Each year, the U.S. Department of Labor (USDOL) releases its Unemployment Insurance (UI) Trust Fund Solvency Report, a critical document that evaluates the financial health of each state’s unemployment insurance trust fund. This report helps determine whether states are prepared to meet unemployment benefit obligations during economic downturns without needing federal assistance. The report for 2025 was just released. Keep in mind it represents data as of January 1, 2025, so it is really 2024 calendar year data.
What is the U.S. Department of Labor?
TheU.S. Department of Labor, established in1913, is a federal agency responsible for promoting the welfare of wage earners, job seekers, and retirees. It administers and enforces more than 180 federal laws covering workplace activities for about 150 million workers and 10 million employers. Among its many roles, the USDOL oversees unemployment insurance programs, ensuring that states maintain adequate funding to support unemployed workers during a downturn in the economy.
Why the Solvency Report Matters
The Unemployment Trust Fund Solvency Report is especially important for employers, as it directly impacts the Federal Unemployment Tax Act (FUTA) tax rates they pay. If a state’s unemployment trust fund is insolvent and it borrows from the federal government (via Title XII advances), employers in that state may face FUTA credit reductions, increasing their tax liability. There are specific guidelines under which a state must operate to ensure repayment is made. If it is not or is delayed over a specific period, employers in the state will see an increase in their federal taxes for the following year and possibly beyond if the outstanding balance continues to be outstanding. While this report is very data-centric, it is crucial for employers to be aware of it, especially as they plan their fiscal year budgets each year.
Key Terms Explained
The following are several important terms and their explanation.
- FUTA Credit Reduction: Employers typically receive a 5.4% credit against the 6.0% FUTA tax rate, resulting in a net rate of 0.6%. That is, providing the employer has paid all its taxes timely and in full. However, if a state has an outstanding federal loan for two consecutive years and hasn’t repaid it, the credit is reduced, increasing the effective FUTA tax rate for employers in that state. If the balance remains beyond this, each year, the employers will lose an additional 0.3% credit reduction, plus the possibility of an additional tax cost, called the BCR Add-On.
- Benefit Cost Rate (BCR) Add-On: This is an additional FUTA tax that may apply if a state has not repaid its federal loan and has not met certain repayment criteria. It’s designed to encourage states to maintain adequate trust fund balances. For the 2025 Federal Form 940 due by January 31, 2026, there is the potential for three states to have a BCR Add-On, with California’s being the highest at 3.7%. The other two states are Connecticut and New York. There have been discussions by the Governor of New York to indicate they are planning to find a way to repay their outstanding balance which as of this writing sits at nearly $4.5 billion. Compare that to California’s which is $20 billion. Connecticut has repaid it’s outstanding loan, so unless they borrow again before November 10, 2025, they will have neither a credit reduction nor a BCR Add-On.
- Average High Cost Multiple (AHCM): This is the primary metric used in the solvency report. It compares a state’s current trust fund balance to the average of its three highest years of benefit payouts over the past 20 years. A state is considered solvent if its AHCM is1.0 or higher, meaning it has enough funds to pay out one year of high-cost benefits without borrowing.
2025 vs. 2024: A Comparative Analysis
The 2025 report shows18 statesmet the recommended solvency level, down from19 in 2024, and significantly lower than the31 statesthat met the standard in2020, before the pandemic’s economic impact.
- States at Recommended Solvency Levels:
- 2025: 18 states
- 2024: 19 states
- 2020: 31 states
This decline highlights the ongoing challenges states face in rebuilding their trust funds post-pandemic. While the pandemic seems like eons ago, it is merely five years since that dreaded event occurred. As a result, states have been trying to dig out from the payment of an historic number of benefits. Much of that, however, was paid out due to fraudsters claiming benefits and will likely never be recovered.
- States with Title XII Advance Balances:
- 2025: 3 states and 1 territory, totaling$27.8 billion
- 2024: 4 states, totaling$27 billion
All four states/territories with outstanding balances in 2025 have carried debt for at least two years, making them likely candidates foradditional FUTA credit reductions.
Additionally, inJanuary 2025, the USDOL reached adebt settlement agreementwithMassachusetts, requiring the state to repay$2.035 millionin overdrawn emergency federal program funds. This amount isnot includedin the Title XII debt figures.
States with Recommended Solvency Levels in 2025
In order of highest solvency levels, the 18 states are:
Alaska, Oregon, Wyoming, Maine, South Dakota, Kansas, Montana, Iowa, Idaho, Nebraska, Mississippi, Utah, North Carolina, Alabama, Arkansas, South Carolina, North Dakota, and Maryland.
These states have demonstrated strong fiscal management of their UI trust funds, reducing the risk of federal borrowing and additional employer tax burdens.
Why Employers Should Pay Attention
Employers in states with low solvency levels or outstanding federal loans facehigher FUTA taxes, which can significantly impact payroll costs. Monitoring this report helps businesses anticipate potential tax increases and advocate for responsible state-level UI fund management. Since the employer bears the burden of paying unemployment taxes in most states, they sit on a highwire because they want the states to be fiscally responsible, at the same time they don’t want states to drastically increase tax schedules or taxable wage bases. Employers who do not use a third-party agent such as Experian Employer Services to manage its unemployment claims and tax administration, it would be beneficial for them to either look into this or have a staff member dedicated to nothing but government affairs and changes to legislation. While 2026 unemployment tax rates seem like something about which employers need to be concerned in May 2025, that would be the same as sticking their heads in the sand. As they say, “Being forewarned is being forearmed”.