U.S. DEPARTMENT OF LABOR
Employment and Training Administration
Washington, D. C. 20210
June 29, 1983
June 30, 1984
UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 31-83
ALL STATE EMPLOYMENT SECURITY AGENCIES
ROYAL S. DELLINGER
Changes in the Social Security Act, title XII and the Internal Revenue Code of 1954, section 3302, made by the Tax Equity and Fiscal Responsibility Act of 1982 and the Social Security Amendments of 1983.
Purpose. To advise States of the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), P.L. 97-248, and the Social Security Amendments of 1983, P.L. 98-21, as they relate to loan repatent and interest provisions.
References. Social Security Act, title XII; Internal Revenue Code of 1954, section 3302; P.L. 97-35, sections 2406 and 2407; P.L. 97-248, sections 27'2 through 274; P.L. 98-21 , sections 511 through 514; and UIPL no. 13-82.
Under the federal Unemployment Tax Act (FUTA), employers in all States are assessed an employment tax at a rate of 3.5 percent on a taxable wage base of $7000. However, employers generally receive a FUTA tax credit of 2.7 percent, resulting in a net Federal tax rate of 0.8 percent. States with insufficient reserves in their unemployment funds to meet State benefit obligations may borrow funds from the Federal Unemployment Account (FUA).
Loan Repayment. If a state does not repay its advances by a specified time, employers in the State begin to lose the FUTA tax credit in increments of at least 0.3 percent per year. Specifically, if a balance of advances is outstanding on two consecutive January firsts and is not fully repaid prior to the following November 10, the FUTA tax credit applicable for that taxable year for the State's employers is reduced by 0.3 percent. For each succeeding year in which a balance of loans remains outstanding, the reduction is at least an additional 0.3 percent (i.e., 0.6, 0.9, 1.2 percent, etc.). Additional offset credit reductions may apply to a State beginning with the third taxable year if a balance is still outstanding and certain criteria are not met. Under legislation enacted in the 1970s, offset credit reductions wire not imposed for taxable years 1975-1979 for states satisfying specific requirements.
Sections 2406 and 2407 of the Omnibus Budget Reconciliation Act of 1981 (OBRA), P.L. 97-35, made two major changes in loan provisions: interest of up to 10 percent is charged on loans made after April 1, 1982 (except those made for cash flow purposes and repaid by September 30 of the calendar year in which they occur); and States are allowed to cap the automatic FUTA offset credit reduction if certain solvency requirements are met.
Cap of Offset Credit Reduction. In a. State that qualifies for the cap, the offset credit reduction is limited to the higher of 0.6 percent or the rate of reduction that was in effect for the State for the preceding calendar year. The cap provisions are designed to give States additional time to make legislative and administrative changes necessary to restore the State unemployment fund to solvency. These provisions lengthen the repayment period, but do not reduce a State's total liability.
To qualify for the cap on the automatic offset credit reductions 3302(f) of the Internal Revenue Code of 1954, a State must demonstrate that:
the State has taken no action decreasing the State's unemployment compensation (UC) system tax effort;
the State has taken no action by which the net solvency of its UI system has diminished;
the State's average tax rate (on total wages) for the calendar year equals or exceeds its average benefit cost rate (on total wages) for the prior five years, and
the outstanding loan balance as. of September 30 of the tax year in consideration is not greater than on the third preceding ,taxable year (the comparable year for taxable year 1983, however, is 1981) .
Federal law imposes interest of up to 10 percent per year on title XII advances obtained by the States after April 1,1982. Interest is not imposed on advances repaid in full before October 1 of the calendar year in which the advances were made, provided no other advance is made to that State after September 30 during the same calendar year.
The due date for interest payable on advances made during the fiscal year is October 1 of the following fiscal year. For loans made during the months :of May through September, the State may defer payment of the interest until the last day of the following calendar year, i.e., interest clue October 1, 1983, may be deferred to December 31, 1984. A State may, at its option, pay the interest on such an advance earlier than the due date. Interest accrues on the deferred interest as though it were, aqcl in the same manner as, an advance made on the day when payment of the interest would have been due except for the deferral.
Advances made before April1, 1982 remain interest-free.
TEFRA and the Social Security Amendments of 1-983 made changes in the offset credit reduction and interest provisions with respect to loans to States. Briefly,
the offset credit reduction is, not applicable when a State makes certain repayments;
the fifth-year offset credit reduction is limited under certain circumstances;
the offset credit reduction cap/limitation provisions are permanent;
two partial offset credit reductions are provided;
the average employer contribution rate computation for third year offset credit reduction is revised; .
interest due dates are changed;
the imposition of interest is permanent;
additional deferrals of interest payment are provided;
a discounted interest rate is provided; and
a penalty is imposed for failure to pay interest (subject will be covered in a future unemployment insurance program letter).
