Unemployment Compensation (UC) and
the Unemployment Trust Fund (UTF):
Funding UC Benefits
Julie M. Whittaker
Specialist in Income Security
September 12, 2012
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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
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 typically funded 50% by the federal government and 50% by the states,
but the 2009 stimulus package (the American Recovery and Reinvestment Act of 2009, P.L. 111-5
Section 2005, as amended) temporarily provides for 100% federal funding of EB through
December 31, 2012. The Emergency Unemployment Compensation (EUC08) benefit was funded
from the EUCA until P.L. 111-5 changed the source to the general fund of the Treasury.
This report will be updated as legislative activity warrants.
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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
Contents
The Unemployment Compensation Program................................................................................... 1
Federal Unemployment Tax Act................................................................................................ 1
Expired Provision: FUTA Surtax............................................................................................... 1
State Unemployment Tax Acts .................................................................................................. 1
The Unemployment Trust Fund....................................................................................................... 2
The Unemployment Trust Fund and the Federal Budget........................................................... 2
Unemployment Trust Fund Revenues and Distributions........................................................... 3
State Unemployment Tax Revenues Are Credited to the State Unemployment
Accounts Within the Unemployment Trust Fund............................................................. 3
Federal Unemployment Taxes Are Credited to the ESAA .................................................. 4
Other Unemployment Trust Fund Expenditures (Reed Act Distributions) .............................. 6
Loans to Insolvent Accounts ..................................................................................................... 6
Figures
Figure 1. The Unemployment Trust Fund........................................................................................ 7
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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
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.
Federal Unemployment Tax Act
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.
Expired Provision: FUTA Surtax
Congress first passed a temporary FUTA surtax in 1976, and since 1983 the 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 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.
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.
1 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.
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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
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), 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 in
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, the 2009
stimulus package (P.L. 111-5 Section 2005, as amended) temporarily provides for 100% federal
funding of EB through December 31, 2012.
The stimulus package also included a change in the financing structure of the emergency
unemployment compensation program (EUC08); the EUC08 program is now paid by the general
fund of the Treasury (previous to the enactment of the stimulus package, the benefits were paid
out of the federal accounts within the UTF). The stimulus package also created the temporary $25
weekly Federal Additional Compensation (FAC) benefit, which is paid by the general fund of the
Treasury and not by the UTF. The authorization for the FAC expired on June 2, 2010.
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 and EB financial transactions. This accounting
device (designation as a trust fund) is used to accumulate legal spending 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.
2 The District of Columbia, Puerto Rico, and the Virgin Islands are considered to be states under federal UC law.
3 For the purposes of this report, the Railroad funds will be ignored.
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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
Federal unemployment taxes are deposited into the unemployment trust fund. Following federal
law, the Treasury invests all receipts in federal securities that bear interest. This investment
increases the federal debt. When these securities are redeemed to pay for administration of the
program, to lend funds to the states, or to pay for extended benefits, this investment decreases the
federal debt.
State unemployment taxes are deposited into the unemployment trust fund. Following federal law,
the Treasury invests all state unemployment tax receipts in federal securities that bear interest.
This investment increases the federal debt. When states pay UC benefits to unemployed
individuals, the Treasury redeems those securities held within that state’s unemployment trust
fund account. Thus, the payment of regular state UC benefits decreases the federal debt.
If states do not have enough reserves in their UTF account, Title XII of the SSA allows the states
to borrow funds from the FUA within the UTF. (States may borrow from other sources although
some states are prohibited from doing so under state laws.) The issuing of loans to the state would
require that the FUA redeem securities. This redemption would decrease the federal debt. If the
FUA is insolvent and the other federal accounts within the unemployment trust fund do not have
sufficient balances to lend the funds that states need (as occurred in FY2010, authorized by Title
IX), Title XII of the SSA allows the FUA to borrow funds from the Treasury. If the Treasury
issues new securities in order to lend funds to the FUA, this will increase the federal debt. When a
state pays back the state loan from the FUA, the FUA would then use those funds to repay its debt
to the Treasury and the federal debt would be decreased.
Unemployment Trust Fund Revenues and Distributions
The UTF is credited4 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.5 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 EB payments. Administrative costs are
funded through distributions from the ESAA to the state unemployment accounts. At the end of
FY2011, states were estimated to have collected $49.3 billion while expending $48.5 billion in
4 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.
5 This differs from funds from the taxation of Social Security benefits that help support the Social Security and
Medicare programs.
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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
regular UC benefits and $0.36 billion in EB payments (primarily for former state and local
government employees).
