March 05, 2015TO: MA Members

You may need to spend some time on this analysis since it somewhat complex, however, if you have never analyzed your UC Rate notice it is time well spent!

I am hoping each of you will take a look at your company’s PA UC Contribution Rate Notice and work your way through the algorithm I’ve outlined below to gain a better understanding of what you are paying to the (PA) Commonwealth each year for UC Taxes, and why you are paying the rate assigned.

Let me know if this is useful information.

Jim Baker, SPHRjbalker@mascpa.org

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HERE IS A GUIDE TO Interpreting your Pennsylvania Unemployment Compensation (UC) Contribution Rate Notice for Calendar Year 2015

As part of the Act 60 amendments to the PA UC Law, the taxable wage base for employer contributions will be increasing each year from 2013 through 2018. Effective January 1, 2015, employers will pay UC Taxes on the first $9,000 of wages paid to an employee in a calendar year.

The UC Tax Rate you pay is communicated to you on your UC Contribution Rate Notice sent out on 12/31/14.

Each employer has a unique rate based on a six factor calculation. 1. Three factors are fixed (which means every employer is assessed the same % rate); 2. One factor is partially fixed and partially variable; and, 3. Only two factors are 100% variable (which means if an employer lays-off employees it

may be paying more than an employer that does not lay-off employees).

- EXAMPLE OF A PA CONTRIBUTION RATE NOTICE –

YOUR EMPLOYER CONTRIBUTION RATE EFFECTIVE 01/01/2015 IS 0.63744.Multiply this rate by the amount of taxable wages paid to each PA employee to determine the amount of UC employer contributions you owe. The components of this rate are indicated in the chart below

Reserve Ratio Factor 0.000Benefit Ratio Factor + 0.034

State Adjustment Factor + 0.010Basic Rate = 0.044

Increase For UC Delinquency +Surcharge Adjustment + 0.002244

Additional Contributions + 0.0065Interest Tax Factor + 0.0110

Total Contribution Rate = 0.063744

You qualify for an experience based rate.Your rate is assigned in accordance with Section 301.1 of PA UC Law.

This is provided as an Example.Your company’s actual data is transmitted to you by PA Dept of Labor & Industry at the bottom of your PA Contribution Rate Notice12-Month Periods(Fiscal Years)

Taxable Wages* Benefit Charges Contribution Payments*

2012 (7-1-11 to 6-30-12) $ 512,564.14 $ 0.00 $21,113.892013 (7-1-12 to 6-30-13) $ 489,171.57 $ 46,993.05 $15,684.642014 (7-1-13 to 6-30-14) $ 588,050.85 $ 7,798.74 $30,487.97

3 yr totals $1,589,786.56 $54,791.793 Year Taxable Wages $1,589,786.56 ÷ 3 = Average $529,928.52

3 Year Benefit Charges $54,791.79 ÷ 3 = Average $18,263.93

This is provided as an Example.Your data is provided to your company by PA Dept of Labor & Industry

Average Annual Taxable Wages*

(AATW)

Average Annual Benefits(AAB)

Reserve Account

Balance*6-30-2014

(RAB)

Employer Reserve Account Percentage

RAB ÷ AATW

Benefit Ratio Percentage

AAB ÷ AATW

**Group Number(See Footnote)

$529,928.52 $18,263.93 $373,551.13 70.49% 3.44%% (.0344) **3

*Only wages reported and contributions paid by September 30, 2014 are used for calculation purposes.

**Group 3: An employer who paid contributions for one or more quarters in each of the three 12-month periods ending on the computation date (June 30), and for at least one or more of the four completed calendar quarters immediately preceding such three 12-month periods.

FOLLOWING IS HOW THE RATE IN EXAMPLE ABOVE IS CALCULATED AND APPLIED FOR AN EMPLOYER WITH 50 FULL TIME EMPLOYEES WHO EACH EARN OVER $9,000 IN THE YEAR.

Factor

For Comparative Purposes Insert

Your Rate Below Which you will find

on your 12/31/14PA CONTRIBUTION

RATE NOTICE

EXAMPLE Actual Rate

Notes About Calculated Rates

1. Reserve Ratio Factor (Varies)

0.000

The reserve ratio factor is part of the experience rate for covered employers. This factor is determined annually and ranges from 0% to 2.7%. It remains at 0.000 as long as the reserve account balance is greater than 20% of the 3 year average annual payroll.