The above changes are described in detail in sections 4 and 5 below. Explanation of the steps States should take to apply for a cap or partial limitation on offset credit reduction, deferral and delay of interest payment, and a discounted interest rate is provided in section 6 and 7 below.
Offset Credit Reduction Provisions.
Offset Credit reduction Not Applicable When State Makes Certain Repayments
Provious Law. Under section. 3302 (c) of the Internal Revenue Code of 1954, a State repaid its outstanding loans only through the automatic repayment provisions of section 3302(c) of the Internal Revenue Code of 1954 or through voluntary repayments. If a State made a voluntary repayment, but did not fully repay its loans, the automatic offset credit reduction provisions applied.
New Law. Section 272 of TEFRA amended Section 3302 of the Internal Revenue Code of 1954 by adding subsection (g) which gives a State the option of repaying on or before November 9 a portion of its outstanding loans each year through transfer of a specified amount from its unemployment fund to the FUA. The transfer to FUA would be in lieu of an increase in the Federal tax paid by the employers in that State. The State must meet the following criteria in order to avoid the offset credit reduction:
repay all loans for the one-year period ending on November 9, plus the additional tax due by reason of the reduced credit amount;
have sufficient funds remaining after the transfer to pay benefits for at least three months from November 1 of the same year without receiving another title XII advance; and
have taken action to increase the net solvency of its UI system and such net increase equals or exceeds the potential additional taxes for such taxable year.
The amendment is effective for taxable years beginning after December 31, 1982.
Fifth Year Offset Credit Reduction Limited
Previous Law. Under section 3302(c)(2)(C) of the Internal Revenue Code of 1954, a State may be subject to an additional credit reduction if all loans are not-,repaid by the fifth or any succeeding consecutive January first as of which there is a balance of outstanding advances and remain outstanding on the following November 10. The additional credit reduction is equal to the difference between the State's benefit cost rate on taxable wages (or 2.7 percent, whichever is higher) and the State's average employer contribution rate on taxable wages.
New Law. Section 273 of TEFRA added subsection (f)(2)(B) to section 3302 of the Internal Revenue Code of 1954 to allow a State to apply for a waiver of the additional credit reduction imposed bysection 3302(c) (2) (C) (discussed above). The waiver may be granted if a State has taken no action to reduce the net solvency of its UI system during the 12-month period ending on September 30 of the year for which the waiver would be applicable, i.e., meets section 3302(f)(2)(B) of the Internal Revenue Code of 1954. However, the offset credit reduction imposed by section 3302(c)(2)(B) of the Internal Revenue Code of 1954 continues in effect.
The amendment is effective for taxable years beginning after December 31,1982.
Offset Credit Reduction Cap/Limitation Provisions in Present Law Made Permanent
Previous Law. Under section 3302(f) of the Internal Revenue Code of 1954, the offset credit reduction cap or limitation applied only to taxable years 1981 through 1987.
New Law. Section 512(b) of P.L. 98-21 makes the cap on the offset credit reduction provision permanent. The amendment is effective upon enactment.
Two Partial Credit Reductions Provided
Previous Law. There is no provision in previous law for partial caps. To qualify for a full or total cap on the offset credit reduction, a State is required to meet conditions (A) through (D) of section 3302(f)(2) of the Internal Revenue Code of 1954.
New Law. Section 512(a) (1) of Public Law 98 -21 provides two partial limitations on offset credit reduction as follows:
if a State meets the conditions of 3302 (f) (2) (A) and (B) and either (C) or (D), the annual credit reduction would be reduced by 0.1 percentage point from what it otherwise would have been.
if a State meets the conditions of 3302 (f) (2) (A) and (B) and qualifies for interest deferral under section 1202 1202(b)(8)(B) of the Social Security Act, the annual credit reduction would be reduced by an additional 0.1 percentage point, for a total of 0.2 percentage points, from what it otherwise would have been.
The lower credit reductions or partial limitations are authorized only for taxable year 1983, 1984, and 1985 liabilities. A State may qualify for a total cap or a partial reduction of 0.1 or 0.2 percentage points.
Credits earned during this period would be applied in determining the State's offset credit reduction for year after 1985. The January lst of each year for which a State qualifies for a partial limitation on the offset credit reduction will be taken into account for purposes of determining future offset credit reductions.
The amendment is effective upon enactment.
