ETS Tax Intelligence: SUI Transfer of Experience Provisions
Mergers and acquisitions (“M&A”), whether an internal reorganization of legal entities under the same organizational umbrella or an external unrelated party, can significantly influence an employer’s state unemployment insurance (“SUI”) tax rates. Past issues of ETS Tax Intelligence addressed the importance of properly reporting M&A transactions and the potential for employment tax overpayments. This month’s issue focuses on transfers of unemployment experience (“TOE”) when an organization undergoes a change involving the movement of employees from one legal entity to another.
SUI tax rates are assigned to employers based on such factors as historical wages, unemployment benefits paid to former employees, the amount of tax contributions paid, and an employer’s reserve account balance. State workforce agencies use these historical factors, known as an employer’s “unemployment experience,” to assess an employer’s propensity to cause the agencies to make future benefit payments to terminated employees. When an employer is involved in a M&A transaction, internal or external, the unemployment experience of the employer may be impacted. The impact is dependent on two primary factors: 1) whether the employers involved in the transaction are related by common ownership, management, or control (“COMC”); and 2) whether the business unit being transferred represents all of the employees operating in the state or just a portion of the employees operating in the state. Depending on these primary factors, state workforce agencies will require a TOE, prohibit a TOE, or allow the impacted employers to choose a TOE.
Whether a M&A transaction creates an optional or mandatory TOE, it is often prudent for employers to perform a rate impact analysis to determine the financial outcomes. The table to the right provides a simplified example of the results of an optional TOE. Without a TOE, the successor’s SUI tax rate is 2.00%, yet with a TOE, the successor’s SUI tax rate is 3.00%, resulting in a $100,000 tax differential.
When addressing partial transfers, the methods used by state workforce agencies to transfer unemployment experiences can vary, which can alter the assigned SUI tax rates of both the predecessor and the successor. The determination of what portion of a predecessor’s unemployment experience will transfer in the 53 SUI taxing jurisdictions includes such methods as:
- Percentage of Experience (pro-rata):
- The relationship of gross or taxable payroll for the transferred portion of the business (including active and terminated employees) to the gross or taxable payroll for the total business as of the transaction date or a requisite period before the transaction date.
- The relationship of the number of active employees transferring to the total number of active employees as of the transaction date or a requisite period before the transaction date.
- The relationship of all assets transferring (including workforce) to the total assets as of the transaction date.
- Actual Experience (wage detail):
- Specific identification of the employees associated with the business unit transferring (including active and terminated employees) for a requisite period before the transaction date.
Once the above partial transfer information is received by the state workforce agency, the agency will provide the employer(s) with a revised SUI tax rate. The effective date of the revised rate could be the day of the transfer, the first day of the quarter in which the transaction occurred, the first day of the quarter following the transaction, or even the first day of the following year, depending on the date of the transaction, relationship of the parties, and jurisdictions in which the transaction occurs. It can take several quarters for the state workforce agencies to process partial transfers, which can create significant under- or overpayment of SUI tax. It is recommended that employers remit tax at the originally assigned rate until a revised rate is issued, while accruing at the expected revised rate.
Most state workforce agencies require employers to report M&A transactions or face penalties. If this is not a sufficient deterrent, failure to file the requisite compliance documents will often prevent an employer from retroactively recovering any overpaid SUI tax resulting from a restart of the annual SUI taxable wage base associated with a mid-year transaction.
The TOE provisions can be onerous, especially for employers with multi-state operations. Equifax assists employers with understanding these provisions and identifying areas of risk and opportunity. For more information, please contact Pete Krieshok at (314) 214-7325 or via e-mail at firstname.lastname@example.org. You can also visit our corporate blog for information on other employment tax matters that might impact your organization.
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