Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF): Funding UC Benefits

Summary

This report provides a summary of how Unemployment Compensation (UC) benefits are funded through the Unemployment Trust Fund (UTF). The UTF in the U.S. Treasury is designated as a trust fund for federal accounting purposes. Although the UTF is a single trust fund, it has 59 accounts: the Employment Security Administration Account (ESAA), the Extended Unemployment Compensation Account (EUCA), the Federal Unemployment Account (FUA), 53 state accounts, the Federal Employees Compensation Account (FECA), and two accounts related to the Railroad Retirement Board.

Federal unemployment taxes are credited to the ESAA; each state's unemployment taxes are credited to the state's unemployment account. Federal taxes pay for administration grants to the states. State unemployment taxes are dedicated to pay for regular UC benefits. The extended benefits (EB) program is funded 50% by the federal government and 50% by the states.

The Unemployment Compensation Program

Unemployment Compensation (UC) is a joint federal-state program financed by federal taxes under the Federal Unemployment Tax Act (FUTA) and by state payroll taxes under the State Unemployment Tax Acts (SUTA). The underlying framework of the UC system is contained in the Social Security Act (SSA). Title III of the SSA authorizes grants to states for the administration of state UC laws; Title IX authorizes the various components of the federal Unemployment Trust Fund (UTF); and Title XII authorizes advances or loans to insolvent state UC programs.

If a state UC program complies with all federal rules, the net FUTA tax rate for employers is 0.6% on the first $7,000 of each worker's earnings. The 0.6% FUTA tax funds both federal and state administrative costs as well as the federal share of the Extended Benefit (EB) program, loans to insolvent state UC accounts, and state employment services. Federal law defines which jobs a state UC program must cover for the state's employers to avoid paying the maximum FUTA tax rate (6.0%) on the first $7,000 of each employee's annual pay.

Congress first passed a temporary FUTA surtax in 1976, and since 1983 this surtax had been applied as 0.2% on the first $7,000 of employee wages until July 1, 2011.¹ As of July 1, 2011, the authorization of the FUTA surtax lapsed. Thus, since July 1, 2011, the effective FUTA tax on employers for each employee is 0.6% (a decrease from 0.8%) on the first $7,000 of wages.

States levy their own payroll taxes on employers to fund regular UC benefits and the state share of the EB program. The SUTA tax rate of an employer is, in most states, based on the amount of UC benefits paid to former employees. Generally, the more UC benefits paid to its former employees, the higher the tax rate of the employer, up to a maximum established by state law.

The UTF is designated, by law, as a trust fund in the U.S. Treasury. The designation as a trust fund is a federal accounting mechanism to directly link revenues and distributions connected to the UC programs. The UTF accounts include the Employment Security Administration Account (ESAA), the Extended Unemployment Compensation Account (EUCA), the Federal Unemployment Account (FUA), 53 state accounts,² the Federal Employees Compensation Account (FECA), and two accounts related to the Railroad Retirement Board.³ Federal unemployment taxes are credited to the ESAA; each state's unemployment taxes are credited to the state's unemployment account. Federal taxes are dedicated to pay for UC administration grants to the states—including administration of the EB program—and the federal share of EB. State taxes are dedicated to pay for regular UC benefits and the state share of EB. Typically, the EB program is funded 50% by the federal government and 50% by the states, however, P.L. 111-5, as amended, temporarily provided for 100% federal funding of EB from February 22, 2009, through December 31, 2013.⁴

In addition to any EUCA distribution, the FUA is credited with the additional taxes paid by employers when a reduced credit against federal taxes exists because the state has an outstanding unpaid loan from FUA. FUA funds are distributed as loans to states, through the state unemployment accounts. (See the discussion below on "Loans to Insolvent Accounts" for a more detailed explanation of these loans.) The FUA balance is limited to the maximum of $550 million or 0.5% of covered wages. At the end of FY2013, the estimated net FUA balance was an estimated $11.27 billion ($8.42 billion owed to the general fund of the Treasury, $19.96 billion borrowed by the states, and $0.4 billion owed to ESAA/EUCA, and an end of year cash balance of $0.13 billion). The balance was lower than the $25.11 billion ceiling and so no Reed Act transfer occurred.

