Webcast Summary: Internal Workforce Movements: UI Impacts
Unemployment Cost Management Overview
The unemployment program was created to provide benefits to employees that have lost their jobs through no fault of their own. These benefits are funded by state unemployment insurance (“SUI”) taxes paid by employers, whose rates are assigned based on their unemployment experience. After the Great Recession, legislation was introduced which mandates employers to timely and adequately respond to ALL claims or face potential financial penalties or face losing the ability to obtain relief from benefit charges attributable to claims even if an employer ultimately wins the claims. This legislation contains what are known as the “UI Integrity” provisions. Proper unemployment cost management is especially important when an employer undergoes an internal workforce movement or reorganization due to the complications that can arise from a claims and tax perspective.
Internal Employee Realignments Overview
An internal reorganization occurs, generally, when employees are transferred from one affiliated or related legal entity to another. Employers are deemed related when there exists common ownership, management, or control between them. The transfer of an employer’s unemployment rating experience is required when there has been a transfer of an organization, trade, or business, or portion thereof. When an internal reorganization occurs, the transaction must be reported to the impacted state workforce agencies. If not reported, the employer is at risk of being found liable for SUTA dumping. SUTA dumping is the manipulation of state experience rating systems, through a shift in workforce from one legal entity to another, so that employers pay lower SUI taxes than their unemployment experience would otherwise allow. The states have implemented software to detect these employee movements.
Internal Employee Realignments: A Case Study
During the webcast, a case study was used to illustrate some of the key areas of risk and opportunity from both an unemployment tax and claims perspective. In the case study, a hypothetical organization was contemplating the creation of a shared services group. This would require the partial transfer of 500 employees from Subsidiary A and 500 employees from Subsidiary B into Shared Services, Inc. Of these 1,000 employees, 900 employees are paid $50,000 per year and 100 employees are paid $150,000 per year. For simplicity, all operations are in a single state. The transaction is anticipated to occur on July 1, 2016. The role of the individual charged with oversight of the organization’s unemployment cost management program was to identify risks, opportunities, and compliance obligations related to the contemplated restructuring. A work plan using a four-phased approach was used to guide the organization through the process.
Phase 1: Due Diligence
During the Due Diligence or “investigative” phase, gather data on the transaction (such as the existing and contemplated organizational structure, quarterly contribution and wage reports, tax rate notices, and historical correspondence from state workforce agencies) and perform an initial risk assessment based on the data gathered.
Phase 2: Planning and Design
During the Planning and Design or “strategy” phase, the primary goal is to understand the financial implications of the contemplated transaction and develop alternative strategies to accomplish the overall objectives. The two primary areas of risk and analyses include:
- SUI Tax Rate Impact – Once the transaction is complete, states will generally require a transfer of experience (“TOE”) from the predecessor employer to the successor employer. Employers should review how the states will process the TOE (e.g., pro rata percentage of payroll versus employee-specific wage/charge detail), when the TOE will become effective (e.g., immediately, first day of following quarter, etc.), and what the impact of the TOE will be on the parties. In the case study, the TOE is effective the first day of the quarter in which the transaction takes place (i.e., July 1, 2016) and results in a cost of $112,500 in 2016 and $300,000 in 2017.
- Wage Base Carryovers – Wages paid by a predecessor employer can be used by a successor employer for purposes of calculating the annual taxable wage base limitation if:
- Federal (FICA and FUTA)
- The successor acquired property used in a trade or business, or a separate unit of a trade or business, of the predecessor;
- Predecessor employees were employed by the successor immediately after the acquisition; and
- The wages were paid during the calendar year in which the acquisition occurred and prior to the acquisition.
- State (SUI)
- Proper TOE compliance documents were filed and approved by the state workforce agency (typically assumes that a trade or business, or portion thereof, was transferred).
- Federal (FICA and FUTA)
In the case study, had the successor employer (Shared Services, Inc.) not properly used the wages paid by the predecessor employers (Subsidiary A and Subsidiary B); an overpayment of $757,300 could have resulted. Employers generally have three years to recover overpaid employment taxes.
Phase 3: Implementation and Compliance
During the Implementation and Compliance or “execution” phase, the focus is on meeting state reporting obligations including: account registrations/closures, status change notifications, TOE applications, etc. Meeting these obligations should typically be undertaken within 30-90 days of the transaction, depending on the state. This will help ensure that the successor employer will be able to carryover annual taxable wage bases. Complying with the requirements of up to 53 different taxing jurisdictions can be onerous and time-consuming.
Employers should also review the unemployment claims implications of internal workforce movements. Considerations include:
- An internal reorganization creates a “separation event” in the eyes of the state workforce agencies.
- Make sure personnel files are transferred so documentation follows the employee.
- If an employer fails to meet the UI Integrity provisions because of the transaction, they may lose “relief of benefit charges” when a claim is overturned on appeal.
- Ensure that third-party administrators have proper authorization (i.e., Powers of Attorney) to respond to claims on behalf of the.
- Ensure the state has the proper address (i.e., the Official Mailing Address) to which claims should be mailed.
- A review of benefit charges for transferred employees to make certain that they are assigned to the proper SUI tax account.
Phase 4: Post-Implementation
During the Post-Implementation or “follow-up” phase, the goal is to ensure desired outcomes are achieved by verifying that the states have processed the compliance filings properly, including validation of the resulting SUI tax rates of the predecessors and successors.
When planning internal workforce movements, using a four-phased work plan helps ensure all compliance obligations are met, risks are identified, and savings opportunities are utilized. For additional information on the issues discussed in the webcast, please contact Pete Krieshok at (314) 214-7325 or via email at email@example.com. You can also visit the Equifax Insights Blog. For a replay of this webcast, please visit the Replay Link.
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