2. Benefit Ratio Factor (Varies) + 0.034

In this example the calculated ratio is 0.034; however, maximum ratio factor is set by the Commonwealth at 0.051. If the actual ratio would have been above 0.051 then it would have been set at the maximum rate 0.051

3. State Adjustment Factor (Fixed)

+ 0.010Fixed Rate / Not subject to appeal /Uniform for all employers.

4. Basic Rate = 0.044

Reserve Ratio Factor + Benefit Ratio Factor + State Adjustment FactorMinimum .0100 - Maximum .0870

5. Increase For UC Delinquency

+ 0.000

Uniform for all employers. 3.0% will be added if the employer has not filed all registration reports required by the department and/or is delinquent for quarterly tax report(s) and/or monies through the second quarter of 2012.

6. Surcharge Adjustment - Unchanged from 2014 - (Partially Fixed and

Partially Variable)

(Minimum, i.e., Fixed Rate Portion is .00051 (.010 X .051 = .

00051)

+ 0.002244

(Item 4 plus Item 5, if applicable x 5.1% Surcharge) This surcharge is converted into an element in the contribution rate by multiplying the employer's “Basic Rate” (Item 4) by the surcharge percentage of 0.051. (In this example .044X.051 = .002244)Not subject to appeal. Uniform for all employers. Determined annually by the Department of Labor & Industry according to a formula set forth in Law.

7. Additional Contributions - unchanged from 2014 –(Fixed)

+ 0.0065Fixed Rate / Not subject to appeal / Uniform for all employers.

8. Interest Tax Factor - unchanged from 2014 – (Fixed)

+ 0.0110Fixed Rate / Not subject to appeal / Uniform for all employers.

9. Total Contribution Rate = 0.063744 Minimum .028010 - Maximum .108937

Below is 2015 rate formula narrative for the six components used in developing the employer's contribution rate with narrative using actual data from the above PA Contribution rate example. The comments in brown letters below are related to the “example employer”

1. Reserve Ratio Factor (RRF) is determined annually. The RRF is 100% variable and unique to each employer; ranging from 0.000 to a maximum of 0.027. The RRF is based on an employer's reserve ratio and is a lifetime measure of the employer's risk with unemployment. A $0 reserve balance for a group 3 employer would result in a 1.2% factor; down to a negative balance of = or >-20% which results in the maximum 2.7% factorTherefore, even in a worst case scenario where an employer has a negative reserve exceeding 20%, since it is capped at 2.7% an employer would be paying an added 2.7% of $9,000 ($243.00/employee).

Due Diligence by an employer may result in savings up to $9,000 X .027 = $243/employee

This ratio is determined by dividing the balance in the employer's reserve account by the employer's average annual taxable payroll for the last three fiscal years (July 1 – June 30). (i.e., the lifetime unemployment contributions paid by the employer minus the lifetime benefits charged against the employer's account)

In the example provided, the Reserve Ratio Factor (RRF) will remain at 0.000 for the employer as long as its reserve account balance (currently at $373,551.13) is greater than 25% of its 3 year average annual payroll (currently at $529,928.52). The RRF is $373,551.13 ÷ $529,928.52 which yields 70.49%.

This is REALLY GOOD NEWS for this employer with a current RRF of 0.000 since the reserve is significantly greater than 25% of the average annual payroll; and, it will continue to benefit from a 0.000 RRF as long as its reserve exceeds $132,482, i.e., 25% X current average payroll of $529,928.52. In fact the Commonwealth has $241,069 excess funds paid in by this employer providing the employer a very nice cushion to continue retaining its 0.000 Reserve Ratio factor.

Unfortunately, this employer can’t ask for a refund since the UC regulations clearly state “a credit (positive) reserve balance does not represent an amount that would be refunded to an employer at any time”.

Click here to view: “Employer's reference guide to unemployment compensation”

The only other two variables, i.e., ratios within employers’ control are the Benefit Ratio Factor (see item 2 below) and a portion of the Surcharge Adjustment Factor (see item 6 below).

2. Benefit Ratio Factor (BRF) is determined annually and ranges from 0% to 5.1% (This is 100% within employers’ control). This is actually a short term comparison of the employer's taxable payroll and UC benefits charged. So in a worst case scenario an employer is paying 5.1% of $9,000 ($459/employee)

This factor is determined by dividing the employer's average annual benefit costs for the last three fiscal years (July - June) by the employer's Average Annual Taxable Wages for the last three fiscal years ending on the computation date (June 30).

