COVID-19 and the Impact on State Unemployment Insurance

In the years leading up to 2021, State Unemployment Insurance (SUI) rates and wage bases both decreased for many states across the US. Unfortunately, COVID-19 shutdowns have impacted thousands of jobs, from full-time employees to those who gig like many professionals in the entertainment industry. This has led to unprecedented unemployment cases, putting pressure on states and forcing many to borrow from the federal unemployment trust funds.

What is the federal unemployment trust fund and how does it impact SUI?

All states must adhere to a base level of federal unemployment trust fund requirements, and beyond that, each state makes its own rules and regulations. When state unemployment benefits are exhausted from high employment, states can borrow from the federal fund if their own reserves are insufficient.

If the federal unemployment trust fund balance falls below a certain amount, like it did in 2020, states must raise unemployment taxes across the board, for all employers, to repay back their loan causing the SUI rate to increase.

During 2020, 20 states exhausted their own funds and had to borrow from the federal unemployment trust fund to pay weekly benefits. Of those states, CO, GA, HI, KY, MD, MN, NY and OH have increased their maximum SUI rates.

How much are SUI rates increasing?

Well, it depends; some states are higher than others.

For example, New York, required by law, had to increase their maximum unemployment tax rate in 2021 (from 7.9% in 2020 to 9.9% in 2021) because they completely depleted their SUI account trust fund during the peak of the pandemic.

California is usually required by law to increase their SUI rates, but unlike New York, they haven’t built up a high enough reserve (since the Great Recession) to move to lower SUI rates. The maximum SUI rate wasn’t increased in 2021 for California and other states with lower trust fund balances because they were already at the maximum rate allowed.

How long until SUI rates are expected to increase?

Even with federal stimulus payments, SUI rates will likely remain high for the next few years, even for the thirty states that did not borrow from the federal unemployment trust fund. Why is this the case?

Due to pandemic unemployment claims, states still need to rebuild their SUI reserve. As an extreme example, Arizona did not borrow federal unemployment trust funds, but massively increased their SUI rate table in 2021. The AZ max SUI rate in 2020 was 11.8%, the max rate in 2021 is 20.6%! The Arizona wage base remains at $7,000, which surprisingly still leaves Arizona in the middle of the pack when total employer SUI costs are compared. This example also demonstrates the significance of looking not just at the SUI rate but also at the wage base when creating a budget. Hawaii’s maximum 2021 SUI rate of 6.6% looks attractive compared to Arizona, but Hawaii has a 2021 wage base of $47,400. SUI in Hawaii would then be $1,980 versus $1,442 in Arizona.

The long-term impact

History repeats itself, and looking back to the effects of the Great Recession on unemployment tax rates and wage bases, we can see how the impact was felt for years as the economy recovered through annual SUI increases. Similarly, states and employers are now experiencing similar repercussions due to the unemployment surges caused by COVID-19.

Production accountants should anticipate that some states, like California did after the Great Recession, will default in repaying their federal loans. For states that default, the federal unemployment tax rate (currently 0.6% of $7,000 in earnings) will increase by 0.3% a year until the loan is repaid (Entertainment Partners nicknamed the additional amount FUI2).

Expect an increase in federal unemployment taxes in 2022 in the 20 states that borrowed federal funds, unless federal legislature extends the amount of time to pay back the loans or a state that has borrowed decides to use federal stimulus funds to replenish the state’s unemployment fund or finds another way (i.e, issues a bond) to repay the loan.