Additional FUTA Credit Reductions Adjust 2014 Calculations

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By Howard Perlman

For 2014, employers in some states may be assessed more than five times the amount of federal unemployment tax that would apply if the states did not have Federal Unemployment Tax Act credit reductions.

Per-employee FUTA costs this year are to reach record highs for employers in credit-reduction states because 2014 is to be the first year for which an additional FUTA credit reduction, the benefit-cost rate (BCR) add-on, will be assessed.

Employers in states that have had a loan balance from the federal unemployment account on Jan. 1 of at least five consecutive years, that have a balance on Nov. 10, 2014, and that did not successfully apply with the federal Labor Department in 2014 for relief from a BCR add-on are to be assessed the add-on for 2014.

Connecticut is the only state that has had a federal unemployment loan balance for at least five years and that not only expects to have a balance on Nov. 10, 2014, but that did not apply with the Labor Department for relief from a BCR add-on for 2014. Employers for 2014 are to be required to pay about four times the amount of federal unemployment tax on wages for work attributable to Connecticut than would apply if the state did not have a FUTA credit reduction.

The other nine states that had a federal unemployment loan balance on Sept. 23 and that have had a balance on Jan. 1 of at least five consecutive years told Bloomberg BNA that they either applied for credit-reduction relief or expect to not have a balance on Nov. 10, 2014.

Seven states that could have a BCR add-on for 2014 submitted fifth-year waiver applications to the Labor Department that, if approved, would prevent employers from being assessed for 2014 a BCR add-on for wages for work attributable to the states.

Approval of the fifth-year waiver applications would not, however, prevent applicability of the general FUTA credit reduction, which is 0.3 percent starting with the second consecutive year a state had a federal unemployment loan balance on Jan. 1 and increases by 0.3 percent with each additional consecutive year when there is a balance on Jan. 1.

Announcements are to be made by Sept. 30 and Nov. 10 regarding applicability of BCR add-ons.

The Labor Department is to announce by Sept. 30 which states' applications were approved for 2014.

Calculating BCR Add-On Costs

The BCR add-ons that may apply for 2014 vary based on states' efforts to achieve solvency of their unemployment trust fund accounts. With regard to states that had federal unemployment loan balances on Sept. 23, the Labor Department estimated that the applicable BCR add-ons for 2014 may range from 0.4 percent to 1.5 percent, with each 0.1 percent representing an additional federal unemployment tax cost of up to $7 for each employee, the department said in its most recent Trust Fund Solvency Report, issued in July.

Connecticut, for example, is to have a general FUTA credit reduction of 1.2 percent and a BCR add-on of 0.5 percent, for a total FUTA credit reduction of 1.7 percent for 2014. When combined with the minimum federal unemployment tax rate of 0.6 percent to which credits cannot apply, for a total federal unemployment tax rate of 2.3 percent for 2014, Connecticut employers are to pay up to $161 in federal unemployment tax costs for each employee for 2014.

The estimated BCR add-on that could apply for employers in Arkansas for 2014 is 0.4 percent; California, 1.5 percent; Indiana, 1.2 percent; Kentucky, 1 percent; New York, 0.7 percent; North Carolina, 0.6 percent; Ohio, 1.4 percent; Rhode Island, 1 percent; and South Carolina, 0.5 percent, the solvency report said.

The U.S. Virgin Islands also could have a BCR add-on for 2014. Delaware employers could be assessed a general FUTA credit reduction for 2014 but not a BCR add-on because the state has had a federal unemployment loan balance on Jan. 1 of only four consecutive years. Although Arizona had a balance on Sept. 23, it did not have a balance on Jan. 1, 2014, causing a credit reduction to be inapplicable for 2014 on taxable wages for work attributable to the state.

Actions Against Add-ons

For 2014, fifth-year waiver applications were submitted by California, Indiana, Kentucky, New York, North Carolina, Ohio and Rhode Island.

Arkansas, Delaware and Rhode Island are to repay their balances by Nov. 9, 2014, representatives of unemployment insurance agencies of these states told Bloomberg BNA. The repayments would prevent the states from being credit-reduction states for 2014 and for Rhode Island would free employers in the state from a BCR add-on even if the Labor Department does not approve the state's fifth-year waiver application.

South Carolina submitted a credit-reduction avoidance application to the Labor Department that would prevent it from being a credit-reduction state for 2014 even if it has a federal unemployment loan balance on Nov. 10, 2014.

The department is to announce whether South Carolina's 2014 application was approved after Oct. 16 but before Nov. 10.

The Labor Department on Nov. 10 is to announce the total FUTA credit reductions that apply for 2014. The Internal Revenue Service will confirm the credit-reduction percentages on Schedule A of Form 940. The form and its Schedule A typically are released in November or December.