In the example, the Benefit Factor Ratio is .034 ($18,263.93 ÷ $529,928.52 = 3.46%) Note: the Commonwealth doesn’t round up or down they simply drop the 2nd decimal.

The maximum rate is 5.1% (.051) however since the calculated rate is lower than the maximum rate factor of 5.1% this employer receives a lower rate of .034. Since this is a three year average, if the employer had average paid benefits charges in 2014 of $46,993.05 (as it had in 2013) rather than only $7,798.74 it would have average annual benefit charges of $31,328.70/ year ($0.00 + $46,993.05 +$34,086+$0.0 ÷ 3 years) and the ratio would have been .059. Since .059 exceeds .051 the ratio of 0.51 would be applied resulting in and added .017 (.051-.034 = .017) .017 X $9000 = $153/employee.

Due Diligence by an employer may result in savings up to $9000 X .051 = $459/employeeThis factor has the highest impact on your rate so it is a very good idea to monitor who is applying for benefits and challenge those who shouldn’t get benefits.

3. State Adjustment Factor 1% (.01) - This factor acts as an assessment on all employers and uniformly levies the common benefit costs that are paid out of the Pennsylvania UC Fund, but which are not charged to any specific employer account. This is also used in calculating your basic rate, by adding this amount to your Reserve Ratio and Benefit Ratio Factors. Note: Pennsylvania’s State Adjustment Factor was reduced from 1.5% to 1.0% in 2013 and will continue at 1.0% through 2016.

4. Basic rate is calculated by Adding Reserve Ratio Factor + Benefit Ratio Factor + State Adjustment Factor Minimum .0100 - Maximum .0870

5. Additionally, delinquent employers are assigned a delinquency contribution rate that is 3% higher than the rate which they would otherwise be assigned.

Good news, again for the employer in this example since it has no delinquency rate shown on its statement, which means it’s paying the Commonwealth on-time!

6. Surcharge Adjustment Factor (SAF) is only partially within employers’ control) with the fixed portion set at just slightly over ½%, i.e., .01 X 0.051 = 0.00051. This surcharge is converted in the contribution rate by multiplying the employer's “Basic Rate” by the surcharge percentage.

The adjustment factor in this is .002244 since it is calculated on a basic rate of 4.4% (.044 X .051=.002244). However, even if this employer had a zero “Reserve Ratio Factor + Benefit Ratio Factor” it would still have a basic rate of 1% which yields a minimum surcharge adjustment factor of .00051 (.01 X .051) or $9,000 X .00051 = $4.59 per employee.

The variable impact for this employer was .002244-.00051 = .001734 which results in $9,000 X .001734 or $15.60 per employee.

On the opposite end, if this employer had a worst case scenario where its RRF +BRF is over 5.1%, the SAF is capped at .003111 (.051 +.010 X .051) which would have resulted in $9,000 X .003111 or $27.99 per employee.

Due diligence by an employer may result in savings up to $23.40/employee

7. Additional Contributions Factor .65% (.0065) - The Additional Contributions component of the overall contribution rate is applicable to all (except those subject to newly liable contribution rates) contributory employers.

8. Interest Tax Factor 1.1% (.011) - The Interest Factor uniformly applies to all (except those employers subject to newly liable contribution rates) contributory

employers and is not subject to appeal. Payments attributable to this Interest Factor, like employee contributions, are not credited to an employer's reserve account. Such amounts are not credited to the employer's experience record for future rate computation purposes. Note: the Interest Factor increased from .2% in 2012 to 1.1% in 2013 and remains at 1.1 %

9. Total Contribution Rate…. The lowest amount any PA employer pays is based on the minimum fixed rate of 0.02801 times $9,000. ($9,000 X .02801 = $252.09), i.e., calculated per employee earning $9,000 or more in the year.

The example employer rate is 0.063744 which means it is paying $9,000 X 0.063744 = $573.70 per employee who earns = or > $9,000 per year. We know that the lowest rate any PA employer must pay is .02801, so we can determine the variable portion is the difference between the actual rate and the fixed rate, i.e., in this example 063744 - .02801 or .035734.

To verify the math is correct it can tied-in directly to the variable amounts of the BBF .0346 + variable portion of the SAF .001734 which also total .035734.

