction

Unemployment insurance (UI) can be a significant employment-related cost and, unlike many other business taxes, can be directly influenced by management performance and organizational behavior.

Compared to other business taxes, UI tax rates can also respond more quickly to the local economy due to some state laws that call for automatic employer contribution adjustments based on factors such as the average wage, inflation, the jobless rate and/or the state’s UI trust fund balance. Additionally, when state UI trust funds fail to keep pace with UI benefit payouts, businesses in those states may be asked to bear additional costs in the form of special state assessments and/or an increase in the federal unemployment insurance (FUTA) tax rate .

Consequently, and particularly for large, multi-state employers, unemployment insurance costs can vary significantly from one year to the next depending on organizational changes (e .g ., merger, acquisition), UI benefits charged to the employer’s accounts, changes in the UI wage base, adjustments in the base UI tax rates and fluctuations in special assessments (e.g., bond or interest surcharges) .

While the federal and state legislative landscape underlying UI tax can be complex, proactively managing this cost is both feasible and prudent .

In this publication, we explain the basics of federal and state unemployment insurance and the trends to be aware of in 2014.

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2 | Guide to unemployment insurance in 2014 May 15, 2014

Legislation establishing a nationwide system of unemployment insurance was spawned by the Great Depression and was incorporated under the Social Security Act of 1935. Specifically, Titles III and IX of the Social Security Act establish a joint federal-state program of unemployment insurance (UI) whereby states are required to maintain a UI trust fund for the payment of temporary benefits to employees who are separated from their jobs through no fault of their own (as defined by state law). Federal law establishes that employers make contributions to these state UI trust funds based on the state’s maximum annual wage limit that, under the current requirements, cannot be less than $7,000 per employee per year .

Titles III, IX and XII provide federal support of the state UI system by certifying that states comply with federal guidelines, making federal funds available for extended worker benefits and offering UI trust fund loans (Title XII) to help states finance their trust funds during periods of insolvency.

In 1939, the Federal Unemployment Insurance Tax Act (FUTA) was passed, requiring that employers make contributions to offset the federal costs of administering the UI system. Effective July 1, 2011, the FUTA tax rate is 6% of a maximum of $7,000 in covered wages per employee per year . In consideration of state and employer compliance with federal guidelines, employers are eligible for a maximum FUTA credit of 5 .4%, thereby resulting in a normal net FUTA rate of 0 .6% .

FUTA credit reduction: the added burden of long-term debt When a FUTA credit reduction applies, the maximum FUTA credit falls below 5.4%. To lose a portion of the maximum 5.4% FUTA credit means that the net FUTA tax rate rises above the normal 0.6%. For instance, if the maximum 5 .4% FUTA credit is reduced by 0 .3%, the net FUTA rate increases from 0 .6% to 0 .9% [6 .0% - (5 .4% - 0 .3%) = 0 .9%] .

States are given the option of accepting a federal UI loan to augment their UI trust funds. If states do not repay these federal loans within a certain time frame, employers in those states are required to assist in repaying these loan balances through funds obtained from the FUTA credit reduction .

Specifically, if a state has an outstanding federal UI loan balance on January 1 of two consecutive years and fails to repay the entire balance by November 10 of the second year, employers in that state are subject to a reduction in the maximum 5 .4% FUTA credit . With certain exceptions, the credit reduction increases in 0 .3% increments each subsequent year the loan balance remains unpaid . The additional FUTA tax per employee that is the result of this FUTA credit reduction can be substantial, particularly if federal UI loan balances linger over several years. (See Figure 1.)

Figure 1: FUTA credit reduction effect before add-on

Number of years with outstanding federal UI loan

Adjusted net FUTA rate (net FUTA rate of 0 .6% + FUTA credit reduction)

Increase over $42 per employee (assuming $7,000 × 0 .6%)

2 0 .9% $21

3 1 .2% $42

4 1 .5% $63

5 1 .8% $84

Additional FUTA tax that is owed as a result of the FUTA credit reduction is reflected on Form 940 and is required to be paid by January 31 of the following year.

Michigan started borrowing in 2006 and 2007, two years sooner than the recession began affecting most states’ UI trust fund balances; therefore, a FUTA credit reduction of 0.3% first applied to Michigan employers in 2009, with payment due by January 31, 2010. Most of the states obtained their long-term FUTA loans in 2009, resulting in 21 states subject to the FUTA credit reduction in 2011 . The loan payoff rate has been slow, with 15 states projected to be subject to the FUTA credit reduction again in 2014 . (See Figure 2 .)

How do you rate?Federal unemployment insurance


Figure 2: FUTA credit reduction states 2009–14

First year of long-term loan

Year FUTA credit reduction applies

Number of states subject to FUTA credit reduction on Form 940

2007 2009 1

2008 2010 3

2009 2011 21

No new long-term loans

2012 19

2013 14

2014 (estimate) 15

Obtaining a waiver of the standard FUTA credit reduction Qualifying states can avoid the standard FUTA credit reduction (as South Carolina did for calendar years 2011–13), provided the state:

• Has submitted an application (originating from the governor) to the US Secretary of Labor no later than July 1 of the year for which avoidance is sought

• Pays the amount that the credit reduction would produce prior to November 10 of the year for which avoidance is sought

• Repays all UI loans received during the one-year period ending prior to November 10

• Increases solvency for the taxable year through legislative action by an amount equal to or greater than the amount of the FUTA credit reduction

• Does not borrow again before the next January 31. (“Important dates for Title XII advances and repayments,” U.S. Department of Labor website .)

A state that is granted a waiver of the standard FUTA credit reduction sees its FUTA tax credit fully restored, resulting in the normal net FUTA rate of 0 .6% .

Obtaining a cap on the standard FUTA credit reduction States can also request a cap on the FUTA credit reduction imposed for the year, beginning with the second taxable year a credit reduction is applicable. The credit reduction would be capped at the higher of 0.6% or the credit reduction that applied for the previous calendar year.

To qualify for a cap on credit reductions, a state must:

• Submit an application from the governor to the US Secretary of Labor no later than July 1 of the year for which a cap is sought

• Take no action (legislative, judicial or administrative) during the 12-month period ending September 30 of the year for which a cap is requested that would reduce taxes or solvency for that same time period

• Have an average tax rate on total wages for the taxable year that equals or exceeds the average benefit cost ratio for the five years ending with the preceding calendar year

• Have a loan balance on September 30 of the taxable year that is less than or equal to the loan balance on September 30 of the third preceding year . (“Important dates for Title XII advances and repayments,” U.S. Department of Labor website .)

Georgia requested that its FUTA credit reduction be capped for 2013 at the 2012 level; however, the request was denied because the state failed to meet the qualification requirements.


Add-ons to the standard FUTA credit reduction Federal law discourages states from carrying their loan balances for more than two years by imposing an additional add-on to the standard FUTA credit reduction. One of two such add-ons can apply, the 2.7 add-on (see next section) and the Benefit Cost Rate (BCR). (See Figure 3.)

