In the last three posts, I’ve discussed the Notice of Contribution Rates and Statement of UI Reserve Account, what the numbers mean, and how to minimize your UI Rate. To read the former posts, see the following links:
Understanding Your CA UI Reserve Notice Part 1 http://ow.ly/g2DUQ
Understanding Your CA UI Reserve Notice Part 2 http://ow.ly/g2MiU
How to Minimize Your UI Rate http://ow.ly/g2PMT
Today I’m going to answer some of the common questions about why the UI rate changes.
1. Why did my rate increase? The rate will increase for any number of reasons:
- A change in the UI rate schedule used for all employers. The annual UI rate schedule is determined by the ratio between the UI Fund balance on September 30 and the total wages paid by all employers. The Rate Schedules are AA, A, B, C, D, E, F, F+. When this calculation produces a ratio of less than .6%, the rate the employer would have paid in the Schedule F is multiplied by 1.15 rounded to the nearest tenth. We are currently in the highest rate (F+).
- A Change in your taxable payroll for the three years used (for 2013 calculatations, 2009-2011 are used). If there is an increase or decrease, this will alter your ratio which affects your UI rate. The reserve ratio is determined by dividing your reserve account balance by the average base payroll. The average base payroll takes the total UI Taxable Payroll listed on the statement and divides by the number of years payroll was reported to get that number. For instance, if you have been an employer for at least 3 years, the total payroll figure is divided by 3 to get the average payroll per year. If an employer for 2 years, the average is calculated by dividing the total payroll by 2. If only one year, the total payroll listed is the average.
- The total charges to your account were more than the credits. If benefits were paid out to former employees more than the tax paid into your account, your UI rate will increase. You need to make up the difference, and a higher tax rate is how that happens.
2. Why is my reserve account charged when none of my former employees drew benefits?
- To ensure the UI Fund remains solvent, all costs must be reimbursed. This is done by sharing costs and income to the UI Fund that are not directly credited or charged to an employer’s reserve account. If an employer has a higher cost of benefits paid than tax remitted to the EDD, there is a shortage which is made up by other employers. The same is true if the business closes its doors and the employees file for unemployment. In order to pay these benefits, the remaining employers cover those costs.
3. Is my reserve balance refundable?
- The balance is not refundable. The funds deposited are used to pay UI benefits. The reserve account measures the employment experience and it is used to determine your UI contribution rate. Even if you have no claims against your account and your reserve balance continues to increase, you must still pay the tax each year, and no amount collected can be refunded to your business.
4. Why does my rate increase when I hire more employees?
- The more employees you have, the greater your risk of UI claims. Any increase in your taxable payroll without a corresponding increase in the reserve account balance can result in a higher UI rate. A higher average taxable payroll without an increased reserve balance reduces your reserve ratio causing the UI rate to increase.
5. Can my reserve account be cancelled?
- Yes, the reserve account can be cancelled. Whenever an employer ceases to pay wages, the reserve account will be cancelled after a period of three years (unless transfered to another account). The remaining balance in the account is then distributed to all remaining employers on a pro-rated basis.
Have more questions? Feel free to contact our office at 310-534-5577 or [email protected].
Must I pay the charges to reserve account?
Hi David, yes, payroll taxes are charged by the EDD based on wages earned and funds paid are posted into the reserve account. We have no choice. The good news is that in California we only have to pay on the first $7000 of earnings for each employee yearly. These funds are used in the event there is a claim filed by a former employee. If they are entitled to a payment (laid off due to no fault of their own, reduced hours because of declining sales, etc) you don’t need to respond to any notice received. If a former employee makes a claim and you feel they are not entitled to payments, you must reply to the state within 10 days or the employee will be granted unemployment.
Candy,
Is the rating that Hawkins Supply Inc. received (F+), the worst possible rating? If so, does that mean that we are a high risk for former employees drawing unemployment insurance? How would I improve the rating for the future?
Hi David,
Are you located in CA? If so, are you looking at the EDD Notice of Contribution Rates and Statement of UI Reserve? If so, the F+ rating does not apply to your business. Rather, it is the schedule the EDD is using for the next year which determines the lowest/highest UI rates to be charged to companies. CA has been on F+ for many years. This does not mean you are at a high risk for employees drawing unemployment insurance. That would be reflected in the rate you are charged (current rates go from 1.5% to 6.2%). The EDD looks at the amount you’ve paid into your account, the amount charged against you, and how many claims (and how much was paid) for UI benefits. To improve your UI rate, you’d like to minimize claims for unemployment. This can be done through better hiring decisions (making sure the candidate is qualified for the job or will be able to learn the skills to perform the required duties – someone let go for the inability to perform the work could collect benefits), make sure you document misconduct so if you terminate and they apply for benefits, you can show they are not entitled to money, etc.
I hope this helps answer your questions!
Candy Messer