2014 guide to unemployment insurance

Unemployment insurance management

UI cost projection

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Considering the significance of unemployment insurance costs, it is prudent business practice to establish and maintain an unemployment insurance management system that includes protocols for due diligence, lookback review, rate review, rate protest, cost projection and claims management.

Many states do not issue SUI rate notices until after the calendar or fiscal year has commenced. Therefore, the actual SUI rate is not known until at or near the filing of the first-quarter state unemployment tax return (later for states where the rating period is the fiscal year, not the calendar year).

As a result, there is a period during the year that businesses must estimate their SUI expense. The accuracy of the financial statement is impaired when the state SUI rate projection is too high or too low.

A number of factors can affect the future UI rate and corresponding tax expense of a business. For instance, a planned increase or decrease in headcount, or an acquisition or other reorganization involving a transfer of employees from one state to another or one account to another, can raise or lower the UI rate and affect financial forecasting.

For all of these reasons, it is important that pertinent information be accumulated and analyzed for SUI rate projection and accrual purposes on an ongoing basis. Information required for this process includes beginning account balances, quarterly payments and adjustments, UI benefit charges and credits, current taxable payroll, and estimated future staffing levels.

Taking all of this information into account, a skilled internal resource or third-party provider must apply the state’s specific tax rate calculation methodology to arrive at a reasonably accurate projection of the future unemployment tax rate. Each state approaches the UI rate calculation differently; therefore, this can be an extremely complicated yet vital analysis for the multi-state employer.

Complicating UI cost projections currently are variables that now apply in the FUTA tax adjustments arising from the FUTA credit reduction. This too must be taken into account in cost forecasting. (See page 2 for more on the FUTA credit reduction.)

An accurate UI tax rate projection holds value beyond the budgeting and forecasting process. It establishes a solid benchmark from which to evaluate the accuracy of the SUI rate once a state has assigned it.

EY - UI rate assignment

EY - UI rate assignment