Order Code RS22077
Updated January 31, 2008
Unemployment Compensation (UC) and
the Unemployment Trust Fund (UTF):
Funding UC Benefits
Julie M. Whittaker and Christine Scott
Domestic Social Policy Division
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), and
the Federal Unemployment Account (FUA), 53 state accounts, the Federal Employees
Compensation Account (FECA), and 2 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 and half of extended UC benefits. State
unemployment taxes are dedicated to pay for regular UC benefits and half of extended
UC benefits. This report will be updated as legislative activity warrants.
The Unemployment Compensation (UC) 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.
Federal Unemployment Tax Act. If a state UC program complies with all
federal rules, the net FUTA tax rate for employers is 0.8% on the first $7,000 of each
worker’s earnings. The 0.8% 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

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program must cover for the state’s employers to avoid paying the maximum FUTA tax
rate (6.2%) on the first $7,000 of each employee’s annual pay.
Expiring Provision: P.L. 110-140. On December 19, 2007, the President signed
P.L. 110-140. Among many other items, P.L. 110-140 includes a one-year extension of
0.2% FUTA surtax. At the end of CY2008, the effective FUTA tax on employers for
each employee will decrease to 0.6% (down from 0.8%) on the first $7,000 of wages.
SUTA taxes are not directly affected by the expiring provision.
State Unemployment Tax Acts. 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 Unemployment Trust Fund
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), and the Federal Unemployment Account (FUA), 53 state accounts,1
the Federal Employees Compensation Account (FECA), and two accounts related to the
Railroad Retirement Board.2 Federal unemployment taxes are credited to the ESAA; each
state’s unemployment taxes are credited to in the state’s unemployment account. Federal
taxes are dedicated to pay for UC administration grants to the states and half of extended
UC benefits. State taxes are dedicated to pay for regular UC benefits and half of
extended UC benefits.
Although the UTF contains 59 separate accounts (often referred to as book accounts)
to attribute and distribute the monies appropriately based on program purpose, the UTF
is a single trust fund. The use of separate accounts means that revenues and distributions
are directly linked to UC program purpose. The use of a single trust fund (the UTF) for
all UC programs permits a balance to carry over surplus spending authority to subsequent
years. The balance represents reserve spending authority available in addition to the
spending authority provided by the automatic appropriation of current tax receipts. This
reserve spending authority is used during recessions when UC outlays exceed UTF tax
revenues; that is, when current spending exceeds current receipts. Like many of the
UTF’s other transactions, the balance is effectively a bookkeeping entry.
The Unemployment Trust Fund and the Federal Budget. All UC tax
receipts and outlays for benefits and administration flow through the Treasury, and thus
affect federal revenue, outlays, and the overall financial position (deficit or surplus) of
the federal government. The UTF accounts for all UC financial transactions. This
accounting device (designation as a trust fund) is used to accumulate legal spending
1 The District of Columbia, Puerto Rico, and the Virgin Islands are considered to be states in UC
matters.
2 For the purposes of this report, the Railroad funds will be ignored.

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authority that is available automatically when needed. However, the UTF does not
contain financial resources. The required cash the federal government needs to pay
benefits or administrative costs must be drawn from current resources through either
taxation or borrowing. The revenue and the expenditures of the UC system are counted
in the federal budget.
Federal laws require that excess UC funds be “invested” in federal government
securities. However, because the UTF is a federal account, its holdings of federal
securities are simply obligations from the federal government to itself. These obligations
represent a budgetary resource to the UC program, not a financial resource to the federal
government. This is because, while no cash has been raised, the interest earned on the
investments is credited to the UTF. Because the federal government is holding its own
securities, no cash is raised when these securities are liquidated. The UTF’s federal
securities must be backed by cash raised through taxation or additional public borrowing.
All things being equal, a UTF surplus reduces the federal deficit, lowering the amount the
federal government must borrow from the public. Conversely, a UTF deficit increases
the overall federal budget deficit and increases federal borrowing needs.
Unemployment Trust Fund Revenues and Distributions. The UTF is
credited3 with revenues from three primary sources:
! state unemployment taxes on employers,
! federal unemployment taxes on employers, and
! U.S. government agency transfers.
Although UC benefits are taxable and are fully subject to the federal income tax, those
revenues do not support the UC system.4 These three types of revenues are depicted at
the top of Figure 1.
State Unemployment Tax Revenues Are Credited to the State
Unemployment Accounts Within the Unemployment Trust Fund. States are
authorized to designate that these funds be used to pay UC benefits. State unemployment
account funds that are attributable to state unemployment taxes may only be used for
unemployment benefits and the state’s portion of extended unemployment benefits.
Administrative costs are funded through distributions from the ESAA to the state
unemployment accounts. At the end of FY2006, states were estimated to have collected
$35.94 billion while expending $30.15 billion in regular UC benefits and $10 million for
their share of extended benefits.
3 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.
4 This differs from funds from the taxation of Social Security benefits that help support the Social
Security and Medicare programs.

