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What UI Taxes Do Employers Pay?

Employers fund the UI system through federal and state taxes. Federal taxes under the Federal Unemployment Tax Act, 26 USC § 3301 et seq., sets a standard rate of 6% of the first $7,000 paid during a calendar year. Employers receive a tax credit of up to 5.4% of the state tax paid on the federal UI tax for an effective rate of 0.6% if they make timely payments on their state taxes.

DUA levies a tax on the first $15,000 of employee wages of every employer covered under the Unemployment Insurance Law, G.L. c. 151A, § 14(a). The tax rate is based in part on the employer’s experience rating—the calculation of an employer's average number of employees whose employment ended during the past three years who subsequently received UI.

The employer’s tax rate is also based in part on the statutory rate schedule in effect for Massachusetts employers. The schedule is designed to automatically increase employer assessments if the UI Trust Fund balance falls too low in relation to UI claims. G.L. c. 151A, §14. Schedules are denoted by a letter (A – G) with higher letters signifying higher overall tax rates. Notwithstanding the purpose of the employer rate schedule to maintain a sufficient balance in the UI Trust Fund automatically, the legislature has frequently intervened to set a rate lower than the schedule calls for.

Federal regulations now require states to meet several new standards for interest-free federal advances taken during the first five months of a calendar year and repaid in the fall. See 75 Fed. Reg. 57146 (9/17/10) codified at 20 CFR Part 606.  Free federal advances are only available if in at least one of the five years prior to the calendar year the advances are taken, the trust fund reserves are equal to an average high cost multiple solvency measure. The measure is phased in over five years from a multiple of .50 for 2014, .60 in 2015 up to 1.0 for advances in 2019.

The Average High Cost Multiple (AHCM) is computed based on the average benefit cost rate for the three highest years in the last twenty or the last three recessions. At the beginning of 2020, Massachusetts’ AHCM was 0.4% reserve ratio, ranked 46th nationally. See Unemployment Insurance Trust Fund Report, February 2020, available at https://oui.doleta.gov/unemploy/docs/trustFundSolvReport2020.pdf Because the Trust Fund balance was insufficient to withstand even a mild recession without going into debt, Massachusetts had to borrow more than $2 billion to pay for UI claims during the pandemic. See KPMG, Unemployment Insurance Trust Fund Reconciliation Project Summary Report, (12/31/2021), https://www.mass.gov/doc/kpmg-ui-trust-fund-reconciliation-project-summary-report/download.

In 2020, and again in January 2021, the Governor filed An Act Financing a Program for Improvements to the Unemployment Insurance Trust Fund and Relief to Employers in the Commonwealth. The legislation was enacted as Chapter 9 of the Acts of 2021. This legislation provided rate relief to employers of the Commonwealth, ensured that the Trust Fund was sufficiently solvent to continue funding benefits for Massachusetts workers, and established a mechanism to repay federal borrowing. In exchange for a freeze on rates and other relief directed at employers, the bill explicitly protected the amount and duration of benefits.

A Senate amendment to the legislation created the UI Commission. The Commission is tasked with studying the long-term solvency of the UI trust fund, including evaluating whether changes are needed to the experience rating system to promote solvency and increase equity for small businesses, increasing or indexing the taxable wage base, industry specific impacts on changes to the unemployment tax rate, reviewing solvency efforts in other states, and determining changes needed to benefit from federal tax credits and federal interest-free borrowing. In December 2021, the Commission filed an interim report, but has not issued its final report including its recommendations to the legislature.

Taxes are assessed against employers in inverse chronological order of the individual’s base period employment, up to 36% of the individual’s wages with that employer.  G.L. c. 151A, §14(d)(3). Certain costs are not charged to an insured employer but rather to the solvency account. These costs include dependency allowances, extended UI benefits to participate in training, leaving for urgent, compelling and necessitous reasons, due to domestic violence, or to accept new employment that the claimant leaves for good cause attributable to the new employer and separations during the base period from employers who were not the claimant’s employer during the last eight weeks of employment before applying for UI.  Id.

The experience rating was designed to encourage employers to keep people on the payroll. One negative consequence, however, is that it gives the employer a financial incentive to argue that claimants should be denied UI benefits, in order to keep the employer's experience rating low. Certain nonprofit and government employers can self-insure, i.e., they opt out of paying these taxes and instead reimburse DUA for the actual benefits paid to their former employees. Reimbursable employers are not relieved of charges for any reason. G.L. c. 151A § 14A (f). Consequently, these employers may contest claims even more vigorously than employers who pay the taxes, because they have to reimburse UI payments including payments charged to the solvency fund on a dollar-for-dollar basis.