With ~50 employees this means the employer in the example must pay $28,684.80 to cover its average annual benefit charges of $18,263.93. So, not only will the Commonwealth not rebate the reserve overage in this example, the employer is continuing to build its reserve.

Employers should also be aware that even if its “Benefit Ratio & Reserve Ratio Factors” would be 0.000 it won’t get off with paying $0, since, in addition to the above variable components, you pay a fixed amount for the three factors, and a semi-fixed amount for one factor, resulting in the 2015 minimum rate of 2.801%. The maximum rate is 10.8937% as long as you aren’t a delinquent payer (this includes the 5.1 percent surcharge, the 0.65 percent Additional Contribution tax and the 1.1 percent Interest Tax Factor). Don’t forget that delinquent payers have another 3% added which could result in a top rate of 13.8937%

So, no matter how many employees you have ever laid-off (or not laid-off) each employer pays a minimum (fixed) amount of $9,000 X .02801 = $252.09 per employee who earns $9,000 or more per year.

If you are a worst case scenario employer paying the maximum (with no delinquency) you pay $9,000 X .108937 = $980.43 per impacted employee. That’s a $728.34 delta from low to high, which translates to $36,417 for an employer with 50 impacted employees.

Note: In 2016 the taxable wage base will increase to $9,500 and again in 2017 to $9,750. It continues increasing through 2018, when it reaches $10,000 and remains at that amount.

You can learn more about this formula at: http://www.portal.state.pa.us/portal/server.pt?open=514&objID=552155&mode=2#rrf

If you are still confused about your rate or you can’t understand why you are paying the rate assessed contact me and I’ll attempt to walk you through the algorithm.

Jim Baker jbaker@mascpa.org

employers and is not subject to appeal. Payments attributable to this Interest Factor, like employee contributions, are not credited to an employer's reserve account. Such amounts are not credited to the employer's experience record for future rate computation purposes. Note: the Interest Factor increased from .2% in 2012 to 1.1% in 2013 and remains at 1.1 %

9. Total Contribution Rate…. The lowest amount any PA employer pays is based on the minimum fixed rate of 0.02801 times $9,000. ($9,000 X .02801 = $252.09), i.e., calculated per employee earning $9,000 or more in the year.

The example employer rate is 0.063744 which means it is paying $9,000 X 0.063744 = $573.70 per employee who earns = or > $9,000 per year. We know that the lowest rate any PA employer must pay is .02801, so we can determine the variable portion is the difference between the actual rate and the fixed rate, i.e., in this example 063744 - .02801 or .035734.

To verify the math is correct it can tied-in directly to the variable amounts of the BBF .0346 + variable portion of the SAF .001734 which also total .035734.

With ~50 employees this means the employer in the example must pay $28,684.80 to cover its average annual benefit charges of $18,263.93. So, not only will the Commonwealth not rebate the reserve overage in this example, the employer is continuing to build its reserve.

Employers should also be aware that even if its “Benefit Ratio & Reserve Ratio Factors” would be 0.000 it won’t get off with paying $0, since, in addition to the above variable components, you pay a fixed amount for the three factors, and a semi-fixed amount for one factor, resulting in the 2015 minimum rate of 2.801%. The maximum rate is 10.8937% as long as you aren’t a delinquent payer (this includes the 5.1 percent surcharge, the 0.65 percent Additional Contribution tax and the 1.1 percent Interest Tax Factor). Don’t forget that delinquent payers have another 3% added which could result in a top rate of 13.8937%

So, no matter how many employees you have ever laid-off (or not laid-off) each employer pays a minimum (fixed) amount of $9,000 X .02801 = $252.09 per employee who earns $9,000 or more per year.

If you are a worst case scenario employer paying the maximum (with no delinquency) you pay $9,000 X .108937 = $980.43 per impacted employee. That’s a $728.34 delta from low to high, which translates to $36,417 for an employer with 50 impacted employees.

Note: In 2016 the taxable wage base will increase to $9,500 and again in 2017 to $9,750. It continues increasing through 2018, when it reaches $10,000 and remains at that amount.

You can learn more about this formula at: http://www.portal.state.pa.us/portal/server.pt?open=514&objID=552155&mode=2#rrf

If you are still confused about your rate or you can’t understand why you are paying the rate assessed contact me and I’ll attempt to walk you through the algorithm.

Jim Baker jbaker@mascpa.org