How Does the Creation of Jobs, As Opposed to the Loss of Jobs, Affect Your UI Tax Rates?

How Does the Creation of Jobs, As Opposed to the Loss of Jobs, Affect Your UI Tax Rates?

In June the number of full-time jobs in the United States finally got back to the same level as the beginning of 2008. It has taken a long time.

labor force statistics

Since full-time jobs are now back to ground zero and increasing, this is a good time to consider how job creation impacts your exposure to UI taxes.

The immediate first year result of your company creating a job is an increase in your UI taxes because of the increase in taxable payroll. In all states except four (NH, NJ, TN, VT) UI tax rates are assigned for a calendar year, so any new hires this year could not affect your UI tax rate calculation until 2015 at the earliest. However, the computation date for 2015 tax rates is June 30 in most states, in which case new hires in the second half of the year will not influence your tax rate until 2016.

In reserve ratio states, the second year impact of creating a job can also be adverse. A reserve ratio is simply a company’s reserve account balance divided by a measure of its taxable payroll. A higher reserve account balance, in relation to payroll, results in a lower tax rate. For a company with a positive reserve account balance creating a job often dilutes the reserve ratio (the reserve account balance grows at a slower pace than the taxable payroll). This can keep the tax rate elevated for an extended period when a company is growing rapidly because the increased taxable payroll makes your reserve ratio a smaller fraction (assuming you have a positive reserve account balance). Attached is a list of reserve ratio states.

The reverse is true in benefit ratio states and benefit wage ratio states. A benefit ratio is a measure of benefit charges resulting from approved claims (usually three to five years of charges) divided by a measure of taxable payroll for the same time period. Creation of jobs translates into a smaller, more favorable benefit ratio or benefit wage ratio, because taxable payroll is the denominator of the ratio, and a lower UI tax rate is assigned, all other factors remaining unchanged. UI tax rates in benefit ratio states and benefit wage ratio states generally respond more quickly (for better or for worse) to changes in taxable payroll. Attached is a list of benefit ratio states and benefit wage ratio states.

Regardless of the state, your company will benefit from other companies creating jobs as well. As jobs are created, UI claimants are able to find a new job sooner, and the average duration of a UI claim decreases. Your UI benefit charges will be reduced when another company hires your former employee sooner.

The average duration of a UI claim peaked at 20.1 weeks in the first quarter of 2010. The duration has decreased for sixteen straight quarters, to 16.7 weeks for the first quarter of 2014 (a 16.9% reduction in duration). This means that your benefit charges (on average) are more likely to be reduced, even if your company experiences the same number of unemployment claims.

unemployment claims

SUI tax rates in most states remain elevated today. However, the state unemployment trust funds are growing, in part because of the increased revenue generated by elevated tax rates. As more jobs are created, the elevated tax rates are applied to more taxable payroll, thereby accelerating the improvement in trust fund solvency (at your expense, of course).

It is our expectation that the slow but relentless upward slope of the jobs graph will finally begin to have a more noticeable impact on tax rates next year. Simultaneously, the decrease in the duration of claims and the reduction in the number of claims as the labor market improves are slowing the drawdown from state trust funds. The combination of these tailwinds causes us to be optimistic about 2015 UI tax rates for most states – particularly the benefit ratio and benefit-wage ratio states. California is a notable exception. Barring any unanticipated legislation, we see no near-term UI tax relief for California employers.

Click the link to view the recent blog: Enforcement of Employer’s Responsibility for UI Program Integrity or check back for more on human resources, payroll, insurance and benefits specifically for nonprofits.

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Enforcement of Employer’s Responsibility for UI Integrity Act

Enforcement of Employer’s Responsibility for UI Integrity Act

Today’s blog offers an in-depth review of the UI Integrity Act and related legislation, focusing on the claims response issues.  The legislation is generally viewed as being threatening, when this is not necessarily the case.  We offer our view on how integrity-related legislation impacts our clients.

THE ISSUE

The amount of erroneous unemployment benefit payments is unacceptably high, and some of the responsibility for this falls on the employer community.  Poor and late responses by employers or their agents tend to result in benefits being approved and paid when a disqualification should have been imposed.  This results in more appeals of initial determinations being filed, unnecessarily burdening the appeals system.  When benefits are paid erroneously, it is quite difficult for the state UI agencies to recover the overpayments, and often they are never recovered.

BACKGROUND

As early as 2005 the state unemployment agencies began monitoring the problems created by employers and their agents who submitted inadequate and/or late responses to unemployment claim forms.  Wisconsin was one of the early states to independently establish a penalty (denial of relief from charges), beginning in 2006, on employers who submitted late or poor responses.  Exacerbating the problem was the fact that some third party administrators had instituted the practice of responding to unemployment claims in an automated fashion, providing very little detail.  Thomas & Thorngren’s practice has always been to provide detailed responses, including documentation, crafted by professional claims analysts, and this has proven to be a great asset for our clients in the eyes of the state agencies.

ERRONEOUS UI PAYMENTS INCREASE

A surge in the number of UI claims occurred in the first quarter of 2009, putting significant stress on the state UI agencies.

benefits paid

The error factor related to improper payment of UI benefits increased concurrently.  Improper payments increased to 11% of payments, or $17 billion for the year ending June 30, 2010.  Three main sources of these errors were identified:

  1. Benefit year earnings.  This refers to benefits continuing to being paid after a person has returned to work or found a new job.
  2. Separation issues.  This refers to benefits being paid when the facts surrounding the separation of employment should have resulted in a disqualification, and
  3. Work search issues.  Generally this refers to claimants receiving benefits when they have not met their obligation to actively search for work and be available for work.