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Federal Unemployment Taxes Are
Credited to the ESAA. Each fiscal year,
UTF Revenues
funds are appropriated through the federal
State Unemployment Taxes.
budget process to make distributions from
Employers required to pay state unemployment
the ESAA for the states’ costs of
taxes may remit their state unemployment taxes
administering their unemployment
to states on a monthly, quarterly, annual or
compensation programs, and for the federal
another basis as determined by state laws and
regulations. States in turn, then remit the
costs of administration. The Secretary of
collected taxes to the Treasury. These funds are
Labor determines (certifies) the amount of
credited to the appropriate state unemployment
the administrative payments, and permits the
account in the UTF.
Secretary of the Treasury to make the
payments to the states. The Secretary of
Federal Unemployment Taxes.
Employers may also be required to pay FUTA
Labor in certifying a state for payment takes
taxes on a quarterly basis. If the estimated
into account that (1) the state’s UC programs
quarterly federal tax is less than $500, an
contain specific provisions related to the
employer may roll the liability over to the next
payment of monies from the state
quarter until the liability is $500 or more. At
unemployment system, (2) the state agency’s
that point, the employer must pay the FUTA
taxes to the Treasury. An annual tax return
specific responsibilities in administering the
reconciles the quarterly deposits to the actual tax
UC program and UC benefits, and (3) the
liability. The ESAA is credited with the federal
rights and responsibilities of the UC benefit
unemployment taxes.
recipients.
U.S. Government Agency Transfers.
Each federal agency is responsible for UC
Each Month, the ESAA
benefits paid on the agency’s behalf. Each
Distributes 20% of the Net Monthly
agency must budget for the unemployment
Activity to the EUCA. Net monthly
benefits paid and reimburse the UTF for
activity is the sum of revenues credited to the
unemployment compensation paid on its behalf
by states. The funds are credited to the FECA.
ESAA less distributions for refunds of FUTA
taxes and additional taxes attributable to a
reduced credit for SUTA taxes. By the end
of FY2006, the federal accounts had collected $7.10 billion; the ESAA held $3.32 billion.
Since the ceiling for the ESAA was $1.44 billion, the excess $1.89 billion in the ESAA
was transferred to the EUCA. At the end of FY2006, the ESAA had distributions of
$3.85 billion to the states for administrative costs.5
If states have an active EB program, EUCA distributions are made for the federal
portion (50%) of EB benefits. At the fiscal year end after any required distribution from
the ESAA, the balance in the EUCA is determined. The EUCA balance is limited to the
maximum of $750 million or 0.5% of covered wages.6 If the EUCA balance exceeds the
limitation, the excess is distributed to the FUA. At the end of FY2006 $10 million was
expended to pay for the federal share of EB benefits and the EUCA balance was $12.67
billion. The EUCA ceiling was $21.16 billion; thus, there was no fund transfer to the
FUA.
5 For a description of the TEUC program see CRS Report RL33362, Unemployment Insurance:
Available Unemployment Benefits and Legislative Activity, by Julie M. Whittaker.
6 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%.

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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
FY2005, the FUA balance was $13.43 billion, lower than the $21.16 billion ceiling.
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.
Other Unemployment Trust Fund Expenditures (Reed Act
Distributions). 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.7 At the end of FY2006, the ESAA balance was $3.32 billion. Because the ESAA
ceiling was $1.44 billion, the excess of $1.89 billion was transferred to the EUCA. After
this distribution, the EUCA balance was $12.67 billion. The EUCA ceiling was $21.16
billion: there was no transfer of funds to the FUA. The FUA balance was $13.43 billion
while the FUA ceiling was $21.16 billion. There was no Reed Act distribution.
Loans to Insolvent Accounts. The Treasury can write checks for a state
unemployment account, provided that legal spending authority exists for such spending.
That is, the state unemployment account has a positive balance. During some recessions,
current taxes and reserve balances were insufficient to cover expenditures for UC
benefits. Some state unemployment accounts required “loans.” Like all other transactions
of the UTF, these are book account transactions that involve no exchange of cash. The
loans are additional credits to a state unemployment account. Subsequent repayment of
these loans reduces the credits in the state unemployment accounts.
The state unemployment accounts can borrow from the FUA. The principal of the
loan is repaid by reducing federal tax credits for SUTA taxes and crediting those
increased revenues to the FUA. 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.
7 For more information on Reed Act distributions, see CRS Report RS22006, The Unemployment
Trust Fund and Reed Act Distributions, by Julie Whittaker.

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Figure 1. The Unemployment Trust Fund
State Unemployment Taxes
Federal Unemployment Taxes
Federal Agency Reimbursements
State Unemployment Employment Security
Federal Employees’
Accounts Administration Account Compensation Account
Unemployment
Payments for states’
administrative costs
20
%

Trust Fund
of
net

Payment to states for federal
m
onthly
employees’ UC benefits
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Extended Unemployment Compensation
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Account
Funds in excess of 0.5% of
State Unempl
m oyment
nt
covered wages in EUCA at the
end of FY
Comp
m ensation
Benef
Benefits
Federal Unemployment Account
Funds in excess of 0.5% of covered wages
in FUA at the end of FY
Reed Act
(If EUCA is also at limit)
Distributions
Source: Figures prepared by The Congressional Research Service (CRS).

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