The 2 .7 add-on to the FUTA credit reduction Federal law encourages states that carry a loan balance to ensure that employers are making the appropriate level of contributions to the UI trust fund to better ensure a path to future solvency. For this reason, a special penalty, known as the 2.7 add-on, triggers in the third year a state carries a federal loan if the state’s average UI tax rate is lower than allowed as compared to a formula provided for under FUTA law. This special penalty applied to Virgin Islands’ employers in 2012 and 2013, but, according to a U.S. Department of Labor representative, it is not expected to apply for calendar year 2014 .

There is a possibility, though unlikely, that Delaware employers could face the 2 .7 add-on for calendar year 2014, since the state is in its fourth year of borrowing.

Figure 3: The accumulating cost of the FUTA credit reduction

BCR add-on to the FUTA credit reductionFederal law discourages states from carrying their loan balances over several years by further reducing the FUTA credit in the fifth year of the loan . This add-on to the FUTA credit reduction is referred to as the Benefit Cost Rate (BCR). The BCR will trigger this year in several states which began borrowing in 2008 and 2009.

The BCR add-on is computed for 2014 using: the average benefit cost for calendar years 2009 through 2013; the calendar year 2013 state taxable wages; and the calendar year 2013 average annual tax rate on total wages.

Waiver of the BCR add-on The BCR penalty may be waived for 2014 if the state’s governor submits an application to the US Secretary of Labor no later July 1, 2014, and the state takes no action (legislative, judicial or administrative) during the 12-month period ending September 30, 2014, that would reduce UI trust fund solvency during that same time period .

• 2 .7 add-on, once triggered, cannot be waived . Should the BCR add-on be waived, as is normally the case if the conditions are met, the 2.7 add-on (that was imposed on the Virgin Islands for 2012-13) can kick in if the state’s average UI tax rate is inadequate and cannot be avoided or waived if triggered on. According to a U.S. Department of Labor representative, this is not expected to apply for calendar year 2014 for any of the credit reduction states, even the Virgin Islands. The 2.7 add-on when triggered cannot be waived . (See Figure 3 .)

If neither the BCR or the 2 .7 add-on applies, the standard FUTA credit reduction as shown in Figure 1 would apply in 2014 (e.g., 1.2% for the states that began borrowing in 2009, for a total net FUTA rate of 1 .8%) . (“Important dates for Title XII advances and repayments,” U.S. Department of Labor website .)

The BCR triggered in 2013 in two states, Indiana and South Carolina, which began borrowing in 2008. Both states requested, and received, waiver of the BCR add-on for 2013.

Full FUTA rate Maximum credit reduction

Net FUTA rate

6 .0% 5 .4% 0 .6%

Credit reduction

Year 2 of federal loan

+ 0 .3% each year

Year 3 of federal loan

2 .7 add-on

Year 5 of federal loanBenefit Cost Ratio (BCR)

+ or

Can’t be waived if triggered



Figure 4: California FUTA credit reduction example

Recap of the 2013 FUTA credit reduction statesEmployers in 13 states and the Virgin Islands were subject to the FUTA credit reduction for calendar year 2013 and consequently they paid a higher FUTA tax rate than employers in other states because these states failed to repay their outstanding federal UI loans by November 10, 2013.

The increased FUTA taxes were due from employers with their fourth quarter 2013 federal unemployment tax deposit on January 31, 2014. (“States with 2013 Federal Unemployment Tax Act (FUTA) credit reductions,” U.S. Department of Labor, November 12, 2013.)

• Indiana . Employers in Indiana saw a 1.2% FUTA credit reduction for 2013 because it was the fourth penalty year. Indiana employers potentially faced an even higher FUTA cost because the state had carried its federal loans for five years. However, the state requested, and received, a waiver of the BCR add-on for 2013.

• Georgia . Georgia requested that its FUTA credit reduction be capped for 2013 at the 2012 level; however, the state did not qualify for the cap. As a result, Georgia businesses saw a net FUTA rate of 1 .5%, the same as businesses in other states that began borrowing in 2009.

• South Carolina . For the third year in a row, South Carolina requested, and received, a waiver of the FUTA credit reduction for 2013. As with Indiana, South Carolina employers potentially faced the addition of the BCR factor because the state had carried its federal loans for five years. However, the state requested, and received, a waiver of the BCR add-on. As a result, although the state still had an outstanding loan balance, South Carolina employers paid at the normal net FUTA rate of 0 .6% for 2013 .

• Virgin Islands . Virgin Islands employers again in 2013 faced the special 2.7 add-on that applied in 2012 because of having an average state UI rate that was lower than allowed under federal law. However, the penalty was lower for 2013, and the net FUTA rate that Virgin Islands employers paid at was 0.3% less than the 2012 rate.

• Interest on loan due by September 30 was temporarily waived under federal law.

• California initiates its federal unemployment insurance loan .

• FUTA credit reduction of 0 .3% applies, increasing net FUTA rate to 0.9% (0.6% + 0.3%) effective July 1 (1.1% through June 30).

• Interest on loan due by September 30, paid by loan from state disability trust fund .

• Risk of additional FUTA credit reduction under the 2 .7 add-on, but did not apply .

• FUTA credit reduction of 0 .9% applies, increasing net FUTA rate to 1 .5% (0 .6% + 0 .9%) .

• Interest on loan due by September 30, paid by loan from state general fund .

• Risk of additional FUTA credit reduction is triggered under the 2 .7 add-on, but did not apply .


• Interest on loan due by September 30, paid by loan from state disability trust fund .

• Additional BCR of estimated 1 .5% could apply .• Or, additional 2 .7 add-on to FUTA credit

reduction could apply (but unlikely) and, if assigned, cannot be waived.


• Projected net FUTA rate is 3 .3% (1 .5% BCR + 1 .8%) .

• Interest on loan due by September 30 .

2009 2010 20132011 2012 2014


Projected 2014 FUTA credit reduction statesFigure 5 below shows the states that are thus far potentially at risk of a FUTA credit reduction in 2014, assuming that nothing changes between now and November 10, 2014.

Several states plan to avoid a 2014 FUTA credit reduction by repaying their federal loan balances before November 10, 2014. States may also request a waiver of the standard FUTA credit reduction or Congress could adopt the President’s proposal to waive the FUTA credit reduction entirely for 2014 . (See page 7 for the President’s fiscal year 2015 budget proposal.)

Note that the projected 2014 net FUTA rates reflected in Figure 5 include the BCR add-on, as projected by the U.S. Department of Labor. The Department projects that should the BCR be waived, none of the states would qualify for the 2.7 add-on, even the Virgin Islands. The Department plans to release an updated estimate of the add-ons that could apply later in the year .