Average Employer Contribution Rate Computation Changed for Offset Credit Reduction for Third and Fourth CONSECUTIVE January Firsts
Previous Law. Section 3302 (c) ('2) (B) of the Internal Revenue Code of 1954 provides that a State may be subject to an additional credit reduction (above the 0.6 percent minimum) if all loans are not repaid by the third consecutive January first on which there is a balance of outstanding advances and remain outstanding on November 10. The additional credit reduction was equal to the amount by which the State's average employer contribution (tax) rate for the calendar year preceding such taxable year was lower than 2.7 percent. The average tax rate was computed from the ratio of State trust fund account revenues collected to State taxable wages. Taxable wages were determined by the taxable wage base in effect in the State. Any wages above the taxable wage base were therefore not included.
In States where the taxable wage base exceeds the Federal taxable base, the ratio of the State's UC revenues to the State's taxable wages would be, lower than it would be if the State taxable wage base were at the Federal taxable wage base. This could have activated the additional credit reduction in the third year in a State that has a relatively higher tax effort.
New Law. Public Law 98-21 changes the calculation under this provision so that all covered wages, instead of just State taxable wages, are considered. Each State's tax rate on all wages subject to taxation under the FUTA is compared to an estimate of the national percentage of all wages, subject to FUTA taxes; that 2.7 percent of taxable wages represents. The 2.7 percent equivalent is calculated as the product of 2.7 percent and the ratio of the Federal taxable wage base to the estimated U.S. average annual wage in covered employment. The ratio of State average annual wages to the Federal taxable wage base converts the difference between the U.S. average tax rate and the State average tax rate based on total wages to a difference based on taxable wages. The equation to determine the effective additional credit reduction, if any, is as follows:
[((.027) x (FTWB)/US AAW) - ST ATRToW] x (ST AAW/FTWB)
FTWB = Federal Taxable Wage Base for the preceding calendar year,
US AAW = US Average Annual Wage for the preceding calendar year,
ST ATRToW = State Average Tax Rate on Total Wages for the preceding calendar year, and
ST AAW = State Average Annual Wage for the.., preceding calendar year.
This amendment is effective for taxable years beginning with 1983.
Interest Due Dates Chanced
Previous Law. Public Law 97-35 required that interest when payable was due and payable no later than October 1 following the Federal fiscal year in which an advance was made, i.e. the interest was due no later than the. first day of the next fiscal year. Specifically, if the next fiscal year fell on a weekend, interest was due in the prior fiscal year. Otherwise, it was due on the first day of the next fiscal year. Under that law it was .possible for a year to lapse with no interest due and payable. For example, interest would be due and payable on September 30, 1983 (FY 1983), .since October 1 falls on a weekend. Interest on FY 1984 loans would be due and payable October 1, 1984 (FY 1985). Hence, no interest would be due in FY 1994.
New Law. Section 514 of Public Law 98-21 amends Section 1202 (b) (3) (A) of the Social Security Act to require payment of interest before the first day of the next fiscal year. The due date for deferred interest on May through September loans remains unchanged (December 31 of the following year) as does the date for interest due by reason of a later advance (i.e., cash flow loans repaid by September 30, followed by later advances).
This amendment is effective upon enactment.
Imposition of Interest Made Permanent
Previous Law. Under P.L. 97-35, interest was imposed on advances to States, (pursuant to title XII of the Social Security Act) made after April 1, 1982, and before January 1, 1988.
New Law. Section 511(b) of Public Law 98-21 amends section 1202(b)(7) of the Social Security Act by striking out "and before January 1, 1988", thereby imposing interest on a permanent basis.
This amendment is effective upon enactment.
Additional Deferrals of Interest Payment Provided
Previous Law. Section 2407 of OBRA amended section 1202(b)(2)_of the Social Security Act to allow a State to defer interest payable only on advances made during May through September. Such interest is payable on the last day of the following calendar year.
High Unemployment Deferral of Interest Payment. Section 274 of TEFRA amended 1202(b) of the Social Security Act to allow a State with high unemployment to defer payment of, and extend the payment for, 75 percent of interest charges due on September 30. The State must pay one-third of the deferred amount in each of the three years following the fiscal year for which it is due. To qualify for this referral and extension of the payment period, the State insured unemployment rate (IUR), as determined for purposes of the Federal-State Extended Unemployment Compensation Act of 1970, must have equaled or exceeded 7.5 percent during the first 6 months of the preceding calendar year.
Section 511(a) and (b) of Public Law 98-21 effected two changes in this type of deferral interest does not accrue on the deferred interest, as originally enacted and the availability of this deferral is permanent, whereas originally enacted it applied to interest accrued before January 1, 1988, since interest did not accrue after that date.
Amendments are effective upon enactment.
