the state of ui: condition, compliance and cost savings under new ui integrity rules

The State of UI: Condition, Compliance and

Cost Savings under new UI Integrity Rules

Silicon Valley APAThursday October 17th 2013

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meet your presenter

Ross E. Hendersonr.henderson@employmenttax.com

COO, Employment Technology Solutions (“ETS”)President, Association of Unemployment Tax Organizations (“AUTO”)

Payroll Advisory Board Member, HR.com

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Presentation Agenda

• Condition of UI Nationally• Legislative Path to UI Integrity• Understanding Section 252• Best Practices for UI Integrity: “A-C-T”

GOALS: Compliance, Efficiency & Cost Savings!

Plus: Raffle Gift!!! - $75 Sports Chalet Gift Card

UI Conditions

Condition of UI: National Focus

Many States’ UI Reserves Still Insolvent

Red = borrowing as of 8/30/13. Yellow = less than 6 mos. of positive balances. Green = more than 6 mos. of benefits. Orange= ER-financed bond

State Trust Fund Solvency as of August 2013. Map taken from August 2013 SUCAP Report, based on US DOL UI data quarterly summary charts & SUCAP Reports.

Condition of the UI System

•Taxable wage bases &/or UI tax rates continue to increase.•National unemployment rate: 7.3% (August 2013, BLS)•National average cost per UI claim: roughly $7,703 (DOL).•Assessments to UI rates • Bond expense, etc. • States using employer-financed bonds: CO, ID, IL, MI, PA, TX

•New legislation & enforcement for UI integrity.•FUTA Credit Reduction for 19 states (2012 tax year). See states.

UI System Outdated & Flawed

•Agency error and overcharging Employer (“ER”) accounts estimated at ~10-15%.

•Federal Sequester raises risk of improper accounting of benefit payments.

•History of ER and Employee (“EE”) abuse of the system (SUTA Dumping, excess collection).

•ER & Third Party Administrator (“TPA”) problems with untimely or inadequate responses for claim info.

•Inefficient communication & data exchange.

Image credit: cassettes

UI System Outdated & Flawed

•Agency error and overcharging Employer (“ER”) accounts estimated at ~10-15%.

- Fed Sequester accounting challenges. - UI Agency IT system challenges (CA, MA etc.)

• History of ER and Employee (“EE”) abuse of the system (SUTA Dumping, excess collection). • ER & Third Party Administrator (“TPA”) problems with untimely or inadequate responses for claim info.• Inefficient communication & data exchange.

8 Track Image Credit: Phillip Pessar

Immediate Impetus: Financial Conditions & Systemic Abuse

• In 2011, the DOL estimated $14B, or 11% of all UI claim payouts, result from overpayments. UI named a “high-error” program. • DOL estimates 19% of UI benefit overpayments stem from employers' untimely response and/or inaccurate information.• States like IN, LA, AZ, CO, VA pegged with 19-43% improper payment rates.• Economic conditions since ‘08 have spiked jobless claims, drained states’ UI reserves, triggered Fed loans to states to cover UI costs.• Growing U.S. deficit/political pressure to reign in budget.

Snapshot of California

• Unemployment Rate (Sept ‘13): 8.9%

• Trust Fund Loan (Sept ‘13); $9B

• ‘13 Taxable Wage Base: $7000

• ‘13 Tax Rates 1.5% min – 6.2% max

• ‘13 Projected FUTA Credit Reduction 1.20%

• ‘13 Min/Max Weekly Benefit $40 - $450

Spotlight On: UI Overpayment

2012 estimated UI improper

payments in CA

Agency role in overpayment error, July 2009 – June 2012

26.62%

Employer role in overpayment error, July 2009 – June 2012

19.87%

Data retrieved from DOL’s UI Improper Payment by State

“Role in error” = part or whole responsibility, calculated as % of total UI claims dollars overpaid in CA

California as an Example

Key Legislation:UI Integrity

Key Federal UI Legislation

• 2004 SUTA Dumping Act• 2011 TAAE UI Integrity (Sec. 252)• 2012 ATRAoEE SS tax returnoWOTC reauthorized

2004 State Unemployment Tax “SUTA” Dumping Prevention Act

•SUTA Dumping (a.k.a. “unemployment tax avoidance”) occurs by shifting EEs to a less-taxed entity to avoid paying a higher UI tax rate.