Figure 5: FUTA credit reduction states — tax year 2013 compared to tax year 2014 projections

State First year of loan

2013 FUTA credit reduction

Net 2013 FUTA rate

Projected 2014 FUTA credit reduction

Projected 2014 BCR add-on

Projected potential 2014 net FUTA rate

Comments

Arkansas1, 3 2009 0 .9% 1 .5% 1 .2% 0 .5% 2 .3%

California1 2009 0 .9% 1 .5% 1 .2% 1 .5% 3 .3%

Connecticut1 2009 0 .9% 1 .5% 1 .2% 0 .5% 2 .3%

Delaware2, 3 2010 0 .6% 1 .2% 0 .9% 0 .0% 1 .5%

Georgia1, 3 2009 0 .9% 1 .5% 1 .2% 0 .6% 2 .4%

Indiana1 2008 1 .2% See comments

1 .8% 1 .5% 1 .2% 3 .3% A waiver of the BCR add-on applied in 2013 .

Kentucky1 2009 0 .9% 1 .5% 1 .2% 1 .0% 2 .8%

Missouri1, 3 2009 0 .9% 1 .5% 1 .2% 0 .4% 2 .2%

New York1 2009 0 .9% 1 .5% 1 .2% 0 .7% 2 .5%

North Carolina1 2009 0 .9% 1 .5% 1 .2% 0 .5% 2 .3%

Ohio1 2009 0 .9% 1 .5% 1 .2% 1 .4% 3 .2%

Rhode Island1, 3 2009 0 .9% 1 .5% 1 .2% 1 .0% 2 .8%

South Carolina1 2008 See comments 0 .6%** See comments

1 .5% See comments

0 .5% 2 .6% See comments

A waiver of the standard FUTA credit reduction applied in 2011–13 and a waiver of the BCR add-on in 2013. Waivers could also apply in 2014, resulting in the normal net FUTA rate 0 .6% .

Virgin Islands1 2009 1 .2% See comments

1 .8% See comments

1 .2% 1 .6% 3 .4% In 2012–13, the 2 .7 add-on applied, but it will not apply in 2014, according to the U .S . Department of Labor .

Wisconsin1, 3 2009 0 .9% 1 .5% 1 .2% 0 .1% 1 .9%

Legend 1 Estimated BCR courtesy of U.S. Department of Labor. The 2.7 add-on could apply if BCR add-on is waived; however, the Department does not anticipate this to be the case for 2014. 2 The state’s employers are at risk of the 2.7 add-on.3 The state plans to repay the loan before November 10, 2014, and avoid the 2014 FUTA credit reduction.



Employer cost of UI trust fund debt financing When states finance UI claim payouts with a federal loan, interest becomes due on the loan each year on September 30 . States are not allowed to take money from their UI trust funds to pay these interest charges. Some states have agreed to fund interest assessments from their general revenues or other state funds, but this is not always the case . Consequently, employers may be required to pay a special interest assessment in addition to their normal SUI taxes .

Some states have issued bonds or have relied on other interest-bearing options to repay their federal UI loans . Accordingly, bond or similar interest assessments may apply to employers, whether or not the state has repaid its federal loan .

See Figure 6 for a summary of the states where employers face these special interest assessments in 2014 .

Figure 6: States with employer UI loan/bond interest assessments in 2014

State Type of debt assessment

Arkansas Title XII

Colorado Bonds

Connecticut Title XII

Illinois (included in SUI rates) Bonds

Indiana (multiplier included in base SUI rate) Title XII

Kansas (paid by negative-balance employers) Loan from state fund

Kentucky (surcharge applies in 2014) Title XII

Michigan (included in SUI rates) Bonds

Missouri Title XII

Nevada Bonds

New York Title XII

Pennsylvania Bonds

Rhode Island (sunsets in 2015 if loan paid in full) Title XII

South Carolina Title XII

Virgin Islands Title XII

Wisconsin (not in effect for 2013–14) Title XII

President’s fiscal year 2015 budget would make FUTA changes Similar to last year, the Administration is proposing to address the continued insolvency of state unemployment insurance (UI) trust funds by raising the federal unemployment insurance (FUTA) wage base to $15,000 starting in 2017 and indexing it each year thereafter based on wage growth. The purpose of this proposal is to force 32 states to increase UI tax by raising their UI wage base to the $15,000 federal minimum . (See Figure 7 .)

In 1976, a temporary 0.2% surtax was added to the FUTA rate. The surtax was extended numerous times until it was allowed to lapse effective July 1, 2011. The Administration again proposes to reinstate the 0.2% surtax and to make it permanent effective with wages paid on or after January 1, 2015.

So that employers aren’t subject to an increase in their FUTA tax because of the increase in the FUTA wage base, the budget also calls for lowering the net FUTA tax rate from 0.8% (0.6% plus the reinstated temporary surtax of 0.2%) to 0.37%, effective in 2017.

The budget again addresses concern about the adverse impact of higher UI tax on job growth by proposing a two-year (2014 and 2015) waiver of interest charges applicable to states that continue to carry a federal UI loan balance . For 2014 and 2015, the FUTA credit reduction paid by employers in states carrying a UI loan balance would also be waived.

Figure 7: States affected by raise in wage base to $15,000

2014 SUI wage base below $15,000 Alabama Kentucky Ohio

Arizona Louisiana Pennsylvania

Arkansas Maine Puerto Rico

California Maryland South Carolina

Colorado Massachusetts South Dakota*

District of Columbia Michigan Tennessee

Florida Mississippi Texas

Georgia Missouri Virginia

Illinois Nebraska West Virginia

Indiana New Hampshire Wisconsin

Kansas New York

*Set to increase to $15,000 in 2015


Raising the federal wage base could have a significant monetary impact on large multi-state employers.

Example: Assume that in 2014 an employer has a US workforce of 10,000 employees distributed evenly in the states of California, New Jersey, New York, Ohio and Texas and that its average SUI rate in these states is 3.0%. As shown in Figure 8, the employer’s SUI taxes would increase by close to $1.5 million as a result of raising the states’ wage base to a minimum of $15,000.

Shown in Figure 8 is an example of how an increase in the wage base would increase FUTA expenses using the 2014 wage base in the analysis.

Figure 8: Multi-state employer impact of increase in federal wage base to $15,000

State Taxable wage base

Employees Taxable payroll

Average UI rate

Total SUI tax cost in 2014

Total SUI tax if wage base at $15,000

California $7,000 2,000 $14,000,000 3 .00% $420,000 $900,000

New Jersey $31,500 2,000 $63,000,000 3 .00% $1,890,000 $1,890,000

New York $10,300 2,000 $20,600,000 3 .00% $618,000 $900,000

Ohio $9,000 2,000 $18,000,000 3 .00% $540,000 $900,000

Texas $9,000 2,000 $18,000,000 3 .00% $540,000 $900,000

Total $4,008,000 $5,490,000



Federal law allows the states, within certain limits, to determine how employer state unemployment insurance (SUI) rates will be determined. SUI contribution rules vary depending on if the employer is reimbursing or experience-rated .

• Experience-rated employers . All private businesses are assigned an SUI rate based on their experience . SUI contributions are computed by multiplying each employee’s wages up to the state’s wage limit by the SUI rate assigned to the employer .