Federal Unemployment Taxes Are Credited to the ESAA
Each fiscal year, funds are appropriated through the federal budget process to make distributions
from the ESAA for the states’ costs of administering their unemployment compensation
programs, and for the federal costs of administration. The Secretary of Labor determines
(certifies) the amount of the administrative payments, and permits the Secretary of the Treasury to
make the payments to the states. The Secretary of Labor in certifying a state for payment takes
into account that (1) the state’s UC programs contain specific provisions related to the payment of
monies from the state unemployment system, (2) the state agency’s specific responsibilities in
administering the UC program and UC benefits, and (3) the rights and responsibilities of the UC
benefit recipients.
Each Month, the ESAA Distributes 20% of the Net Monthly Activity to the
EUCA
Net monthly activity is the sum of revenues credited to the ESAA less distributions for refunds of
FUTA taxes and additional taxes attributable to a reduced credit for SUTA taxes. By the end of
FY2011, the federal accounts had collected an estimated $6.6 billion; the ESAA held $0.57
billion. Since the ceiling for the ESAA was $1.74 billion, no excess funds were transferred to the
EUCA. At the end of FY2011, the ESAA had distributions of $5.01 billion to the states for UC
administrative costs.
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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
If states have an active EB program, EUCA
UTF Revenues
distributions are made for the federal portion
(50% in permanent law; 100% as required by
State Unemployment Taxes
P.L. 111-5, as amended) of EB benefits. Prior
Employers required to pay state unemployment taxes
to the passage of P.L. 111-5, the EUC08
may remit their state unemployment taxes to states on a
program funds were also are paid out of
monthly, quarterly, annual, or another basis as
determined by state laws and regulations. States, in turn,
EUCA.6 At the fiscal year end after any
then remit the col ected taxes to the Treasury. These
required distribution from the ESAA, the
funds are credited to the appropriate state
balance in the EUCA is determined. The
unemployment account in the UTF.
EUCA balance is limited to the maximum of
Federal Unemployment Taxes
$750 million or 0.5% of covered wages.7 If
Employers may also be required to pay FUTA taxes on a
the EUCA balance exceeds the limitation, the
quarterly basis. If the estimated quarterly federal tax is
excess is distributed to the FUA. At the end of
less than $500, an employer may roll the liability over to
FY2011, an estimated $11.56 billion was
the next quarter until the liability is $500 or more. At
expended to pay for the federal share of EB
that point, the employer must pay the FUTA taxes to the
benefits, and approximately $52.66 billion
Treasury. An annual tax return reconciles the quarterly
deposits to the actual tax liability. The ESAA is credited
was expended on the EUC08 program. (The
with the federal unemployment taxes.
EUC08 expenditures were paid from general
Treasury funds and not from FUTA revenue.
U.S. Government Agency Transfers
They are not loans and do not need to be
Each federal agency is responsible for unemployment
repaid by the UTF.) The EUCA net balance
compensation for federal employees (UCFE) paid on the
agency’s behalf . Each agency must budget for the
was an estimated shortfall of (negative)
unemployment benefits paid and reimburse the UTF for
$15.74 billion ($13.51 billion owed to the
unemployment compensation paid on its behalf by states.
general fund of the Treasury and $2.3 billion
The funds are credited to the FECA.
owed to FUA/ESAA). The EUCA ceiling was
$22.96 billion; thus, there was no fund transfer to the FUA.
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 FY2011, the estimated net FUA balance was an
estimated $10.83 billion ($29.26 billion owed to the general fund of the Treasury, $38.16 billion
borrowed by the states, and $0.65 billion owed to ESAA/EUCA, and an end of year cash balance
of $2.58 billion). The balance was lower than the $22.96 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.
6 With the passage of P.L. 111-5, the EUC08 program is now 100% financed by the federal government through
general funds within the U.S. Treasury.
7 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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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
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.8 At the end of FY2011 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 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.9 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.10 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.
8 For more information on Reed Act distributions, see CRS Report RS22006, The Unemployment Trust Fund and Reed
Act Distributions, by Julie M. Whittaker.
9 For details on loans to insolvent accounts, see CRS Report RS22954, The Unemployment Trust Fund (UTF): State
Insolvency and Federal Loans to States, by Julie M. Whittaker.
10 For a list of current advances of funds to the states, see http://ows.doleta.gov/unemploy/budget.asp.
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Unemployment Compensation (UC) and the Unemployment Trust Fund (UTF)
Figure 1. The Unemployment Trust Fund
Source: Figures prepared by the Congressional Research Service (CRS).
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