•Migration of EEs between legal entities (M&A, consolidation, etc.) may trigger time-sensitive mandatory compliance reporting – often missed!

• Penalties for missing or incorrect reporting can include max UI ratings; civil &/or criminal penalties.

• Read Employer’s M&A “To Do” List.

2012 ATRA (American Taxpayer Relief Act )

•EE SS tax rates return to 6.2% in 2013 from 4.2% in 2012 (i.e., 2% FICA payroll tax cut "payroll holiday" not extended).

•SS taxable wage limit up to $113,700 in 2013 (from $110,100 in 2012).

•Extension of Emergency Unemployment Compensation ("EUC").

•Temp. extension of 100% federal reimbursement for states triggering on regular extended benefits ("EB").

•Extension of over 30 business credits, including: R&D, WOTC, EZ

2011 Federal “TAAEA” Law: Sec. 252/UI Integrity

•Follow-on to 2009 Executive Order 13520 to reduce improper UI payments.

•Under TAAEA’s Sec. 252, states must not relieve ERs of charges when they fail to respond timely or adequately to agency request for info.

•States to develop their own definitions for “pattern of failure” (some states also defining “non-timely response”).

•All states to enact UI Integrity legislation by 10/22/13.

UI Integrity: Sec. 252 Points

•Also provides ERs cannot collude with EE to misuse UC system.

•ERs and TPAs with established pattern of non-timely response penalized more, but pattern can be as little as two instances!

•ERs may be held responsible for inaction and timeliness (or lack thereof) on the part of their TPAs.

•Fault means in part or in whole.

State Legislation Snapshot

Some State Legislation Goes Beyond the Federal Requirement:• HI and CT legislation prohibits relief from charges after just one occurrence of late or inadequate response.

• ID’s legislation prohibits relief after two occurrences.

• VA law widens scope of timeframe; pattern = 4 occurrences in 4 years.

Download ETS:“Section 252 Employer Fact Sheet” here.“UI Integrity Law Compliance Tips” here.

“Pattern of Failure" Defined (Examples)

State Enacted Date Effective Date Pattern of Failure =

WA 5/8/13 10/20/13 Greater of 3 or more offenses in 2 years or 2% of total current claims.

WV 4/2/12 7/1/12 Not defined

WY 3/13/13 7/1/13 Greater of 2 or more offenses or 2% during the four most recent completed calendar quarters prior to current request

MA Prior to TAAEA (in effect) First offense

NC 2/19/13 10/21/13 2% during the past year

SC 6/7/13 10/21/13 3 or more offenses OR 3% of agency requests within a year, whichever is greater.

Financial Impact Example

Case Study: • ER With 100 Separations/Yr; Classified with “Pattern of Failure.” • Benefit$ paid to claimant prior to successful Appeal by ER.

FACTORS FIGURES

Weekly benefit amount Assume $300

Time to appeal 8 weeks

# of claims lost on initial determination & won by ER on Appeal

10 (out of 100 total separations)

Charge to ER UI account $24,000 ($2,400 x 10 claims) now NON-RECOVERABLE due to “Pattern of Failure.”

Additional Exposure / Negative Impact •May raise AUDIT RISK for other UI areas, other state taxes, other jurisdictions•May elevate ER experience rating

Audit Alert: Inter-Agency Info Sharing

•Fed & state sharing info, data mining, creating cross-agency task forces.

•Questionable Employment Tax Practices “QETP” Initiative

- 37 states & IRS

•Facilitated by movement to electronic databases.

QETP Results Through Mid-2012

• Nearly 12,000 businesses examined.

• States reclassified $1.8B+ in wages and assessed $27M+ via federal data.

• IRS assessed almost $23M in taxes from state referrals.

• Over 107,000 workers reclassified.

• Significant incentives to agencies to aggressively evaluate and audit employers.