• Reimbursing employers . Nonprofit and governmental employers may be experience-rated or they may elect to be reimbursing . Reimbursing employers generally repay UI benefit charges dollar for dollar .

In all cases, the UI benefits paid to an employer’s separated workers directly affect the employer’s SUI costs .

For experience-rated employers, the following state-driven factors can directly or indirectly determine the SUI tax they will pay:

• State jobless rate

• Minimum and maximum UI benefits

• SUI wage base

• Rate determination method

• New employer and experience rates

• Special surcharges and assessments

• Statutory elections that can lower the SUI rate

• Rules governing transfer of wages and experience (mergers, acquisitions and employee transfers)

• Penalty SUI rates

State jobless rate The national unemployment (“jobless”) rate for March 2014 was 6.7%, comparing favorably to the November 2013 rate of 7.0% and a significant improvement from the April 2010 rate of 9.9%, when the number of states requesting federal UI (Title XII) loans had reached its peak.

One indicator of risk for higher future UI costs is the extent to which a state’s jobless rate negatively varies from the national average. For this reason, the U.S. Department of Labor (DOL) ranks the states in order of this statistic . In March 2014, 18 states had jobless rates greater than the 6.7% national average for the same period. North Dakota carried the lowest unemployment rate (2.6%) and Puerto Rico the highest (14 .7%) during this period .

Minimum and maximum UI benefits States determine the maximum duration workers can receive benefits; however, most set the limit for regular benefits at 26 weeks. Massachusetts (at 30 weeks) and Montana (at 28 weeks) are the only states with a maximum benefit period exceeding 26 weeks.

The maximum weekly benefit varies considerably by state and can include additional amounts for dependents . In 2014, Puerto Rico had the lowest maximum weekly benefit ($133) and Massachusetts the highest ($1,019) .

Generally, the more generous a state’s UI benefit package, the higher the UI cost for its employers and the larger the drain on UI trust fund balances . Due to the latter, there has been a trend in recent years to cut back on benefits, particularly by reducing the maximum number of weeks a qualifying beneficiary can receive benefits.

In 2011, Michigan was the first to cut workers’ benefits by reducing the number of weeks (to 20 from the standard 26) that claimants may collect SUI benefits, a provision mirrored by Missouri and South Carolina. Arkansas and Illinois were milder in their benefit cuts in 2011, reducing the number of weeks of SUI benefits from 26 to 25.

Florida, Georgia and North Carolina adopted a unique approach to cutting benefits by implementing a sliding-scale reduction in benefit weeks based on the average state jobless rate. Florida’s maximum benefit weeks range from 12 to 23, effective January 1, 2012; Georgia’s range from 20 to 26, effective July 1, 2012; and North Carolina’s range from 12 to 20 weeks, effective July 1, 2013.

How do you rate?State unemployment insurance


Standard and alternate base period States also differ in their method for determining benefit eligibility. All states require a worker to have earned a certain amount of wages, worked for a certain period of time or both to be monetarily eligible to receive unemployment compensation benefits. Generally, an individual’s wages are drawn from a one-year period (four calendar quarters) to calculate eligibility . The standard base period (SBP) used by all the states (except Massachusetts, which uses the last four completed calendar quarters) to determine claimant eligibility for unemployment benefits is the first four of the last five completed calendar quarters .

For workers failing to qualify under the SBP, 38 states use an alternative base period (ABP). Under the ABP, generally the last four completed calendar quarters are used to determine claimant eligibility for benefits. For example, if the worker fails to qualify using wages and employment in the first four of the last five completed calendar quarters, then the state will use wages and employment in the last four completed calendar quarters . (See Figure 9 .)

Finally, several states use an extended base period (EBP) so that individuals who have no wages in the current base period may qualify for benefits using older wages and employment under certain conditions. These conditions typically involve illness or injury. For example, for a worker who was injured on the job and who has collected workers’ compensation benefits, the state may use wages and employment preceding the date of the worker’s injury to establish eligibility .

Use of the ABP or EBP expands the number of eligible claimants, making them a variable to consider when projecting future SUI costs.

Figure 9: SBP and ABP illustrated

SUI wage base State UI trust funds are largely financed by employer contributions (except in Alaska, New Jersey and Pennsylvania, where employees also make contributions).

States are required to maintain an SUI wage base of no less than the limit set under FUTA. The 2014 FUTA wage base of $7,000 has remained unchanged since 1983, despite increases in the federal minimum wage and annual cost-of-living adjustments over the last 31 years .

Some states are conservative in their approach to maintaining adequate UI trust fund reserves. Consequently, the UI wage base is flexible, meaning it is indexed to the average wage or varies based on the trust fund balance . According to the DOL, 22 states and the Virgin Islands have a flexible wage base in 2014. Conversely, in 2014, the wage base is fixed in 29 states and Puerto Rico. (U.S. Department of Labor, Comparison of State Unemployment Laws, May 2014 .)

The recent strain on UI trust fund reserves sparked numerous state wage base changes. As a result, only three jurisdictions continue to have a wage base of $7,000 (Arizona, California and Puerto Rico), compared to seven in 2010 (although in Louisiana and Tennessee the taxable wage base can decrease to $7,000 when the trust fund reaches a certain level, and in Florida the taxable wage base is scheduled to revert to $7,000 in 2015).

The U.S. Government Accountability Office (GAO) has expressed the view that while the last recession has drained UI reserves, many states had been failing to keep pace with inflation since the recession that ended in 1975 and had less of a buffer to withstand a high-cost benefit period. (GAO, “Long-standing State Financing Policies Have Increased Risk of Insolvency,” April 2010 .)

How well SUI trust funds will withstand another recession is a concern that will drive UI costs in upcoming years .

4th quarter 2013

1st quarter 2014

2nd quarter 2014

3rd quarter 2014

4th quarter 2014

SBP

ABP

http://www.oui.doleta.gov/unemploy/comparison2014.asp


Rate determination method In order to determine the UI experience of an employer, each business entity is assigned an account into which taxable payroll is reported, contributions are made and from which UI benefits are paid. The specific experience rate assigned to a business depends on some variable of the benefits charged against an employer’s account, the contributions (UI tax) paid to that account and the employer’s taxable payroll .

The primary methods used in SUI rate determinations are reserve ratio and benefit ratio.

Reserve ratioUnder the reserve ratio method, the employer’s account is increased by the contributions the employer has paid and reduced by the UI benefits paid to its unemployed workers during the year. The reserve ratio is the balance (reserve) in the employer’s account (UI contributions less benefit charges) divided by the employer’s average taxable payroll for a specific period of years (usually three), expressed as a percentage. This resulting reserve ratio is matched to the state’s UI rate table to determine the assigned rate . The higher the ratio, the lower the tax rate.

Benefit ratio methodThe benefit ratio method considers the relationship between the unemployment benefits charged to the employer’s account during a stated period and the employer’s total taxable payroll for that period . The employer’s UI contributions are not factored into the equation . Once an employer’s benefit ratio is calculated as benefit charges divided by taxable payroll, the employer’s UI contribution rate for the upcoming year is usually equal to the benefit ratio, plus other state-determined factors based on economic conditions. The lower the benefit ratio, the lower the tax rate.

