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U.S. DEPARTMENT OF LABOR
Employment and Training Administration
Washington, D. C. 20210

CLASSIFICATION

UI

CORRESPONDENCE SYMBOL

TEU

ISSUE DATE

December 31, 1991

RESCISSIONS

None

EXPIRATION DATE

December 31, 1992

DIRECTIVE

:

UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 11-92

 

TO

:

ALL STATE EMPLOYMENT SECURITY AGENCIES

 

FROM

:

DONALD J. KULICK
Administrator
for Regional Management

 

SUBJECT

:

Payment of Interest from a State Unemployment Fund

  1. Purpose. To advise State agencies of the Department of Labor's position on payment of interest from a State unemployment fund.

  2. References. Sections 303(a)(1), (4) and (5) of the Social Security Act (SSA); Sections 3304(a)(3) and (4), and 3306(f) and (h) of the Federal Unemployment Tax Act (FUTA); and UIPL 25-89.

  3. Background. Over the years, questions have arisen concerning whether refunds of contributions or retroactive payments of unemployment benefits may also include payments of interest from a State unemployment fund. This UIPL is issued to advise States of the Department of Labor's position on the payment of interest from the unemployment fund. Because this matter also involves a determination as to whether such interest could be considered to be "sums erroneously paid" into the unemployment fund, the term "sums erroneously paid" is also interpreted.

    As part of the development of this UIPL, the Department reviewed the advice it had provided States concerning interest payments from the unemployment fund. The Department found that in the majority of cases, the States had been advised that any payment of interest would conflict with Federal law requirements. However, in several cases involving court orders requiring payment of interest on late benefit payments to claimants, the Department took the opposite position. In these cases, the Department advised that interest could be paid from the unemployment fund as long as the interest payment did not exceed the amount of interest earned in the fund. This UIPL resolves these conflicting positions and hereafter restricts payment of interest from a State unemployment fund solely to a refund of interest "erroneously paid into such fund." This UIPL does not address whether interest may be paid from funds granted under Title III, SSA, for the administration of a State's unemployment compensation law.

  4. Federal Law Requirements. The relevant Federal law requirements are as follows:

    1. Section 3304(a)(3), FUTA, requires, as a condition of employers in a State receiving credit against the Federal unemployment tax, that an approved State law shall provide that:

      all money received in the unemployment fund shall (except for refunds of sums erroneously paid into such fund . . .) immediately upon such receipt be paid over to the Secretary of the Treasury to the credit of the Unemployment Trust Fund . . . .

      Section 303(a)(4), SSA, contains the same requirement as a condition for receiving administrative grants.

    2. Section 3304(a)(4), FUTA, requires, as a condition of employers in a State receiving credit against the Federal unemployment tax, that an approved State law shall provide that:

      all money withdrawn from the unemployment fund of the State shall be used solely in the payment of unemployment compensation, exclusive of expenses of administration, and for refunds of sums erroneously paid into such fund . . . .

      Section 303(a)(5), SSA, contains the same requirement as a condition for receiving administrative grants.

    3. Section 3306(f), FUTA, defines "unemployment fund," in pertinent part, as:

      a special fund, established under a State law and administered by a State agency, for the payment of compensation . . . An unemployment fund shall be deemed to be maintained during a taxable year only if throughout such year . . . no part of the moneys of such fund was expended for any purpose other than the payment of compensation (exclusive of expenses of administration) and for refunds of sums erroneously paid into such fund . . .

    4. Section 3306(h), FUTA, defines the term "compensation" as "cash benefits payable to individuals with respect to their unemployment."

    5. Section 303(a)(1), SSA, requires, as a condition for receiving administrative grants, that a State law include provision for:

      Such methods of administration . . . as are found by the Secretary of Labor to be reasonably calculated to insure full payment of unemployment compensation when due.

  5. Discussion. Since the inception of the unemployment insurance program, the Department and its predecessor agencies have interpreted the above provisions as requiring that withdrawals from the unemployment fund must be limited to payments of compensation, i.e., cash benefits payable to individuals with respect to their unemployment. A withdrawal may fail to meet the definition of compensation for one of several reasons: it is not a cash benefit; it is not payable to an individual; or it is not paid with respect to the individual's unemployment. Regardless of the reason, an exception to this requirement is allowed only as permitted or required under Federal law.

