UI Claims Management

The End of North Carolina FUA Debt


Emptech's founder, Jeff Aleixo


Jeffrey Aleixo

Federal Unemployment Act North Carolina

Earlier this month, the state of North Carolina successfully followed through on its plan to pay off the Federal Unemployment Account (FUA) debt to the United States government. As recently as January 2013, North Carolina FUA debt stood at $2.5 billion dollars. This early repayment will save North Carolina employers over $700 million dollars in taxes over the next 15 months.

North Carolina was first hit with a FUTA tax penalty in 201. At that time, nearly half the country faced FUTA tax penalties in the wake of the Great Recession. Since then, North Carolina employers are estimated to have paid nearly $700 million dollars in FUTA penalties alone. Additionally, they have collectively paid an estimated $262 million dollars in interest for the FUA debt.

In the fall of 2012, North Carolina had the third largest outstanding FUA loan balance of any state in the country. At the time, only New York and California’s FUA debts topped North Carolina’s.

North Carolina’s UI Integrity Law Marked a Turning Point

In February 2013, North Carolina adopted HB 4, an Unemployment Insurance (UI) Integrity law that aggressively cut unemployment benefits and incorporated features aimed at addressing the poor state of North Carolina’s unemployment system. The passage of this legislation marked a pivotal point for the state’s debt recovery. Called the Unemployment Insurance Fund Solvency & Program Changes, it sped up North Carolina FUA debt repayment plan to a three year schedule.

After North Carolina FUA debt repayment, HB 4 has been declared a success by Republicans in North Carolina, but less so by workers advocates, who claim that the favorable tax outcome for businesses has come at the workers’ expense. Supporting the GOP perspective, not only is the state out of debt but the unemployment rate has also dropped, which indicates that those who lost extended unemployment benefits were ultimately able to secure employment of some kind. Also, the Governor’s office reports that the unemployment system is more efficient, more customer friendly and the time needed to settle appeals has been dramatically reduced.

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North Carolina Employers’ FUTA Cost per Employee

North Carolina FUTA costs per employee by year, based on taxable wage limit of $7,000:

2010: $42 (this is without North Carolina FUA debt)

2011: $63

2012: $84

2013: $105

2014: $126 (a whopping 200% increase from $42)

2015: $42 (would have been $147; potentially $192 with BCR add-on)

For perspective on how this looks compared to other states, in 2014, FUTA rates were also $126 per employee in California, New York, Ohio, Kentucky and the Virgin Islands. They were higher only in Indiana ($147) and Connecticut ($161).

It is not surprising that North Carolina FUA debt repayment is celebrated by the state’s politicians for making North Carolina more attractive to employers who may want to move or stay there and support future job creation.

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Potential Impact of President’s FY 2016 Budget

Employers may be able to take some comfort in the fact that the latest U.S. Department of Labor report on the President’s FY 2016 Budget projects that outstanding FUA loans will mostly be repaid by FY 2018, so the end to skyrocketing FUTA tax rates may be in sight.

Other proposed changes in the FY 2016 President’s Budget include a new net FUTA tax rate starting in 2016 and an increased FUTA taxable wage base starting in 2017. The taxable wage base would jump to $40,000 and then be indexed to annual wage growth. States would be required to have a minimum tax equivalent to 0.175% of the FUTA wage base, effective in 2017. For 2017, with the proposed new taxable wage base, that translates to $70 per employee. At a 66% increase over $42, that may look more attractive to employers in the seven states currently shouldering FUA loans than it will to employers in the 46 other states and territories, like North Carolina, who are finally back down to $42 per employee.

Insolvency during the Great Recession

In the aftermath of the Great Recession, states were faced with higher than normal unemployment compensation costs. During this period, the federal government was funding the large majority of unemployment compensation payouts in the form of the extended benefits programs, which offered a maximum of 73 weeks of benefits. However, federal benefits could not be paid out until an individual had exhausted the unemployment insurance benefits fully funded by state, usually lasting 26 weeks. As claims increased with the onset of the recession in 2008-2009, federal tax credit reductions began posing a problem for a large number of states in 2011, as by that time they had had insolvent accounts for two years.

In order to be ready for another economic recession, employers need to review the existing structure of employer taxes, unemployment benefits, administrative integrity as well as workforce development strategies. However, this burdensome task can be significantly simplified with automated unemployment claims management for both taxable and non-taxable unemployment programs.

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Editor’s Note: This post has been updated for accuracy and comprehensiveness.

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