Other methods Delaware and Oklahoma use the benefit wage ratio method, and Alaska uses a method called “payroll variation.” Michigan and Pennsylvania use a combination of the reserve and benefit ratio methods.

Note that states can change their experience rating systems, and if they do so, this can change the SUI rates of employers . For instance, South Carolina changed from reserve ratio to benefit ratio (effective with 2011 tax rates), and New Mexico will make the same change (effective with 2015 tax rates).

New employers and experience rates New employer ratesWhen a business first begins to employ workers, it is generally assigned a new employer rate until it has met the required period for merit (experience) rating. A number of states assign a new employer based on industry. Most commonly, a higher new employer rate applies to the construction industry. In Kentucky, for instance, the new employer rate for 2014 is 2 .7% and 10 .0% for the construction industry .

Interstate transfers — a re-emerging trend in 2014 A re-emerging trend in 2014 is to give employers transferring into a state the option of transferring their SUI experience from a prior state, referred to as an “interstate transfer,” a provision adopted by Kansas (HB 2576, effective July 1, 2014) and Tennessee (HB 1386, effective July 1, 2014). A few others states (e.g., Michigan and New York) have allowed for interstate transfers for many years. The intent of the legislation is to encourage businesses, under limited circumstances, to transfer their operations into the state by removing the potential “penalty” of a higher new employer rate.

Experience ratingStates use schedules to convert an employer’s individual experience rating into a contribution/tax rate. In some of the benefit ratio states, the benefit ratio itself is the employer’s SUI rate.

The minimum and maximum rates generally depend on the state’s UI trust fund balance; however, under federal law, the maximum rate must be at least 5 .4% .

• Array system of rate assignment . A number of states use a more complex “array” system that annually ranks employers against each other rather than using a schedule of predetermined experience levels. In 2014, an array system is used by Alaska, Idaho, Iowa, Kansas, Maine, Montana, Nebraska, North Dakota, Oregon, South Carolina and Vermont . Automatic rate schedule adjustments and rate freezing . In some states, the minimum and maximum rates are scheduled to automatically move up or down, depending on formulas that measure the adequacy of the UI trust fund .

Theoretically, automatic rate schedule adjustments keep UI trust funds in balance; however, legislators sometimes circumvent this process by freezing the rate schedule when a sluggish economy triggers an increase in UI rates . For instance, Massachusetts enacted legislation in 2014 that continues the freeze at Schedule E, with rates ranging from 1.26% to 12.27%, a move that spared Massachusetts employers from a 33% rate increase .

While rate freezes have a beneficial short-term effect on employers’ UI costs, they can delay trust fund recovery and postpone or extend cost increases into the future .



SurchargesIn addition to interest or bond assessments discussed in more detail on page 17, many states also impose surcharges on new and experience-rated employers for worker retention, job development and other costs that cannot be financed from UI base contributions. For 2014, 27 states impose a surcharge for other than debt financing costs.

It is important for employers to keep in mind that for FUTA credit purposes, it is only contributions made pursuant to the state UI base rate that are taken into account.

Statutory elections Some states commonly make two statutory elections available to employers to potentially lower future SUI rates: voluntary contributions and joint accounts . Common to both statutory election options is the need to carefully determine whether they will result in cost reduction, because once made, they are irreversible for the statutory period .

Voluntary contributionsIn reserve ratio states, voluntary contributions increase the reserve balance in an employer’s SUI account and, if the increase is sufficient, can lower the SUI rate. For the few benefit ratio states that allow voluntary contributions, these contributions can decrease the amount of benefit charges used in the rate computation and lower the SUI rate.

Twenty-six states (as of January 1, 2014) have provisions allowing employers to make annual voluntary contributions (for 2014, the voluntary contribution option is not available in California). In all but Minnesota, Texas and Washington, the voluntary contribution can alter the employer’s reserve ratio and reduce the assigned UI rate by at least one incremental step. These states use a reserve ratio formula (or a variation or combination thereof) to calculate SUI rates. The employer’s reserve balance (total SUI paid less total UI benefits charged) is divided by the employer’s average taxable payroll for a one- to five-year period (depending on state law). The resulting figure is the “reserve ratio,” which is keyed to an SUI rate table to determine the assigned tax rate. Voluntary contributions can increase the reserve balance to the next highest reserve ratio bracket (or further) listed in the SUI rate table and may generally reduce the employer’s assigned SUI rate .

Deciding whether a voluntary contribution should be made requires two calculations:

1 . Determination of the amount of the voluntary contribution necessary to effect an SUI rate reduction

2 . Assessment of the profitability of making the voluntary contribution

Joint accountsThe common rate/joint account is an option available in some states (e.g., New York) for employers with two or more commonly owned companies in the same state (Arkansas, Missouri, New York and West Virginia do not require common ownership of the companies).

This option allows the employer to request that the state combine the SUI tax experience of two or more companies in the state for SUI rating purposes. When determining if there is a cost-benefit advantage to forming a joint account, it is important to consider the state’s “lock-in” period — the period of time the joint account must remain in place before the employer can dissolve it. Depending on the state, lock-in periods vary from one year to an indefinite period.

Dissolution of most common rate/joint accounts can be accomplished only by written request at the expiration of the lock-in period. Hawaii automatically terminates common rate/joint accounts after one year.

Knowledge of the requirements for and limitations of making statutory elections is essential to avoid costly errors . For more information on statutory elections, see our special report .

http://www.ey.com/Publication/vwLUAssets/EY-2013_elections_that_could_lower_UI_rates/$FILE/UI-cost-reduction-options.pdf



Mergers, acquisitions and employee transfersPositive and negative cost fluctuations can occur as the result of a change in the business, such as acquisitions, mergers, reorganizations or the transfer of employees to new state job locations.

Because all of these transactions potentially shift the experience of an employing unit, specific rules govern when businesses may transfer employees between UI accounts and when they can transfer wages for purposes of determining if the UI wage base has been reached. In fact, as a result of federal legislation enacted in 2004 (P .L . 108-295), states are watchful of the suspicious and unlawful movement of employees between UI accounts for the sole purpose of “dumping” negative experience and will impose specific monetary consequences. For these reasons, whenever all or part of another business is acquired, the state rules governing the transfer of the wages and experience from the predecessor to the successor should be complied with.

Total and partial transfersMost states mandate the transfer of experience and wages when all of a business is acquired .

In the case of a partial transfer, however, some states make the transfer of experience optional unless there is common ownership of the entities. When a partial transfer is voluntary, businesses should carefully consider if there are advantages in exercising the option. For example, is there an immediate UI tax reduction available due to the transfer of wages (for partial transfers occurring after the beginning of the year), and is there a projected positive impact on the future UI experience rate? Conversely, if transferring the experience would adversely affect future SUI rates, the employer would likely not exercise the option .

