As of January 13, 2011, Indiana had borrowed almost $2 billion from the federal government in order to pay unemployment claims. What does this mean for Indiana employers? Under federal law, if a state has an outstanding loan balance on January 1 of two consecutive years and has not paid the balance by November 10 of the second year, employers will lose 0.3% of their federal unemployment tax credit for that year (Indiana first borrowed money in November 2008).
The federal unemployment tax is currently 6.2% on the first $7,000 of wages and employers get a credit of 5.4%, which means that employers pay 0.8% or $56 per employee to the federal government. With the loss of 0.3% of the credit, all Indiana employers will pay an additional $21 per employee to the federal government. This is estimated to cost Indiana employers around $58 million in 2011. Indiana employers will continue to see this 0.3% loss for the next two years under the current situation, so by 2013 employers will pay an additional $63 per employee (approximately $175 million total). This money goes to pay down the outstanding loan balance. Also, unless Congress takes action, Indiana will be obligated to pay interest on the loan. This is estimated to be around $75 million for 2011. This cannot be paid out of the state’s unemployment trust fund. Bottom line: Barring action by Indiana’s General Assembly this session, employers would have to also pay this amount through a special assessment.
Over the past several months, the Indiana Chamber has worked very closely with the governor’s office, the Department of Workforce Development and some key legislators to craft a solution to help Indiana employers. As it currently stands, Indiana employers will be subject to the tax rates in Rate Schedule B for this year and then move to Rate Schedule A, which contains the highest rates, next year. A preliminary bill draft has a provision that would put all Indiana employers into Rate Schedule E (with its lower tax rates) for the next several years. By doing this, the amount of money saved by employers having to pay less into the state’s unemployment insurance trust fund will at least offset the increased amounts they will have to pay because of the loss of the federal credit and the payment of interest through a special assessment.
The Chamber has also been involved in promoting the idea of having bonds issued to raise money to pay off the federal loan. There would probably be interest savings, but the real benefit would be that Indiana employers would have their federal tax credit restored to the 5.4% level.