GOVERNMENTAL RESPONSE

An Executive Order from President Obama in November of 2009 addressed the need to reduce improper payments in major federal programs including unemployment compensation.  On June 10, 2011 the U.S. Department of Labor issued a DOL Program Advisory to all state unemployment agencies, notifying them that the DOL was “making an immediate call to action to all state administrators to ensure that UI integrity is a top priority and to develop state specific strategies to bring down the UI improper payment rate.

The solution to the “separation issues” problem was to incentivize employers to make better responses to the state UI agencies upon receipt of an unemployment claim form.  Several states had already taken independent action by 2011, including Arkansas, Colorado, Georgia, Illinois, Kansas, Kentucky, Michigan, Nevada, Tennessee, Texas, and Utah.  Three of these states (Colorado, Kansas, and Nevada) had already enacted legislation providing that an employer that has failed to submit a timely or thorough response to a request for information has waived their status as an interested party and has lost the right to appeal the determination.

To address this issue on the national level, the Trade Adjustment Assistance Extension Act of 2011 included provisions affecting relief from charges on UI claims.  The provisions were contained in Section 252, entitled The Unemployment Compensation Integrity Act of 2011, or “The UI Integrity Act.”  This bill was unique in that it imposed a federal standard on matters relating to benefit charges and experience rating, which had historically been relegated to state policy and law.

The UI Integrity Act prohibits state UI agencies from granting relief from charges to an employer’s UI tax account when unemployment benefits are overpaid and when the overpayment results from an employer (or the employer’s agent) failing to respond timely or adequately to a request for information by the state agency and when, at a minimum, the employer or agent has established a pattern of failing to respond to such requests in a timely or adequate manner.

Similar federal legislation had been introduced as early as 2006, with no success.  This time the UI provisions were inserted in the Senate, and received no attention in the floor debate about the bill because of the other major policy issues addressed in the bill.

The UI Integrity Act gave states a two-year window to enact legislation consistent with the new federal law.  State legislation was generally required to be in place by October 21, 2013.

UNDERSTANDING THE UI INTEGRITY ACT

Here is an example of how the provisions of The UI Integrity Act come into play.  An employee is discharged for misconduct and files a claim for unemployment benefits.  An initial claim form is mailed to the employer but the employer fails to respond with information regarding the reason for separation.  For this reason, the claim is approved and benefits are paid.  The employer receives a determination indicating that benefits are approved, and the employer decides to appeal the determination.  An appeals hearing is held, and the appeals decision ultimately disqualifies the claimant.  In the meantime 10 or 12 weeks have elapsed since the time the claim was filed, and the person has received benefits erroneously during this time.  Even though the claimant has been disqualified, the employer’s UI tax account will remain charged with the 10 or 12 weeks of benefits that have already been paid, if there is a finding that the employer (or the employer’s agent) has established a pattern of failing to respond timely or adequately.

The bottom line is this:  when unemployment benefit charges are assessed to an employer’s tax account, such charges are used in future tax rate calculations and are likely to raise the employer’s tax rate for one or more years in the future.  The resulting increase in tax payments generally exceeds the amount of benefit charges.  The denial of relief from charges is invisible at first, because it does not affect the tax rate for the year in which the penalty is imposed.  However, the impact over time can be quite substantial, costing potentially several thousand dollars in increased taxes.

If a determination is made that an employer (or agent) is at fault for failing to respond timely or adequately to a request for information, the employer must be given the right to appeal such a determination.

The U.S. Department of Labor provided the state UI agencies with guidance on the new requirements.  The guidance gave the state agencies considerable flexibility in administering these provisions.  Each state was required to develop its own definition of what it means to establish a pattern of failing to respond timely and adequately, including the period of time involved.

SOME STATE PENALTIES EXCEED THE UI INTEGRITY ACT MANDATE

The states have the authority to impose even stricter standards if they wish to do so.  For example, a state law could deny relief from charges after the very first instance of a failure to respond timely or adequately, and fifteen states now have such legislation in place.  Sixteen states now have the authority to deny the employer the right to appeal an adverse determination if the employer submitted an inadequate or late response to the initial claim form.  Further, six states have the authority to impose monetary penalties on the employer.

OUR PERSPECTIVE: RESPONDING TO UI CLAIMS PROFESSIONALLY

We expect the UI Integrity Act and related state legislation to have a long-term positive impact on our clients.  The integrity-related legislation is designed to shift the cost burden of improper payments to the employer that contributed to the improper payments, i.e., the employer that submitted an inadequate or untimely response to a UI claim form.  Without such legislation, the nonresponsive employer can be granted relief from charges and funding of the erroneous benefit payments becomes the collective burden of all employers in the state.

When the nonresponsive employer is granted relief from charges, the UI benefits are nonetheless paid to the claimant, and funds are withdrawn from the state UI Trust Fund.  These improper payments become a socialized cost, accounted for in the tax rate tables and adjustment factors used in rate calculations.  This is detrimental to our clients, who are committed to processing UI claim forms responsibly.  We are supportive of legislation that encourages the assessment of improper benefit payments to the employer that contributed to the payments.  This is healthy for the experience rating system, the UI program in general, and our clients in particular.

It has always been sound business practice to focus on providing a complete, detailed response to the initial UI claim form and to include supporting documentation.  This avoids unnecessary appeals that can be costly in terms of time spent by supervisory personnel.  Our company is focused on providing effective claim responses by coordinating with our client in the most efficient way possible, given your organizational structure.  This collaborative approach now provides even more opportunity to reduce UI taxes in the current environment.

Check back for more on human resources, payroll, insurance and benefits specifically for nonprofits.

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