How Will My Employees’ Unemployment Claims Related to COVID-19 Affect My Unemployment Tax Premiums?

Unemployment claims have skyrocketed in Utah, as in other states, since the outbreak of COVID-19. Many employers are concerned that the spike in claims will cause their unemployment insurance premiums to dramatically increase.

On March 25, 2020, the Utah Department of Workforce Services (DWS) issued guidance on this topic:

First, DWS indicated that the spike will have no immediate impact on employer premiums. Premiums are adjusted annually, as follows:

  • The premium for 2020 is already set and will not change.
  • The premium for 2021 will be determined based on benefits costs from July 1, 2019 through June 30, 2020, and three prior fiscal years.
  • The premium for 2022 will be determined based on benefits costs from July 1, 2020 through June 30, 2021, and three prior fiscal years.

Second, DWS announced that, effective immediately, all unemployment insurance claim benefit costs attributable to COVID-19 will be charged to Social Costs instead of to employers’ individual benefit costs. To understand the implications of this change, we need to understand the formula by which employer unemployment premiums are set:

Basic Tax Rate x Reserve Factor + Social Tax = Employer Premium

The Basic Tax Rate is based on the total benefits paid to an employer’s former employees and on the total taxable wages paid by the employer. The Reserve Factor is used to adjust all employers’ contributions up or down to maintain an adequate reserve fund. The Social Tax is used to pay for Social Costs, which include:

  • Benefit costs of employers who have gone out of business without having successors.
  • The state’s share (50%) of benefit costs which result from the payment of federal extended benefits paid during periods of high unemployment.
  • An employer’s benefit costs which exceed the maximum contribution (tax) rate plus the social costs.
  • Benefit costs from which employers have been granted relief.
  • Uncollectible benefit overpayments.

With that background, it becomes clear that DWS’s decision to charge benefit costs attributable to COVID-19 to Social Costs will result in spreading out the cost of COVID-19 benefits among all employers.

DWS does not mention any federal relief for COVID-19 unemployment benefits. However, the Emergency Unemployment Insurance Stabilization and Access Act, which goes into effect on April 1, 2020, allocates $1 billion in emergency state grants to assist with processing and paying unemployment insurance benefits. We expect that Utah will receive a grant and use it to defray the benefits charged to Social Costs.