Surprise Unemployment Tax Jumps

February 21, 2003
| By Katy Rent |
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GRAND RAPIDS — Business owners are aware of the unemployment tax, and some may be aware that the legislation changed in January. But what does that mean to employers?

It was, for some, a rather unexpected surprise that came in the form of an increase in the unemployment tax rate. Three little lines in the legislation and the way businesses pay the unemployment tax rate have changed. What makes it worse is that many employers may not have been expecting or planning for part of the increase.

To break it down, the unemployment tax rate has three components. There is a flat 1 percent Non-Chargeable Benefits Component (NBC), which is a true tax. The second component is the Chargeable Benefits Component (CBC), which is calculated based on actual unemployment claims against the employer over the last five years. If a company experiences significant layoffs, it expects the rate to go up.

“If you had claims, and layoffs, that kind of turnover, your rate is going to go up. We understand that. You pay that CBC based on your history. It is almost like the insurance company. If you have cracked your car up a few times, you pay a higher premium,” said Doug Van Der Aa, tax manager with Hungerford, Aldrin, Nichols & Carter. “And we expect that in unemployment.”

However, businesses with a stable workforce and no layoffs are unexpectedly seeing the 2003 unemployment tax rates go up due to a change in the Account Building Component (ABC), the third component.

Van Der Aa said that while the CBC is looking backward at the company’s history, the ABC is looking forward. He added that the state has a formula that sets an amount to be paid based on a business’s payroll and how many employees it has. The formula says the business has to build up a pot of money, to be put on deposit with the unemployment bureau, as a reserve against future claims.

This has been determined, since 1998, by computing the difference between the required reserve and actual reserve with the state and dividing the number by 12 months of total payroll, Van Der Aa said.

That number is then multiplied by 25 percent, with the businesses paying 25 percent each year, effectively giving the business four years to build up the account to the required reserve amount.

The one tiny detail the Bureau of Workers’ and Unemployment Compensation forgot to mention on its Web site, among all of the other changes, was that the State of Michigan has now changed the multiplier from 25 percent to 50 percent.

Oops.

Van Der Aa said the legislature was worried about the solvency of the unemployment fund so in a bill last spring, former Gov. John Engler signed into effect this new piece of legislation.

It’s a piece that Van Der Aa noted requires a special decoder ring to understand. And by searching the Legislature’s Public Acts of 2002, Act No. 192 of 2002 can be found. Section 19 (4) of the bill contains that troublesome language but does in fact change the ABC multiplier from 25 percent to 50 percent.

What this in effect does is decrease the amount of time a business has to build up the “war chest.”

If the statewide unemployment “war chest” has a balance of less than 50 percent of the cumulative targeted reserve, every business has to quicken its account building pay-in from a four-year spread to a two-year spread.

“It has nothing to do with your performance, but when the big boys lay off 1,000 employees, every employer in the state has to double the rate of their account building pay-ins. And that is the surprise,” said Van Der Aa. “We have a lot of clients for whom business has not been good but they are stable, they are treading water and haven’t had turnover. Particularly service businesses, dentists, those kinds of folks, they haven’t had turnover and haven’t had claims, but all of a sudden their rate jumped up and this is why.”

In essence, Van Der Aa said, this is a real kick in the teeth for those businesses that are treading water — and the bad news just keeps coming.

Not only do businesses have to come up with the same amount of money in half the time, the payment is also front-loaded. Van Der Aa explained that businesses pay unemployment on the first $9,000 paid to an employee in the year, which means the business has to pick up this extra tax or payment in the first three to six months of the year.

“When people come out of the recession, and we think the economy is going good and people will add more employees, as they increase their payrolls, they have to build up that reserve, double as fast in two years,” said Van Der Aa. “That is a disincentive to hire people back. I understand they were protecting the solvency of the unemployment fund, but it is tough on employers, and I am not sure it is good economic policy.”

In addition, there isn’t anything Van Der Aa or his counterparts in the accounting industry can do to help these businesses. The best advice he can give, he said, is to review the calculations, check to make sure that the claims history that has been assigned, in terms of the CBC, is correct and that the calculation of the reserve is correct.

“Basically double check, and hopefully this will also explain to a lot of employers what has happened to them. This is not a reflection of them or of their experience rating, it is just something that the legislature has given to us,” said Van Der Aa. “Beyond that, I am powerless and I offer my condolences.”           

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