    In a December 16, 1988, decision in a conformity proceeding involving the State of Minnesota, the Secretary of Labor affirmed the Department's position on an issue concerning withdrawals from a State's unemployment fund. (See UIPL 25-89, dated April 5, 1989 (54 FR 22973 (May 30, 1989)). In that decision, the Secretary adopted the Administrative Law Judge's Recommended Decision. In discussing Section 303(a)(5), SSA, and Section 3304(a)(4), FUTA, the Administrative Law Judge noted that:

    Congress itself has defined the only exceptions to the fundamental requirements of the legislation. SSA and FUTA neither explicitly nor implicitly authorize either the Secretary or the individual States to modify or augment those exceptions. The pertinent legislative history buttresses this restrictive view. . . .

    In sum, States may neither withdraw amounts for payments which are not "compensation," nor may States restrict withdrawals so that an individual does not receive the full amount of compensation to which he or she is entitled, unless a clear and unambiguous exception is found in the Federal law.

    Of the several exceptions in Federal law to the requirement that withdrawals from the unemployment fund be used solely for the payment of "compensation," only one is relevant to whether amounts may be withdrawn for the payment of interest. This exception pertains to amounts erroneously paid into the unemployment fund and is discussed below.

    1. Payment of interest on benefits. Although the payment of interest on benefits may be intended to make whole the claimant, such payment is not a payment of compensation. The payment is not made with respect to the individual's unemployment, but instead with respect to a delay in the payment of compensation. Therefore, interest on late payments of compensation may not be paid from the fund. This interpretation is consistent with the restrictive nature of the Federal law provisions discussed above; if there is to be an exception, it must be clearly specified in Federal law.

      In addition, the payment of interest is a cost of administration related to the proper determination of a claim for benefits. The Federal law provisions cited above expressly prohibit payments from the fund for "expenses of administration."

    2. Payment of interest on refunds. Federal law provides for the "refund of sums erroneously paid into" a State's unemployment fund. (Sections 3304(a)(3) and (4), FUTA, Section 3306(f), FUTA, and Sections 303(a)(4) and (5), SSA.) The term "erroneously paid" means that some error has been made, either by the employer or his agent (e.g., a miscalculation in amount due) or the agency (e.g., an incorrect rate assignment) which results in money being paid into the fund which was not required by law to be paid. Any amount properly paid into the fund under the law in effect at the time of the payment is not an erroneous payment because no error was made.

      This exception applies only to "sums erroneously paid into" the fund. This means no amount in excess of the sum actually paid in error into the fund may be refunded. Therefore, interest on an erroneous payment may not be paid from the unemployment fund under this exception.

      It should be noted that, if interest is erroneously paid into the unemployment fund, the interest erroneously paid into the fund may be refunded. This might occur in those few States which require penalty and interest to be paid into the unemployment fund. However, the amount that may be refunded is limited solely to the amount actually paid into the unemployment fund in error.

  6. Interpretation. Provisions of Federal law relating to the withdrawal of money from the unemployment fund are interpreted as follows concerning the payment of interest from the fund and refunds of sums erroneously paid into the fund:

    1. Payments of Interest on Benefits. Moneys may be withdrawn from the fund only for cash payments to individuals with respect to their unemployment except as specifically provided for in Section 303, SSA, or Section 3304(a), FUTA. Interest on benefit payments to claimants is not "compensation" but is an administrative expense, and therefore may not be paid from the fund.

    2. Payments of Interest on Refunds. Amounts may be withdrawn from a State unemployment fund to refund sums erroneously paid into the fund. Sums are "erroneously paid" into the fund only if an error is made by the employer, his agent or the State agency which results in an amount being paid into the fund which was not required by the State law in effect at the time the payment was made. Interest on an erroneous payment does not represent a sum "erroneously paid into" the fund. However, an amount equal to any interest erroneously paid into the unemployment fund may be refunded; interest erroneously paid into another State fund may under no circumstances be refunded from the unemployment fund.

  7. Action. State agency administrators are requested to review existing State law provisions involving the payment of interest to ensure that Federal law requirements as set forth in this program letter are met. Prompt action, including corrective legislation, should be taken to assure Federal requirements are met.

  8. Inquiries. Please direct inquiries to the appropriate Regional Office.