UI Claims Management

Federal Sequester Cuts to Impact State UI Programs

03.28.2013

Author

Jeff Aleixo

unemployment insurance form federal sequester cuts

Earlier this month, the US Department of Labor (DOL) issued guidance to the state workforce agencies regarding details of how the federal sequester will impact unemployment insurance (UI) program benefits and operations.

The federal sequester cuts were effective March 1, 2013. According to the DOL, the following programs will be affected:

  • UI state administrative grants under Title III, Social Security Act,
  • UI national administrative activity funding,
  • The federal share of extended benefit (EB) reimbursement,
  • Emergency Unemployment Compensation (EUC) benefits and administrative funding,
  • Administrative funding for UCFE, UCX, and administrative funding for TRA, ATAA, and RTAA benefits under the Trade Adjustment Assistance Act,
  • Reemployment and Eligibility Assessments (REAs) for regular UI program claimants,
  • EUC-related Reemployment Services and Reemployment and Eligibility Assessments, and
  • Federal reimbursements of state Short Time Compensation benefit costs.

For extended (EB) and emergency (EUC) benefits, the reduction will be 5.1% to benefits for FY 2013; October 1, 2013 through September 30, 2013. Because of this, the actual reduction in benefits for the remainder of FY 2013 will be higher than 5.1% in order to meet the required budget savings. However, the DOL has determined that EUC and EB benefits already paid out are not subject to the reduction. Rather, it will apply to weeks of unemployment starting on or after March 31, 2013.

This means that the actual benefits reduction required by the DOL will be 10.7% starting March 31, 2013. For states that implement the cuts later, the reduction will be greater. Likewise, claimants in most states will first see a reduction in their benefits for the week ending April 6, 2013.

Use this detailed guide on unemployment insurance to make sure you respond effectively and accurately to frequent changes in federal and state UI policy.

Unemployment Benefit Cuts (EUC & EB) Reductions

Implemented in time for unemployment week March 31-April 6 = 10.7% cut

Implemented in time for unemployment week April 28-May 4 = 12.8% cut

Implemented in time for unemployment week June 2-June 8 = 16.8% cut

Implemented in time for unemployment week June 30-July 6 = 22.2% cut

Impact of the Budget Cuts and Takeaways for Employers

Employers should be aware that changes in federal funding to UI programs may result in employers being charged more, either in error, or through the states asking employers to assume additional costs to make up the missing funds.

Already-spread thin state workforce agencies may be ill-equipped to implement the programming and administrative changes required by the federal sequester. The reductions in administrative funding included in the federal sequester will only compound the problem. Employer UI accounts were prone to error 10-15% even before the recent recession put tremendous strain on state workforce agency resources – they will be even more so now.

Doug Holmes, of the UWC – Strategic Services on Unemployment & Workers’ Compensation, has indicated that the federal sequester is likely to result in significant instances of overpayments.

Therefore, employers should monitor their UI benefit charges even more closely than usual. It is also recommended that employers keep tabs on how the states and state workforce agencies plan to keep EB federal sequester cuts from being paid out of UI trust funds and erroneously charged to employer accounts.

Background on Sequestration

Sequestration resulted from the Budget Control Act of 2011 (BCA), which was signed after House Republicans refused a traditionally pro forma increase in the statutory debt ceiling in 2011 and forced negotiations with the Obama administration over spending cuts. The BCA created a Joint Select Committee on Deficit Reduction or Super Committee tasked with coming up with $1.2 trillion in deficit reduction over 10 years. To ensure deficit reduction would occur even if the Super Committee failed to agree on specific measures, the backup procedure of federal sequester cuts was created. This process mandated cuts to defense and nondefense spending, split equally, totaling $109.3 billion annually over fiscal 2014–2021. Because the Super Committee did indeed fail to agree on specific spending cuts or tax increases that would have achieved the legislated deficit reduction, the mandated federal sequester cuts were triggered for fiscal 2013. They took effect on March 1 after being postponed by two months and marginally reduced by the American Taxpayer Relief Act of 2012.

Federal sequester cuts affected the amount the federal government contributes to state grants, which provided roughly one-third of total state revenues. Even though sequestration spared some programs, many programs operated at the state and local level felt the effects. Each state experienced different impacts, and many faced tough choices concerning how to respond to fiscal contraction.

Modernize your unemployment claims administration and experience a simple, cost-effective, and efficient tool to manage your unemployment costs.

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

Disclaimer: This article is general in nature and is not intended to replace the guidance of an employment tax expert and/or legal professional with regards to an appropriate course of action in your particular circumstances. Please consult with a professional for appropriate advice in your case. Pursuant to IRS “Circular 230” rules, any information included herewithin is not intended or written to be used for the purpose of avoiding penalties under the federal Internal Revenue Code.