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How to Manage Unemployment Insurance

Published: January 31, 2023 by Wayne Rottger

employers managing unemployment insurance

The federal-state unemployment insurance system (UI) was created in 1935 under President Roosevelt, as a form of social insurance, and held on through decades of transformations of the economy and society as one of the social security legislations that remained firmly in place. Through this system, eligible workers who lost their jobs through no fault of their own can file for insurance benefits for a period of up to 26 weeks. Designed with the aim to provide income support in between jobs, unemployment insurance also helps sustain consumer demand and serves as an economic stimulus.

To be eligible to receive unemployment insurance benefits, a person must:

  • Have left the job through no fault of their own,
  • Be “able to work, available to work, and actively seeking work”, and
  • Have a sufficient work record, e.g. has earned a certain amount of money while occupying that position.

In periods of severe general economic distress, the unemployment insurance benefits may be extended beyond six months. UI should not, however, be confused with other relief programs and other federal incentives.

Though established and overseen by the federal government, the program eligibility requirements may vary from state to state. One requirement, though, can be considered universal – if a person was fired for misconduct, they may not be eligible for UI permanently or, in some states, for a limited period.

Federal-State Partnership

The Unemployment Insurance program functions under the federal law umbrella but it is administered by each state and is funded by unemployment taxes collected straight from the employers. The state unemployment agencies pay benefits to the newly unemployed workers out of the employer-funded accounts. In all but three states, the employers fund the program. In New Jersey, Alaska, and Pennsylvania, employers need to deduct the taxes for this purpose from their employees’ earnings.

Employers have to meet mandatory requirements and contribute to this system through payments to both federal and state governments. The Federal Unemployment Tax Act (FUTA) imposes quarterly or annual tax liability on employers and enables the IRS to collect it and channel it back to fund the administration of the program by each state..

The unemployment insurance taxes make up just one portion of the complex payroll tax system and employers should keep a vigilant eye on ways to maintain compliance on both federal and state levels.

Employers Financing Both SUTA and FUTA

In the complex unemployment insurance system, employers are not just bound by FUTA but by a relevant piece of legislation at the state level – a State Unemployment Tax Act (SUTA). Whereas FUTA finances federal oversight and administration of the UI state programs, the SUTA tax is collected to enable funding for the payment of unemployment insurance benefits.

The federal tax amounts to 6 percent of the taxable wage, which is set at the first $7,000 each employee earns annually, i.e. $420. It is possible to reduce this amount by up to 5.4 percent if the employer makes the state tax contributions regularly and on time. In this way and regardless of the state tax amount paid, employers may end up paying a federal tax rate of 0.6 percent, or $42 per covered employee a year.

In turn, each state determines its tax rates. These depend on different factors such as the number of employees and experience rating. The latter indicates the number of unemployment claims filed by former employees and contributes to a possible increase in the tax rate. The more people laid off and more unemployment claims filed, the higher the unemployment tax rate. The SUTA tax thus usually ends up being somewhere between 2% and 5% of the employee’s wages.

Further, state laws determine the structure and amounts of benefits paid, as well as the period during which the benefits can be paid to workers. Companies with branches all over the country need to follow the regulations of the state in which the unemployment insurance claim has been made.

Exemptions from SUTA payments may include certain not-for-profit, religious and educational institutions. In these instances, the employer repays dollar-for-dollar, any unemployment benefits paid to former employees who have been deemed eligible to collect rather than paying quarterly taxes based on a tax rate.

Manage UI Costs Efficiently

Complying with both FUTA and SUTA is just one side of the coin for companies when it comes to unemployment insurance. The responsibilities of the employer extend further than that. An important step in the process that should be proactively handled is responding timely to unemployment claims. This applies especially to employment terminations due to misconduct.   In the case of a discharge the burden of proof lies on the employer to prove there was willful misconduct on the part of the claimant.  Without the proper documentation and first-hand witness participation, the administrative law judge will be forced to make a decision on one person’s word against another; that being the claimant’s word against the employer’s.  In such an instance, the state typically will rule in favor of the claimant.

Add to that a rather high level of errors made by the state in the claims processing, and a complex situation turns into a tax-burdened nightmare.

It is wise to consider several best practices every business could easily follow to secure a good starting point in processes of this type. These include:

  • Train employees and ensure their awareness of company rules and relevant legislation,
  • Avoid firing employees without warning,
  • Document everything,
  • Keep state databases up to date and maintain a prompt record in responding to UI claims,
  • Use State Information Data Exchange System (SIDES), and
  • Take advantage of an automated solution to upgrade your claims management.

Outsourcing the claims management to a team of experts featuring a digital solution is a reliable way to improve your claims win ratio, reduce paperwork, recover overpayments, and minimize the inevitable costs.

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