Example 1: Assume in October 2014 you purchased a segmented portion of WidgeCo’s assets, including four of its Kansas employees. The Kansas wage base is $8,000, which all employees’ wages exceeded prior to October, and your UI rate is 1.44%. You pay $10,000 to each of these employees through December 2014. By transferring the wages paid by WidgeCo through October 2014, the SUI tax savings are $461 for 2014 ($8,000 × 4 employees × 1 .44% = $461) .

Example 2: Further assume that WidgeCo’s SUI rate is the highest rate for Kansas employers at 7.4%. You have had no claims against your Kansas UI account, and you pay at the lowest rate of 0 .09% . The result of transferring WidgeCo’s experience is an upward adjustment in your Kansas UI rate, with the rate falling between 0.09% and WidgeCo’s higher rate of 7.4%.

Transferring employees across state linesWhen an employer transfers employees from one state to another within the same calendar year and under the same federal account number, most states (with the exception of Louisiana, Minnesota and Montana) allow a credit for wages paid in the previous state up to the new state’s wage limit.

Example 3: Assume an employee earned $12,000 in Kansas through June 2014. Wages up to the Kansas wage base of $8,000 are credited against the wage base in the state of transfer. Therefore, if the employee moved in July 2014 to Arizona, which has a wage base of $7,000, no SUI tax would be owed in Arizona for this employee for the remainder of 2014.

For more information about transferring SUI wages when employees change their work state, read our blog .

Penalty SUI rates In 2014, several states (i.e., Alaska, Indiana, Montana, Ohio, Pennsylvania, Virginia and Washington) increase the employer’s SUI rate if the employer fails to comply with various UI requirements, such as filing UI returns and making timely SUI payments. In some cases, the penalty rate is the highest SUI rate assigned to businesses .

http://payrollperspectivesblog.ey.com/2013/07/17/when-employees-move-be-sure-to-pack-their-year-to-date-wages/


Considering the significance of unemployment insurance costs, it is prudent business practice to establish and maintain an unemployment insurance management system that includes protocols for due diligence, lookback review, rate review, rate protest, cost projection and claims management .

Due diligence When deciding whether to purchase a business, and in deciding subsequent to a purchase how the organization(s) will be structured, a company should consider the SUI cost element . Necessary to this analysis is the SUI rate history of the entities, as well as skill and experience in applying the state rules that govern. For instance, state rules governing the transfer of experience vary based on factors such as common ownership and bankruptcy. (For more information concerning mergers and acquisition, see page 14 .)

Lookback review and refund studiesA “lookback” review/refund study investigates UI data for prior years within the statute of limitations to make sure that material issues and transactions weren’t overlooked. Periodic lookback reviews are often beneficial to businesses that have been involved in mergers, acquisitions or other transactions that involve the movement of employees between UI accounts or the movement of employees within the same UI account to different work locations. Businesses frequently request a lookback review subsequent to purchasing another business, particularly if UI taxes were not reviewed in detail in the due diligence process .

While the desired outcome of a lookback review is refund opportunities, areas of material noncompliance may also be detected, giving the business an opportunity to voluntarily disclose its findings and potentially mitigate punitive consequences.

Documents generally needed in a lookback review include:

• The past three years’ federal and state employment tax returns and other related documents (i.e., SUI rate notices and benefit charge statements)

• Forms W-2 or other documents showing employee work state history

• A description of the company’s mergers, acquisitions and restructurings for the prior three years

• A copy of the company’s organizational chart describing the parent-subsidiary legal structure

Rate review As shown in Figure 10, a number of circumstances can lead to an error in the SUI rate and can result in significant SUI overpayments, depending on the state(s) and number of employees involved. A thorough review of an SUI rate involves verifying every component used in the state’s rate determination, including benefits charged against the account .

Figure 10: Errors that can result in an incorrect UI rate assignment

State error Employer errorIncorrect assignment of higher penalty rate

Failure to transfer previous state wages when employee moves to another state

All employer contributions not posted

Failure of successor to take into account wages paid by predecessor

Benefits charged incorrectly to account

Failure to notify state of a total or partial acquisition

Taxable payroll and reserve balances not timely or correctly transferred

Not taking advantage of statutory elections

Incorrect or untimely posting of statutory elections

Not timely dissolving joint accounts that are no longer advantageous

Rate notices and protestsEach year, states notify employers of the SUI rate assigned to them . Rate notices may be mailed to employers, or they may be available via the state workforce agency’s online SUI system. Each state has a deadline in which employers can protest the SUI rate assigned to them, and for this reason it is important that rate reviews are scheduled to take into account the date rate notices are issued and the protest deadline .

It is also important that all parties receive timely notification of SUI rate information, including third parties that process SUI returns and SUI tax payments and those who assist in in the UI management process .

Occasionally, retroactive legislation may be enacted that changes SUI rates already assigned . For this reason it is also essential to monitor state developments regularly and throughout the year.

How do you rate?UI management


UI cost projection Many states do not issue SUI rate notices until after the calendar or fiscal year has commenced. Therefore, the actual SUI rate is not known until at or near the filing of the first-quarter state unemployment tax return (later for states where the rating period is the fiscal year, not the calendar year). As a result, there is a period during the year that businesses must estimate their SUI expense . The accuracy of the financial statement is impaired when the state SUI rate projection is too high or too low.

A number of factors can affect the future UI rate and corresponding tax expense of a business . For instance, a planned increase or decrease in headcount, or an acquisition or other reorganization involving a transfer of employees from one state to another or one account to another, can raise or lower the UI rate and affect financial forecasting . For all of these reasons, it is important that pertinent information be accumulated and analyzed for SUI rate projection and accrual purposes on an ongoing basis . Information required for this process includes beginning account balances, quarterly payments and adjustments, UI benefit charges and credits, current taxable payroll, and estimated future staffing levels.

Taking all of this information into account, a skilled internal resource or third-party provider must apply the state’s specific tax rate calculation methodology to arrive at a reasonably accurate projection of the future unemployment tax rate . Each state approaches the UI rate calculation differently; therefore, this can be an extremely complicated yet vital analysis for the multi-state employer.

Complicating UI cost projections currently are variables that now apply in the FUTA tax adjustments arising from the FUTA credit reduction. This too must be taken into account in cost forecasting. (See page 2 for more on the FUTA credit reduction .)

An accurate UI tax rate projection holds value beyond the budgeting and forecasting process . It establishes a solid benchmark from which to evaluate the accuracy of the SUI rate once a state has assigned it .


Due to the 2008 recession, unemployment insurance (UI) claims increased significantly, and so did UI benefit overpayments. The U.S. Department of Labor reported that in fiscal year 2011 alone, estimated federal and state UI benefit overpayments reached $14 billion, representing about 11% of UI claim payouts. Through June 30, 2013, a U .S . Department of Labor report estimates that 19 states had an improper UI benefit payment rate over 10%, with six of them having a rate exceeding 14%.

