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Divergent Approaches to Unemployment Insurance Await Congressional Action

The states face mounting pressure to generate funds for unemployment benefits while the two political parties jockey as to the best way of helping the situation.

In May, the number of people who filed new applications for jobless benefits leaped 43,000 to 474,000 - the highest level in almost nine months.

According to Steve Carter, assistant director of government relations, Tax with TALX (, a provider of Equifax Workforce solutions, most state legislatures have completed their legislative sessions, and several states have focused on the unemployment insurance (UI) financing crises. 

Currently, 33 states and the Virgin Islands unemployment trust funds have been depleted, part of the Great Recession.  As a result, a federal loan program has kicked in to continue benefit payments. Indebted states are now faced with paying back over $43 billion in federal loans, plus interest amounting to more than $1.2 billion in 2011.  In addition, employers in 22 states will see an automatic loan repayment mechanism kick in, resulting in increases in federal unemployment taxes in 2011 and, in many instances, for years beyond.

Carter says, “The federal unemployment-tax issues are significant in their cost and are contributing to a nightmare for companies trying to project budgets based on the uncertainty of the situation.”

As a means of easing the pressure on employers in the affected states, the Obama administration proposed relief with the budget proposal it submitted for the 2012 fiscal year in February. 

The highlights of that package include:

  • Delay of the increase in the federal unemployment tax that will occur for 2011-12.
  • Waiver of interest payments on federal loans for 2011-12.
  • An increase in the federal unemployment (FUTA) taxable base from $7,000 to $15,000 starting in 2014 and indexing the base to increase each year thereafter.  This would also force many states to adjust their state taxable wage bases, which have to equal the federal base.

Republicans in the House of Representatives objected strongly to the proposal, saying that it contributes to the growing national deficit and includes a steep tax increase on employers.  In response, they have proposed HR 1745, which includes the following components:

  • Allows the states to determine whether they want to redirect the cost for federal unemployment benefits payable through the end of 2011, starting July 1, to other purposes including payment of interest, federal loans, the employer’s cost of federal tax increases or provide for job training enhancements.
  • Allows the end of the “temporary” 0.2% FUTA tax that was scheduled to end June 30, which the Administration proposes to continue in their proposal. The “temporary” tax increase in FUTA has existed for more than 35 years and is an outgrowth of the need to pay back federal loans from the recessions of the 1980s.

The House proposal awaits a vote on the House floor in the coming weeks.  The Obama proposal has been introduced in the Senate as S386.  Both will probably meet head-on this summer with the outcome having significant ramifications for employers in 2011.  Interest payments on federal loans have to be made by Sept. 30, and many states have issued special assessments to employers to make the payments.  The 22 states that will see increases in federal unemployment taxes will know if the increase has occurred in November.  The IRS is already amending tax forms to reflect the scheduled decrease in federal taxes for the last half of 2011.

Carter says, “At this point, it is difficult to advise employers with specifics on this issue as the outcome is going to be in the ‘either/or’ category–we will have interest payments and federal tax increases or we won’t.  That is totally dependent on congressional action this summer.  It’s possible that no relief will be passed, in which case employers should be prepared for some rather nasty tax increases later this year.” 

He offers these strategies for how businesses can handle forthcoming changes:

  • Stay informed on the latest legislative updates and tax-intelligence tips.
  • Train the team on how to reduce risk by handling discipline and separations the right way.  Share a consistent message throughout the organization.
  • Help displaced employees find new jobs. Lower unemployment costs, improve company reputation and reduce certain employment-related risks by providing displaced employees with the tools and support they need to find their next job quicker.
  • Partner with third-party unemployment tax experts who can handle claims administration and case management and who will work with the Labor Department to improve processes and results.

“The biggest concern is that the entire issue may be caught up in pre-2012 presidential campaign positioning without a resolution in time to affect the 2011 situation,” Carter says.


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