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Unemployment Trust Fund Balance Continues to Fall; Should Businesses Expect Higher Taxes in 2021?

Michigan’s Unemployment Insurance (UI) Trust Fund is quickly losing money, which is likely to have tax implications for employers in 2021.

The UI Trust Fund is the fund that the state uses to pay UI benefits to unemployed workers.  It is 100 percent employer financed through state and federal UI taxes.   At the start of COVID-19, Michigan’s UI Trust Fund had a healthy balance.  It had $3.9 billion, the third highest balance in the nation.

Due to COVID-19, however, the Trust Fund balance has been falling rapidly.  It fell from $3.9 billion in mid-May to below $2.5 billion now.  It is still unclear how long the fund will last because much of that depends on how quickly workers return to work.  However, if the fund drops to zero, the state will need to borrow money from the federal government and that money ultimately will need to be repaid.

Due to Executive Order 2020-57, “[a]ny benefit paid to a claimant who is laid off or placed on a leave of absence must not be charged to the account of the employer or employers that otherwise would have been charged but instead must be charged to the Unemployment Insurance Agency’s non-chargeable account.”  Although this is good news for employers because this means individual employers will not see their UI tax rate increase due to COVID-19, benefits are still being paid by employers; the costs are just socialized amongst all employers.

Because the Trust Fund has fallen so significantly since March, it is expected that employers will face higher UI taxes in January of 2021.  Under Michigan law, if the UI Trust Fund falls below $2.5 billion on June 30, and the Unemployment Insurance Agency (UIA) projects that the Trust Fund balance will continue to stay below that amount for the succeeding calendar quarter, the state’s taxable wage base for the next calendar year will automatically increase from $9,000 to $9,500.

The last time the taxable wage base fluctuated was in 2016.  In that case, the taxable wage base decreased from $9,500 to $9,000 and employers collectively saved about $57 million.  However, the net impact will vary from employer to employer because the taxable wage base is just one figure that is used in a calculation to determine an employer’s annual UI tax rate.

Given the state budget deficit, it may be unrealistic to expect the Legislature or Governor to fill the hole and avoid a tax increase come 2021 but we will be having these conversations in the coming days.  We will also be exploring whether the federal government might be willing to step in to help states fill the COVID-19 related Trust Fund shortfalls.  We will continue to keep you posted as this story develops.

If you have any questions, please contact Wendy Block at wblock@michamber.com.

Michigan’s Unemployment Insurance (UI) Trust Fund is quickly losing money, which is likely to have tax implications for employers in 2021.

The UI Trust Fund is the fund that the state uses to pay UI benefits to unemployed workers.  It is 100 percent employer financed through state and federal UI taxes.   At the start of COVID-19, Michigan’s UI Trust Fund had a healthy balance.  It had $3.9 billion, the third highest balance in the nation.

Due to COVID-19, however, the Trust Fund balance has been falling rapidly.  It fell from $3.9 billion in mid-May to below $2.5 billion now.  It is still unclear how long the fund will last because much of that depends on how quickly workers return to work.  However, if the fund drops to zero, the state will need to borrow money from the federal government and that money ultimately will need to be repaid.

Due to Executive Order 2020-57, “[a]ny benefit paid to a claimant who is laid off or placed on a leave of absence must not be charged to the account of the employer or employers that otherwise would have been charged but instead must be charged to the Unemployment Insurance Agency’s non-chargeable account.”  Although this is good news for employers because this means individual employers will not see their UI tax rate increase due to COVID-19, benefits are still being paid by employers; the costs are just socialized amongst all employers.

Because the Trust Fund has fallen so significantly since March, it is expected that employers will face higher UI taxes in January of 2021.  Under Michigan law, if the UI Trust Fund falls below $2.5 billion on June 30, and the Unemployment Insurance Agency (UIA) projects that the Trust Fund balance will continue to stay below that amount for the succeeding calendar quarter, the state’s taxable wage base for the next calendar year will automatically increase from $9,000 to $9,500.

The last time the taxable wage base fluctuated was in 2016.  In that case, the taxable wage base decreased from $9,500 to $9,000 and employers collectively saved about $57 million.  However, the net impact will vary from employer to employer because the taxable wage base is just one figure that is used in a calculation to determine an employer’s annual UI tax rate.

Given the state budget deficit, it may be unrealistic to expect the Legislature or Governor to fill the hole and avoid a tax increase come 2021 but we will be having these conversations in the coming days.  We will also be exploring whether the federal government might be willing to step in to help states fill the COVID-19 related Trust Fund shortfalls.  We will continue to keep you posted as this story develops.

If you have any questions, please contact Wendy Block at wblock@michamber.com.