News & Insights

2021 State Unemployment Tax Cost Reductions from COVID-19

Tax Development Sep 03, 2020

2021 State Unemployment Tax Cost Reductions from COVID-19The following bulletin highlights a potential cost reduction opportunity regarding the 2021 state unemployment tax rates in light of COVID-19.

 

Background

In general, when an employee is eligible for unemployment insurance (UI) benefits, the payments are made directly from the state’s UI trust fund. The state trust fund is funded by all employers in the state through UI taxes. Employers are assigned tax rates each year based on their specific unemployment history in the state. If and when an employee collects benefits, the benefits are charged directly to the specific employer’s account. As a result, increases in benefit charges generally cause an increase in the employer’s subsequent year’s UI tax rate.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. The CARES Act provided for temporary, federally funded increases in UI benefits and eligibility. Most states adopted similar laws by reducing eligibility requirements and providing benefits faster. As a result of COVID-19-related unemployment and new federal and state legislation, the volume of approved UI benefit claims is at one of the highest levels in history.

Cost Reduction Opportunity Resulting from COVID-19

Many states announced that benefit charges related to COVID-19 will not be assessed against the specific employer’s UI account. Rather, COVID-19 benefits will be charged to a general fund. The pooling of the benefit charges will likely increase UI tax rates for all employers, as it will impact tax rate tables and/or administrative surcharges. However, the pooling of the benefit charges should result in smaller increases to tax rates when compared to the alternative of direct assessments against the specific employer’s account.

The 2021 tax rate notices will be released between October 2020 and March 2021. Employers are highly encouraged to review the tax rate notices, specifically for benefit charges, to ensure the state properly excluded COVID-19-related benefits. States generally have short appeal windows for UI tax rates. Therefore, once the initial appeal opportunity has closed, the tax rate may be final.

TECHNICAL INFORMATION CONTACT:

Kevin Cappock
Principal
Ryan
813.879.5127
kevin.cappock@ryan.com

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.