How do you rate?UI integrity and claims management

Employers and government share in the cost and responsibility of administering the UI program. States are required to make sure that individuals receiving UI benefits have met the eligibility requirements, and employers are responsible for providing the states with information critical in that determination. For this reason, states notify employers when a request for benefits is made, specifying a time limit for employers to respond .

For instance, with limited exception, employees who voluntarily quit their jobs without cause are ineligible for UI benefits; hence, when employers receive the initial claim notice, they are asked to provide the reason for the employee’s termination (e.g., voluntary quit, discharge for misconduct). Many UI benefit overpayments are the result of late, incorrect, incomplete or missing employer responses to state UI claim notices (also called “separation information requests”) .

Once the issue of UI overpayments drew the attention of policy-makers, the U.S. Department of Labor subsequently unveiled a comprehensive system of reforms under its UI integrity initiative. One aspect of this initiative, included in the Trade Adjustment Assistance Extension Act of 2011 (TAAEA), required states to enact laws that prevent employer accounts from being relieved of UI benefit overpayments resulting from the employer, or the employer’s agent, failing to timely and fully respond to state UI information requests .

UI integrity law overviewIn a nutshell, the TAAEA directs all states (including the District of Columbia, Puerto Rico and the Virgin Islands) to prohibit the non-charging of UI benefit overpayments to an employer’s account that are the result of failure by any employer, both experienced-rated and reimbursing, or the employer’s agent, to respond timely or adequately to the state’s request for information relating to a UI claim, if a pattern of failing to respond to such requests has been established . Federal law doesn’t define “pattern of failure” but gives the states the freedom not only to define the term but to impose other sanctions as well. For instance, Virginia also imposes a $75 penalty beginning with the third offense .

States were required to adopt this UI integrity provision with overpayments occurring after October 21, 2013; otherwise, employers risked losing the 5.4% maximum federal unemployment insurance (FUTA) credit — increasing the FUTA tax rate employers would pay from 0.6% to 6.0%.

All of the states have adopted the UI integrity law or have implemented administrative policies that have a similar result.

“ The effect of the UI integrity law is to raise the bar on what constitutes leading practices in the claims management process and underscores the need for employers to take a more active role in third-party service arrangements .“

— Nicki King Director, Ernst & Young LLP

Unemployment claims processing center

http://www.dol.gov/dol/maps/map-ipia.htm

http://www.gpo.gov/fdsys/pkg/PLAW-112publ40/pdf/PLAW-112publ40.pdf

http://www.gpo.gov/fdsys/pkg/PLAW-112publ40/pdf/PLAW-112publ40.pdf


Employer consequences of late or inadequate responses to claim noticesAll employers incur a direct or indirect cost when UI benefits are charged to their accounts . For experience-rated employers, benefits charged to their accounts are used in determining their future state UI tax rates . Reimbursing employers (limited to electing nonprofit and governmental entities) are required to pay directly for benefits charged to their accounts .

Absent this UI integrity provision, an employer’s account could be credited for erroneously collected UI benefits, regardless of whether the employer responded in a timely fashion to the original claim notice . Under the UI integrity provision, once the deadlines are reached for responding to claim notices and other state information requests, employers generally give up their right to have their accounts credited for the overpaid UI benefits.

Likewise, if an employer does not provide complete details regarding the separation from employment (for instance, simply states that the individual should not be eligible rather than explaining the facts surrounding the termination), the employer may be charged for those benefits even if it later found the benefits should not have been paid.

For employers (or their third-party providers) accustomed to perfecting their responses to UI claim notices after the initial determination period, the UI integrity law can have a significant monetary impact.

Many states aggressively impose the UI integrity sanctionFederal law gives states the freedom to specifically determine what constitutes a “pattern of failure” in failing to respond to UI notices. Some states follow the federal law closely and do not specify the term “pattern of failure .” Other states are generous in their enforcement . For instance, Kentucky imposes the provision after the greater of six offenses, or more than 2%, of total claimants in a calendar year. However, close to half the states prohibit the relief of UI benefit charges after one or two offenses. These “aggressive” states are shown in red below.

VT

NH

ME

NY

PA

VAWV

KY

IL

IANE

CO

NMAZ

SD

NDMT

WA

MO

IN

NC

SC

MARICT

NJ

DE

DCMD

GAAL

LATX

OK

KS

TN

WI

MN

WY

MS

FL

UTCA

ID

NV

OR

AK

HI

AR

MI

OH

Figure 11: UI Integrity Act — state enforcement

LegendNo provisionApplies after one or two offenses


Avoiding the high cost of UI integrity sanctions

key elements of a successful UI claims management system

1 . Even if claims management is outsourced, assign at least one person in the organization with the task of supervising and evaluating performance

2 . Require adequate augmentation of electronic UI notice response systems

3 . Expect your third-party service provider to regularly intervene for at-risk claim notices

4 . Confirm proper collection, storage and access to employment records relevant to a UI claim

5 . Require training programs for human resources and field personnel

6 . Implement and maintain benchmarking and goals-based performance review for field personnel, human resources and third-party service providers

For most employers and their third-party service providers, the most common reason for failing to respond fully to initial claim notices is a lack of readily available details concerning the employee’s termination or resignation .

For instance, to establish that an employee was terminated for excessive absence or tardiness, the employer typically needs to show that the employee was informed of the policy (e.g., employee signature on a document stating that he or she read the company policy) and that there was progressive counseling concerning the policy violation (e.g., oral and written notice to the employee). Records also need to document the dates of the policy violations and counseling sessions, who in the organization participated with the employee, and any written or verbal comments of the employee.

Nicki King, Director of Ernst & Young LLP’s Dallas-based UI claims processing center, explains that remaining compliant with these tough new standards for responding to state UI claim notices and information requests will require a review of existing processes with specific attention to the key elements necessary to an efficient claims handling system.

• Human resources or field training. Frequently, field personnel responsible for hiring and terminating employees are not given adequate training concerning the proper disciplinary steps and the documentation needed in the case of employee misconduct, a layoff or a voluntary quit. Similarly, human resources staff responsible for the oversight of these processes may also lack adequate UI claims training.

• Augmentation of electronic UI notice response systems . Greater use of electronic UI response systems may actually hinder, rather than help, the ability to provide sufficiently detailed information during the UI eligibility determination period . For instance, the electronic system may merely ask if the employee quit voluntarily or if the employee was terminated for misconduct, offering no prompts to expand on the details or to provide the documentation that may be necessary for the state agency to deny a claim for UI benefits. For this reason, it is important that employers provide the third-party service company or internal UI management staff with complete information concerning employee separations. Substantiating documents should also be provided if there is a possibility that this additional information may be necessary in fully responding to the claim .

• Timely access to employee records . Companies are increasingly concerned about limiting access to employees’ confidential information, meaning that supervisors responsible for hiring and terminating may be required to send their employee paperwork to a central records location. Later, when supervisors are questioned concerning the details of a job separation, they may not have timely access to the required documents.