Legislative-Action or Average Tax Rate Deferral of Interest Payment. Section 511(a) of Public Law 98-21 amends Section 1202(b) of the Social Security Act to allow another type of deferral. The amendment allows States to defer 80 percent of the interest due for a fiscal year, effective for interest accrued in fiscal years 1983, 1984, 1985. The initial payment of interest, 20 percent of the total amount payable, is due on the required September 30 date. The amount deferred under this provision would be payable in four installments, in each of the succeeding years, equal to at least 20 percent of the original amount of interest due. A State would be required to meet conditions i and ii(A) or ii(B) below to qualify for the deferral.
no action has been taken since October 1, 1982, to reduce the State's tax effort or unemployment fund solvency as determined for purposes of section 3302(f)(2)(A) and (B) of the Internal Revenue Code of 1954 (see the explanation provided in UIPL No. 13-82, Item 4c, Criteria h(1) and (2)); and
(A) action (certified by the Secretary of Labor) has been taken after March 31, 1982, which increases revenues to the State's unemployment fund and decreases benefits by a total of 25 percent in the calendar year for which the first deferral is requested; and, deferral of interest due for the two years immediately following the year in which the first year change is effective may be received if changes of 35 and 50 percent, respectively, are made effective in those years; or
(B) for taxable year 1982, total State unemployment compensation revenues to the unemployment fund equaled at least two percent of total wages paid by employers. covered under the State unemployment compensation law. Interest will not be charged. against any interest for which payment is deferred under this provision or as noted previously under the high unemployment deferral. Interest will continue to accrue on interest deferred for May through September advances. Once a legislative-action deferral is approved, a State must continue to maintain its solvency effort. Failure to do so would result in requirement of immediate payment of all deferred interest.
The amendment is effective far interest accrued during fiscal years 1983, 1984, and 1985.
High Unemolovment Delay of Interest Payment. Section 511(a) of the Social Security Amendments of 1983 amends section 1202(b) of the Social Security Act to allow a State to delay up to nine months the payment of interest due September 30- of any calendar year after 1982 during which the average total unemployment rate (TUR) in the State was 13.5 percent or higher. The average total unemployment rate for a State is computed using the 12 month period for which the most recent information is available prior to~the month in which the interest is due. Interest will not be charged against interest -for which payment is delayed. Any interest delayed is not subject to either further delays or deferrals; the interest is due and payable at the specified time. The amendment is effective upon enactment.
Discounted Interest Rate Provided
Previous Law. There is no provision in previous law for a discounted interest rate.
New Law. Section 511 of Public Law 98-21 allows States to receive a discounted interest rate that would be one peKcentage point below the interest rate that would otherwise apply. It is available to a State which produces a solvency effort of 50, 80, and 90 percent rather than the 25, 35, and 50 percent, respectively, as specified under the legislative-action deferral, section 1202(b) (8) (B) (ii) (I) of the Social Security Act.
Effective for interest accrued only for fiscal years 1983, 1984, and 1985.
Application for Total Cap and Partial Limitations on Offset Credit Reduction
Total Cap. The Governor of a State wishing to apply for a cap on offset credit reduction under section 3302(f) of the Internal Revenue Code of 1954 shall submit a request to that effect to the Secretary of Labor by July 1 of the year-for which a cap is sought. The request should include the information specified in UIPL No. 13-82, item 4d, beginning on page 8. The Secretary of Labor will determine the proper amount of offset credit reduction as of November 10 and. notify the Governor and the Secretary of the Treasury of his findings. Such findings will be published in the Federal Register.
Partial Limitation. The Governor of a State wishing to apply for a partial limitation on offset credit reduction under section 3302(f)(8)(A) of the Internal Revenue Code of 1954 shall submit a request as specified for a total cap. To apply for a partial cap under section 3302(f) (8) (B) of the Internal Revenue Code of 1954, the Governor shall submit a request as specified for legislative-action or average tax rate deferral of interest payment (see following section 7). The Secretary of Labor will determine the proper amount of offset credit reduction as of November 10 and notify the the Governor and the Secretary of the Treasury of his findings. Such findings will be published in the Federal Register.
Repayment by Transfer of Funds. The Secretary of Labor may require a State to furnish such information at such time and in such manner as may be necessary to determine if the State meets the requirements of 3302 (g) of the Internal Revenue Code of 1954 to avoid an offset credit seduction.
Application for Deferral and Delay of Interest Payment and Discounted Interest Rate.
