By Tom Towson
Last updated: May 19, 2021 (changes since last update on April 30, 2021 will begin with **NEW**)
In this article:
The COVID-19 pandemic has created an unprecedented surge in initial state unemployment insurance (“SUI”) claims. **NEW** During the 60 weeks ended May 8, 2021, there were approximately 86.9 million initial unemployment claims filed.1 This is the lowest level for initial claims since March 14, 2020 when it was 256,000. The COVID-19 virus continues to impact the number of initial claims and continued unemployment. The past 60 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
As shown in the above graphic, the Great Recession caused a slow increase in initial unemployment claims. In contrast, there was 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. Quarters of unprecedented initial claims, and continued claims, have had a compounding effect and put stress on the SUI system as a whole.
Average U.S. SUI tax rates declined over the past eight years (from 3.48% in 2012 to 1.78% in 20203). The increase in unemployment claims associated with COVID-19 did not have an impact on already established 2020 calendar year 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 has had an impact on calendar year 2021 rates, all of which have been issued for the state of Texas.
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.
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.
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 future increases in rates will be coming off an 18-year low (the average U.S. SUI tax rate in 2002 was 1.80%,3 not shown above).
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. As of January 1, 2021, 40 states were not considered adequately funded.5
The amount of unemployment benefits paid out in a relatively short period does not 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 the near-term.
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, caused net state trust fund balances to decrease by $39.50 billion (from $70.49 billion to $30.99 billion) from Q1 2020 to Q2 2020. Net state trust fund balances decreased by $38.47 billion (from positive $30.99 billion to negative $7.48 billion) from Q2 to Q3 2020 and decreased by $13.33 billion (from negative $7.48 to negative $20.81 billion) from Q3 to Q4 2020 and decreased by $10.01 billion (from negative $20.81 billion to negative $30.82 billion) from Q4 2020 to Q1 2021.6 & 7
The following graphic compares trust fund balances as of the beginning of 2020 to trust fund balances as of the end of each quarter, by state.
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%. From 2020 to 2021, taxable wage bases increased by an average of 2.9%.
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 May 17, 2021, the following states have received Title XII advances or have been granted authorization for future advances (like a line of credit).
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.
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.
In addition, the FFCRA provides a waiver of interest, through December 31, 2020, on outstanding advances under Title XII of the Social Security Act. The waiver of interest was extended through March 14, 2021 by the Consolidated Appropriations Act, 2021, discussed further below.
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.
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:
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:
On September 5, 2020, FEMA ended funding of the LWA program. States that were approved for funding received six weeks of funding and there have been no extensions made and the program sunset. 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.
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 $4,000 every two weeks 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 IRS issued further guidance, Notice 2020-65, indicating that the deferred tax is to be repaid ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. The Consolidated Appropriations Act, 2021, addressed further below, extends the deadline for employees to repay such deferred taxes until December 31, 2021.
On December 27, 2020, the President signed into law the Consolidated Appropriations Act, 2021. The unemployment insurance provisions include:
On March 11, 2021, the President signed into law the American Rescue Plan Act of 2021. The federal unemployment benefit programs, initially implemented under the CARES Act and later reauthorized via the Consolidated Appropriations Act, 2021, were set to expire March 14, 2021. Under the Act, these federal benefit programs are now extended until the week ending September 4, 2021, outlined as follows:
Additional unemployment-related provisions of the American Rescue Plan Act of 2021 include:
**NEW** On May 11, 2021, the Department of Treasury issued an Interim Final Rule to implement the Coronavirus State and Local Fiscal Recovery Funds established under the American Rescue Plan Act of 2021. Recipients of funds may make deposits into state trust funds up to the level needed to restore to pre-pandemic levels (as of January 27, 2020), or to pay back advances received under Title XII for the payment of benefits between January 27, 2020 and date the Interim Final Rule becomes effective.
Since the level of state trust funds is a primary driver in determining SUI tax rates, the use of funds to replenish depleted trust funds has positive implications for employers. This of course is dependent on how the states decide to use the funds available to them. Should a state decide to improve the solvency of its trust fund, and do so prior to the rate computation date (often June 30), this could mitigate the anticipated increases in SUI tax rates for 2022 and future years.
In addition, if a state uses the funds to repay Title XII advances prior to January 1, 2022, this could help avoid FUTA credit reductions for the 2022 calendar year. Also, as the current waiver of interest on Title XII advances ends on September 6, 2021, the elimination of some or all of the Title XII advances could help avoid the payment of interest and surcharges to employers.
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.
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, with other states still considering similar actions:
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.
Other examples of state actions taken in response to the COVID-19 pandemic, for those states that have yet to issue their tax rates, include:
The COVID-19 crisis has lasted over a year and has been severe and unprecedented. States are continuing to take actions to mitigate some of the financial hardship expected on employers in 2021 and beyond.
Some of the provisions enacted to date make it easier for claimants to obtain benefits while other provisions attempt to mitigate some of the financial hardship expected on employers, including retroactive revisions to 2021 rating calculations. The impact of the COVID-19 pandemic has been felt in 2021 and is certain to impact employers for years to come.
To keep up-to-date, please visit our COVID-19 Resources website which will be updated as new information becomes available. Our COVID-19 Resources site includes a Tax Guide intended to assist employers in identifying potential risks associated with increases in SUI tax costs from 2020 to 2021. The Tax Guide also lists those states that have already issued 2021 SUI tax rates, which is most of them. Keep in mind, although most states have issued 2021 rates, there are potential rate revisions coming as a result of legislative action taken subsequent to the issuance of rates.
Please 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.
1 Per U.S. Department of Labor Unemployment Insurance Weekly Claims News Releases issued from March 26, 2020 to April 8, 2021. The amount reported for the week ended April 3rd 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. 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.