• Single point of management accountability . Considering that the UI integrity provision holds employers liable for the practices of their third-party service providers, it is increasingly important that someone within the organization be assigned overall responsibility for UI claims management, including regularly reviewing performance reports and other measures of the overall compliance and efficiency of the UI response network.

For employers (or their third-party providers) accustomed to perfecting their responses to UI claim notices after the initial determination period, the UI integrity law could have a significant monetary impact .

How do you rate?UI integrity and claims management


Teamwork and performance measures are vitalConsistently responding to UI claim notices depends on efficiently coordinating the efforts of personnel in the field, human resources, and, if applicable, the third-party service provider. The function of this team is to evaluate their collective performance as measured against their goals. King explains that third-party service providers or the internal UI management team should create regular benchmark reports that provide both quantitative and qualitative information concerning the UI claims processed in the period and any recommendations for improvement. Employers should schedule regular intervals to review and discuss benchmark reports with third-party service providers and field personnel where applicable.

Figure 12: Unemployment claims management benchmark reports

Quantitative reports Qualitative reports Total claims for the period

Number of claims notice responses meeting compliance standards

Explanation why compliance standards were not achieved. Third-party reports should indicate if client or third party was responsible

Number of initial claims successfully protested

Number of initial claims unsuccessfully protested Explanation as to why the protest was denied, including names of company personnel involved in the appeal (e.g., field personnel)

Number of determinations successfully appealed

Number of determinations unsuccessfully appealed Explanation as to why the appeal was denied, including names of company personnel involved in the appeal (e.g., field personnel)

Recommendations for improvements (e.g., training of field personnel, revisions to standard documentation templates)


Table 1: 2014 state unemployment insurance facts

State 2014 wage base Base 2014 UI rates Alabama $8,000 0 .89%–7 .04% ()

Alaska $37,400 () 1 .0%–5 .4% ()

Arizona $7,000 0 .03%–7 .17% ()

Arkansas * $12,000 1 .0%–12 .9% ()

California * $7,000 1 .5%–6 .2%

Colorado * $11,700 () 0 .66%–8 .9%

Connecticut * $15,000 1 .9%–6 .8%

Delaware * $18,500 () 0 .3%–8 .2%

District of Columbia $9,000 1 .6%–7 .0%

Florida $8,000 0 .59%–5 .4% ()

Georgia * $9,500 0 .04%–8 .1%

Hawaii $40,400 () 0 .6%–6 .0% ()

Idaho $35,200 () 0 .436%–5 .4% ()

Illinois * $12,960 () 0 .55%–8 .55% ()

Indiana * $9,500 0 .5%–7 .4%

Iowa $26,800 () 0 .0%–8 .0% ()

Kansas $8,000 0 .09%–7 .4% ()

Kentucky * $9,600 () 1 .0%–10%

Louisiana $7,700 0 .10%–6 .2% ()

Maine $12,000 0 .73%–6 .8% ()

Maryland $8,500 0 .3%–7 .5% ()

Massachusetts $14,000 1 .26%–12 .27%

Michigan * $9,500 0 .06%–10 .3%

Minnesota $29,000 0 .1%–9 .0% ()

Mississippi $14,000 0 .20%–5 .4% ()

Missouri * $13,000 0 .0%–7 .8%

Montana $29,000 () 0 .42%–6 .12% ()

State 2014 wage base Base 2014 UI rates Nebraska $9,000 0 .0%–5 .4% ()

Nevada * $27,400 () 0 .25%–5 .4% ()

New Hampshire $14,000 0 .1%–8 .5%

New Jersey $31,500 () 1 .2%–7 .0%

New Mexico $23,400 () 0 .1%–5 .4%

New York * $10,300 () 2 .025%–9 .825% ()

North Carolina * $21,400 () 0 .072%–6 .912% ()

North Dakota $33,600 () 0 .16%–9 .76% ()

Ohio * $9,000 0 .3%–8 .5% ()

Oklahoma $18,700 () 0 .2%–7 .3% ()

Oregon $35,000 () 1 .8%–5 .4% ()

Pennsylvania * $8,750 () 1 .701%–9 .7937%

Puerto Rico $7,000 2 .4%–5 .4%

Rhode Island * $20,600, $22,100 ()

1 .69%–9 .79%

South Carolina * $12,000 0 .0%–7 .36% ()

South Dakota $14,000 () 0 .0%–9 .5%

Tennessee $9,000 0 .15%–10% ()

Texas * $9,000 0 .41%–7 .31% ()

Utah $30,800 () 0 .4%–7 .4% ()

Vermont $16,000 1 .3%–8 .4%

Virginia $8,000 0 .52%–6 .62% ()

Virgin Islands * $22,500 () 1 .5%–6 .0%

Washington $41,300 () 0 .14%–5 .82%

West Virginia $12,000 1 .5%–8 .5%

Wisconsin * $14,000 0.27%/0.7%–9.8%

Wyoming $24,500 () 0 .348%–9 .868% ()

Legend

Retroactive 2014

Decrease from 2013

Increase from 2013

2014 rate freeze

= interest assessment applies

* = outstanding loan/bonds


Unemployment insurance can represent a significant cost of doing business and is variable depending on your work states, employment history and management practices. Forecasting your 2014 and future costs depends on how you rate in each of these three areas. Here we provide a snapshot of the state unemployment insurance landscape for 2014 as of 1 April 2014. Note that “state” as used below includes District of Columbia, Puerto Rico and Virgin Islands .

How do you rate?Across the states in 2014

No change

29 states

Decrease 2 states

2014 state wage base

Highest $40,400 Hawaii

Lowest

$7,000 Arizona, California, Puerto Rico

2014 state base tax rates

No change

22 states

Increase 7 states

Decrease 24 states

Highest 1 .0%–12 .9% Arkansas

Lowest 0%–5 .4% Nebraska

2014 FUTA rates over 0.6% Projected

Highest 3 .4% Virgin Islands

Lowest 1 .5% Delaware

2014 state employer interest assessments

Highest 3 .0% Indiana

Lowest 0 .029% North Carolina

2014 penalty rate states

Alaska

Indiana

Montana

Ohio

Pennsylvania

Virginia

Washington

Late filing of returns or payment of contributions could cost you more in these states

Projected Form 940 actual Form 940 actual

2014

2013

0 5 10 15 20

2012

Federal unemployment insurance (FUTA) — higher tax rates for loan states Number of states affected from 2012 to 2014

For more information, ask about our unemployment insurance rate finder™ .

Increase 22 states

http://response.ey.com/CSG3/?uifactfinder


Summary

Efficient management of an organization’s UI costs requires time, skill and commitment. This is why so many businesses engage one or more third-party service providers to assist them .

When choosing a third-party UI management provider, consider its:

1 . Tax knowledge and experience

2 . Commitment and track record in understanding your industry and your business

3 . Technology, processes and people to support efficient claims management and benchmarking

4 . Flexibility in providing reports and training tailored to your needs

5 . Reputation for quality and customer service

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