By Tom Towson
A comprehensive unemployment cost management program encompasses both claims management and tax management strategies. Tax management strategies include, among others, the use of Voluntary Contributions (VCs), Joint Accounts (JAs), and other Special Rating Strategies to help reduce future SUI tax burdens. This article will focus on these tax management strategies.
Twenty-six states permit employers to make VCs to their unemployment accounts. A VC is a special payment which, if made to the state within a specified period, reduces the employer’s tax rate. Depending on the state, an employer’s rate may be decreased by one or more rate table brackets, even to a minimum rate in some states.
A voluntary contribution increases the employer’s reserve balance in reserve ratio states or decreases the benefits charged against the employer in benefit ratio states. Once the state receives the voluntary contribution, the tax rate is recomputed using the new factors.
If any outstanding delinquencies exist on an employer’s account, the submitted voluntary contribution payment may first be applied to the debt and then to the rate calculation, creating a shortage in the amount necessary to reduce the tax rate. Voluntary contributions are generally nonrefundable. Therefore, if an employer miscalculates and underpays the voluntary contribution, the state may not allow an additional payment or return the insufficient amount. Likewise, if the employer pays in excess of the amount needed to reduce the rate, the state may not refund the overpayment.
Voluntary contribution deadlines vary from state to state. Many state deadlines are set at a specific date by law, while others provide a certain number of days after the issuance of the rate notice to make a VC.
Several states offer employers the option to reduce unemployment taxes by forming a JA (also referred to as a common rate group). The formation of a JA permits two or more legal entities to combine their state unemployment experience rating factors to obtain a single or common SUI tax rate applicable to all members electing to participate in the group. The goal is to achieve a lower combined unemployment tax cost for the members as a whole.
The combination is strictly for SUI rating purposes and does not require changes to organizational or legal entity structures. Each JA member will continue to file their quarterly contribution reports utilizing their respective SUI account numbers, with limited exception. Factors used to determine if a JA is beneficial include:
Alaska Payroll Variation Election
Alaska’s SUI rating system is based on an employer’s experience with quarterly wage declines. If an employer has a decline in “reportable” wages (not taxable wages) from one quarter to the next, this decline in wages is known as a quarterly decline. For rating purposes, a quarterly decline quotient is calculated, which is the percentage decrease in wages from one quarter to the next. All the quarterly decline quotients for an employer’s qualifying quarters are added together, and this total is then averaged. A SUI tax rate is then assigned based on this average of all the quarterly decline quotients.
Several factors may create artificial quarterly declines. If an employer pays bonuses or lump-sum payments, or pays bi-weekly, the state workforce agency may be able to lower the employer’s contribution rate by removing the effects of artificial declines created by these situations.
Employers can elect to remove the negative impact on the quarterly declines in the above situations. An employer can choose to either delete or apportion the wage payments in order to obtain a more favorable rate.
Careful consideration should be given to the choice of options (decline method or the appropriation method), as once an option method is chosen, it is effective for future years and may not be changed without state workforce agency approval. Employers are required to file an “option form” for every quarter in which their artificial decline situation arises.
Options may be used to change a rate retroactively. Through June 30, options can be used to correct the rate for the preceding calendar year as well as the current year. From July 1, only the current year’s rate can be changed, but the lower rate would be retroactive to January 1 of the current year.(1)
Arkansas Single Year Payroll Election
The state of Arkansas allows employers to elect to use a one-year taxable payroll factor in its SUI tax rate computation instead of the standard three-year average or five-year average taxable payroll. If a one-year taxable payroll factor is less than the three or five-year average, a one-year payroll factor election must be requested in writing with the state workforce agency by July 31st of the year prior to the year the election is to become effective.(2)
New York Negative Write-Off Election
From the inception of an employer’s SUI account in New York, when unemployment benefits charged to an employer’s account exceed the contributions paid in and credited, the result is a negative reserve account balance and the SUI tax rates are based on the employer’s negative reserve ratio. If, as of December 31 of any given year, an employer’s negative reserve account balance exceeds 21% of its most recent fiscal year taxable payroll (from October 1 to September 30), the portion above 21% is mandatorily transferred out (i.e., “written-off”) of the employer’s account, by the state, and charged to the General Fund. For the following year, the employer is assigned a normal rate based on the employer’s negative account percentage prior to the transfer and, for the three succeeding years, will be assigned the maximum rate for that year’s size of fund index.(3)
For example, an employer with a transfer to the General Fund on December 31, 2021 (i.e., the 2022 rate year) will be assigned a normal rate for 2022. For the 2023, 2024, and 2025 rate years, the employer will be assigned the maximum tax rate.
However, an employer may elect to make a special payment to avoid the maximum SUI tax rate assignment for three years. The due date for this special payment is March 31st of the impacted year. A cost-benefit analysis should be performed to determine if the expected savings from a reduced SUI tax rate for three years sufficiently exceeds the amount of the special payment necessary to repay the amount of the write-off.
Employers seeking to utilize the special payment provision should be mindful of the following scenarios:
Employers are often unaware of the long-term implications a state mandated write-off can have, which can be complicated further if write-offs are made in two or more consecutive years.
Pennsylvania Negative Write-Off Election
In Pennsylvania, a higher SUI tax rate is assigned when an employer’s reserve account has a negative balance. If the benefits charged to an employer’s reserve account exceed the amount of contribution credits to the employer’s reserve account by an amount which is more than 20% of the employer’s annual payroll, the employer may elect to have its reserve account downwardly adjusted to a negative balance equal to 20% of its average annual payroll. Upon election, the maximum experience rate will be assigned for the current and the following two calendar years. This could result in a lower rate in subsequent years if benefit charges are negligible during the three years that the election is in effect.
The election must be made in writing after January 1st but no later than April 30th of the tax year in question. The request is not revocable after 10 days from the postmark date.(4)
Due to the complexity of the special rating strategy calculations, and the short turnaround time between when tax rate notices are mailed and the election deadlines, it is recommended that employers implement a strategy prior to when SUI tax rate notices are issued.
Employers should identify the authorized representative or officer available to review and approve any special rating strategy elections to help ensure timely submission. After implementation, employers must be diligent in their follow up with the state workforce agencies to help ensure the proper SUI tax rate(s) has been assigned.
Using sophisticated techniques and an understanding of each states’ rating calculations, Equifax assists employers with planning strategies to help identify cost savings opportunities. Please reach out to your Equifax representative for further information on “Planning Strategies to Help Reduce SUI Tax Burdens in 2023 and Beyond.” 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. Equifax is not providing, and cannot provide, tax and legal advice. Before taking any actions, employers should consult with internal and/or external counsel.