Solutions & Best Practices for

UI Compliance, Efficiency & Cost Savings

•DOL & state agencies collaborate on secure, electronic, standardized-format platform for UI data transfer. •SIDES E-Response: web-based for smaller ERs (limited claims). •SIDES: direct data exchange for TPAs and larger ERs, requires internal IT & $$$ for setup.•Aims to improve timeliness and completeness, reduce overpayments & erroneous charges, lower UI tax rates.• 46 states in some stage of SIDES implementation (….not CA)

UI Integrity Oversight Plan

Designate a Person or

Total UI Claims (also by

state/location)Which claims failed to be

timely/ adequate? Why?

Track win/loss

for protests.

For losses, why? Who?

Track win/loss for appeals. Why? Who?

Impact on experience

rating? Calculate cost

to organization.

Find & fix areas of

organizational weakness.

“ACT.”Provide information to UI agencies

that is:AccurateComplete

Timely

Best Practices

Controllable Risk FactorsContributing to UI Cost & Noncompliance

Challenge #1: Organizational Structure:•Limited infrastructure committed to UI process•Minimal or non-existent “intra-departmental” technology for seamless, timely receipt &“effective” follow-through for every claim •Inconsistent expertise responsible for program success (turnover) = inconsistent program delivery•Lack of corporate recognition/support

Controllable Risk Factors Contributing to UI Cost & Noncompliance

Challenge #2: Training for Results• Educate invested parties (C-level, HR, Payroll, Managers….) to recognize: • Relationship between claim process & cost impact to organization• Secure/train competent charge analyst:

o Match benefit year wages vs. chargeso Scrutinize reports for charge irregularityo Audit charge statement to ensure accuracyo Create effective contact process with agencyo Follow-through on reversing inaccurate charges

Controllable Risk Factors Contributing to UI Cost & Noncompliance

Challenge #3: Initial Claim Protest- Strong From the Start

• Cost-effective elements in initial claim protest process:o Detailed system of records to collect/transmit required

data o Mechanism to ensure timely response/all initial claimso “Follow-through” procedures to ensure agency

complianceo Built-in “triggers” to determine needed process

improvement

Critical Report Audits & Tracking

•Track results/determine program compliance & process improvement initiatives•Manage/scrutinize high cost contributors •Identify strong program performers•Charge impact driver by separation mix and charge amounts

• Electronic benefit charge audit system (cross-check all charges)•Ensure charge accuracy against agency tables/formulas•Tools for aggregate review & analysis of “real time” reports

UCM Plus Screenshot

Here’s where an electronic solution can really help minimize your costs by delivering

advanced reporting features and supporting Accurate, Complete & Timely responses to

agency.

This image has been redacted to protect the integrity of ETS’ UCM Plus UI Claims Management Solution. Should you wish to view a

demo of the software, please contact ETS at info@employmenttax.com.

UI Integrity Prep Checklist

Done? UI Prep Item

Understanding of Issues (i.e. Costs & Audit Exposure)

Internal Assessment of Readiness / Exposure

Develop a Plan / Organizational Strategy

Identify Responsible Parties (Individual or Teams)

Establish Training for Key Staff (and/or strategy for TPA Partner)

Regular Reporting and Measure Success / Areas for Improvement (Access to Real-time Reporting Tools)

“Rinse & Repeat”

Retro UI Review

General Evaluation• Contact ALL UI jurisdictions• Perform account balancing (per state records) – Qtr. by Qtr. rearward review.• Determine what credits found eligible for refund & if debits, found if correct.• Research for any missing / incomplete or untimely reporting on the account.• Review all M&A past 3 years.• Help reduce source of potential penalty or increased UI tax expense.

Photo credit: motone

ETS Resources•UI Integrity State Legislation Tracker•How Nonprofit Employers Can Reduce UI Cost•Tips on Choosing a UCM Vendor

Go here to download three pages of UI Tips

from ETS.

ETS’ UI

Download this one page checklist to assess the state of your UI Claims Administration

Is Your UCM Broken?

Go here to learn more, and here to contact ETS.

Learn more about ETS’ UCM Plus Solution

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Questions & Requests for Presentation Slides::

Ross Henderson-COO r.henderson@employmenttax.com

the state of ui: condition, compliance and cost savings under new ui integrity rules

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states ui reserves

ui tax rates

ui rates bond expense

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