High Unemployment Deferral of Interest Payment. The Governor shall submit to the Secretary of Labor a request for a deferral under this provision by July 1 of the fiscal year for which the deferral is requested. The Secretary of Labor. will make the determination based on weeks claimed and covered employment data previously submitted by all States for the purpose of determining the status of the extended benefit program. The Secretary of Labor will notify the Governor of his determination within 30 days of receipt of the request for deferral.
Legislative-Action...Deferral of Interest Payment. The Governor may request a certification under these provisions at any time after State legislation is enacted. However, application for legislation enacted on or before June 30 of the year in which a deferral or discount is requested must be received by the Secretary of Labor no later than July 1 of the request year or within 30 days of enactment, whichever is later. For legislation not enacted by July 1, a preliminary application must be received by the Secretary of Labor by July 1 indicating the most likely options to be adopted if legislation is enacted. Notification of final action must be received within two working days of final enactment, but no later than September 10 of the request year in order to allow certification by September 20 of the request year.
To determine whether a State meets the conditions for a legislative-action deferral,. the Secretary of Labor will provide by June 1 quarterly estimates of the IURs for all States for the base year, the calendar year in which the deferral is requested. A State requesting a deferral or discount, will determine the level of benefits and revenues to the unemployment fund using the State IURs and the State law in effect before passage of the legislation. The cost estimate of changes as a result of new legislation will be made from the base year for each year for which a deferral is requested. Changes in State law which provide for automatic increases in benefit amounts, i.e., an escalating maximum weekly benefit amount prior to March 31, 1982, will be considered as if they were in effect in the base year for purposes of determining the change occurring as a result of new legislation. The Secretary of Labor may use historical growth rates for indexed items when considered appropriate. The Secretary of Labor may request additional data as required in order to make the necessary determination.
Increases in the taxable wage base from $6000 to $7000 after calendar year 1982 and increases in the maximum FUTA taxrate to 5.4 percent after calendar year 1984 will not be considered for purposes of meeting criteria for a legislative-action or an average tax rate deferral, section 1202(b)(8)(B) of the Social Security Act.
States will not be penalized or rewarded if economic events change from those used in the base year for determining eligibility for legislative-action or average tax rate deferral, section I202(b)(3)(B) of the Social Security Act.
Specifically, the Governor should submit with the request, an analysis of each legislative change which has a revenue or outlay impact. The analysis should include, but is not limited to:
a brief description of each change,
a brief description of. any interrelated effects of the change which could have additional impact on
outlays or unemployment fund revenues,
the anticipated impact on unemployment fund revenues and outlays for each change for each year for which a deferral is requested,
all necessary data used to support the estimates provided, including:
the most recent actual data related to the change;
any assumptions made and the rationale for each assumption;
the effective date and termination date (if any) for each change.
Average Tax Rate Deferral of Interest Payment. If a Governor wishes to request this type of deferral, the State should submit contributions, taxable wages, and total wages, as specified in items (1) through (3) under the heading "For Criterion b.(3)&qout; beginning on page 10 in UIPL No. 13-82. For legislative-action and average tax rate deferrals, requests received by August 1 will be processed within 45 days. Applications received after August 1 will be processed by September 20. Applications must be received by September 10 in order for the Secretary of Labor to complete the certification process and notify the Governor and the Secretary of the Treasury of the determination by September 20. If the initial request is incomplete and the Secretary of Labor requests additional information, the determination by the Secretary may be delayed.
High Unemployment Delay of Interest Payment. The Governor shall submit to the Secretary of Labor by September 1 of the year for which the delay is requested, a written request of intention to delay .payment of interest because of high unemployment (13.5 percent TUR).
The Secretary of Labor shall notify the Governor of his decision within 15 days of receipt of the request, but in no case before September 15 (the earliest date on which the required information for determination is available) of the year of the request. The 12 month average State TUR will be based on the most recently benchmarked data available from the Bureau of Labor Statistics.
Discounted Rate of Interest. The Governor of a State wishing to apply for a discounted rate of interest under section 1202(b)(8)(D) of the Social Security Act shall submit a request as specified under the legislative-action deferral of interest payment (see above). The Secretary of Labor stall notify the Governor of his decision in the same manner as indicated under the legislative-action deferral noted above.
OMB Approval. The timing of the changes in the Internal Revenue Code of 1954 and the Social Security Act did not allow for prior office of Management and Budget (OMB) clearance under the Paperwork Reduction Act of 1980. However, immediate dissemination of this information is imperative. OMB approval is being sought and States will be notified once this approval has been obtained.
Action Required. Administrators shall advise their Governors of the requirements necessary to secure a cap or partial cap on offset credit reductions, deferral and delay of interest payments, and a discounted interest rate.
Inquiries. Direct inquiries to the appropriate regional office.