Distributions are made to the state unemployment accounts from the FECA to reimburse the states for employment compensation paid to former federal employees. Each federal agency reimburses the UTF for its share of federal workers' UC benefits.

At the end of the fiscal year, there is a limitation on the balance in the ESAA—the account balance cannot exceed 40% of the prior fiscal year's appropriation by Congress. If the balance in the ESAA exceeds this limitation, the excess is distributed to EUCA. After the distribution, if the balance in the EUCA exceeds the limitation, the excess is distributed to the FUA. If after the distribution from the EUCA, the FUA balance exceeds the limitation, the excess is distributed, as a Reed Act distribution, to the states.⁹ At the end of FY2013 there was no Reed Act distribution.

The Treasury can write checks for a state unemployment account, provided that legal spending authority exists for such spending if the state unemployment account has a positive balance. During the most recent recession, current taxes and reserve balances were insufficient to cover expenditures for UC benefits.¹⁰ Many state unemployment accounts required and/or continue to require "loans" to pay for state UC benefits.

The state unemployment accounts can borrow from the FUA. If states do not increase their SUTA taxes to repay the loan, federal law requires that the principal of the loan is repaid by reducing federal tax credits for SUTA taxes and crediting those increased revenues to the FUA.¹¹ The state cannot pay the interest on such loans using the state unemployment account but must pay the interest through state general revenues or other measures.

Federal law also authorizes appropriations if balances in the federal accounts are insufficient to cover their expenditures. For example, if the states' borrowing needs exceed the available FUA balance, Congress is authorized to appropriate additional spending authority to cover the amount needed. Such appropriations require discretionary action by Congress and the President. Since FY2009, the FUA has had to borrow funds from the Treasury in order to loan funds to the state accounts.

Source: Figures prepared by the Congressional Research Service (CRS).

Footnotes

P.L. 94-566 first imposed the 0.2% surtax, increasing the net FUTA tax from 0.5% to 0.7% on the first $6,000 of earnings. The surtax was to be eliminated when all advances to the states had been repaid. P.L. 97-248 extended the surtax (increasing the net FUTA tax from 0.6% to 0.8%, on the first $7,000 of earnings) until the EUCA (Emergency Unemployment Compensation Account dedicated to funding the extended benefit program) loans were repaid. P.L. 100-203 extended the 0.2% surtax for three years—until January 1991. P.L. 101-508 extended the surtax for five years—until January 1996. P.L. 102-164 extended the surtax for an additional year—until January 1997. P.L. 103-66 extended the surtax for an additional two years—until January 2000. P.L. 105-34 extended the surtax for an additional nine years—until January 2008. P.L. 110-140 and P.L. 110-343 each extended the surtax for one additional year. P.L. 111-92 extended the authorization of the FUTA surtax through June 2011.

The District of Columbia, Puerto Rico, and the Virgin Islands are considered to be states under federal UC law.

For the purposes of this report, the Railroad funds will be ignored.

P.L. 111-5, as amended, also included a change in the financing structure of the Emergency Unemployment Compensation program (EUC08); P.L. 111-5 had EUC08 benefits paid by the general fund of the Treasury (previous to the enactment, the benefits were paid out of the federal accounts within the UTF). P.L. 111-5, as amended, also created the temporary $25 weekly Federal Additional Compensation (FAC) benefit, which was paid by the general fund of the Treasury and not by the UTF. The authorization for the FAC expired on June 2, 2010.

All revenues associated with UC are deposited to the U.S. Treasury, and all UC distributions (payments) are made by the U.S. Treasury. The revenues and distributions made by the U.S. Treasury are linked to the different UC programs and purposes through the federal accounting mechanism of the UTF and its separate accounts.

This differs from funds from the taxation of Social Security benefits where the revenue is used to support the Social Security and Medicare programs.

With the passage of P.L. 111-5, the EUC08 program was 100% financed by the federal government through general funds within the U.S. Treasury until EUC08 authorization terminated in December 2013.

P.L. 105-33 increased the statutory ceiling on the FUA from 0.25% to 0.5% of covered wages, effective October 1, 2001. P.L. 102-318, had lowered the FUA from 0.625% to 0.25% and increased the ceiling for EUCA from 0.375% to 0.5%. P.L. 100-203, had raised the EUCA ceiling from 0.125% to .375% and increased the FUA ceiling from 0.125% to 0.625%.