Solvency tax to hit Michigan Jan 1

December 17, 2008
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The solvency tax is back in Michigan after a long hiatus. Employers across the state of Michigan have been receiving letters notifying them of the tax, which becomes effective Jan. 1.

The tax only affects “negative balance” employers — those that “have had to pay unemployment taxes for five consecutive years, and have a negative balance in their experience account as of June 30 of the preceding calendar year,” according to the Beene Garter Web site tax update.

“It’s a tax that the Unemployment (Insurance) Agency imposes only on certain employers … employers whose employees or former employees have, in effect, drawn out from the system more than the employer has paid in,” said Rob Dubault, a partner with Varnum who specializes in labor and employment.

“It only kicks in during time periods where the state has to borrow money from the federal government to pay unemployment compensation claims, and when the balance in the state unemployment trust fund is less then the loans taken from the federal government.”

The trust fund Dubault mentions was marked at $177 million in unpaid federal loans as of June 30, 2008.

The percentage of Michigan businesses that fall into that category is approximately 15 percent, around 40,000 employers.

“According to the Unemployment (Insurance) Agency’s own statistics, 85 percent of the employers are at least not negative balance employers. But that being said, they have had employees that have taken a lot out of the system, just not more than they’ve paid in,” said Dubault.

Employers can correct their solvency tax issues by making a voluntary payment equal to what they owe by June 30 of next year. Otherwise, they will have to pay a tax rate of $67.50 for every employee currently on the payroll.

“Each employer would have to look at it and say, ‘Are we going to pay more in, based on the solvency tax rate ($67.50), than we’re actually in the hole?’ If they are, they may want to look at that and pony up. I would imagine that many of these businesses that find themselves in this situation are a little bit strapped for cash.”

Dubault said the federal government recently authorized money for extended unemployment benefits of up to an additional 12 to 13 weeks for certain employees depending on the circumstances.

“If anything, that could just cause the state of Michigan to go further into the hole and have to borrow more money from the federal government. I think that’s an indication that this solvency tax could be around for some period of time,” said Dubault. “I don’t believe that the fact we have a new president will impact us significantly over what we’ve seen already.”

Hope for Michigan to climb out of the solvency tax is, of course, a rise in employment. Dubault said the state’s unemployment rate was around 9.3, tied for the highest rate in the country.

Claude Titche, a partner at Beene Garter, expanded on the importance of the unemployment rate.

“As long as we have high unemployment, companies are going to have this negative account, and therefore the state is subject to paying interest on this loan. And until we get higher employment to where people no longer have negative balances, we’re going to have this solvency tax,” he said. “A lot of other states are falling into this same thing, so the feds may change the rules at some point.”

Dubault has worked with many companies that have restructured their work force in one way or another to fight the strain of the current economic downturn.

“I have worked with a number of employers lately who have been taking steps to manage their work forces, and sometimes that’s adjusting schedules, reducing hours, cutting overtime, and also a number of employers are engaging in layoffs, whether they’re temporary or permanent,” said Dubault.

“I imagine this is going to be something we’re going to see continue on for at least some period of time. Hopefully things will turn around in pretty short order here, maybe after the first of the year, and we’ll be back out of this situation and on the road to some better times.”

Titche summed up the situation: “We just have to get the economy going and get employment in the state of Michigan to increase so that we get the balance that we’ve borrowed paid back and we’re more pay-as-you-go on this unemployment coverage.”

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