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Home / Washington Business - November/December 2004 / UI Voluntary Contribution Program Expands for 2005 |
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UI Voluntary Contribution Program Expands for 2005 |
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Written On: November/December 2004 |
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Written By: By Tom McBride |
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Tom McBride is AWB’s director of tax and fiscal policy and is responsible for unemployment insurance issues.
Since 1996 the Unemployment Insurance Voluntary Contribution Program (VCP) has provided Washington employers with a method to control their unemployment insurance costs in certain circumstances. Based on legislation passed in 2003 (2ESB6097), 2005 will bring additional opportunities for employers to participate in the program.
What is the VCP?
The VCP allows employers to lower their contribution rate following a sudden hike in unemployment insurance rates due to an increase in benefits charged to their experience rating account. The VCP enables an employer to “buy-down” its experience rating to lower the benefit ratio which, in turn, lowers the contribution rate. This opportunity is available to employers for a premium: a 10 percent surcharge on the contribution amount to be reduced.
Who Can Participate in the VCP?
In order to participate, the following must apply:
• The employer’s rate must have been based on its own unemployment insurance history for the current and previous year.
• The employer’s rate class (level) must have increased by 12 rate classes.
• The employer’s buy-down must reduce the rate level by at least four classes.
In 2005, many more employers should meet the qualification requirements than did in 2004 or will in 2006. It is projected that instead of roughly 5,000 qualified employers each year, 22,000 will qualify in 2005 due to the increase in tax rate classes from 20 to 40. In effect, most businesses will experience an increase in rate classes by the restructuring of the rate class ladder even without any increase in claims. However, due to the changes in the rate class ladder, an increase in rate classes alone does not necessarily result in an increase in unemployment insurance costs.
The VCP is even available to those eligible employers who qualified to participate but passed in 2004. This is because every employer who has been in business long enough to receive an earned rate for 2004 and is in one of the new rate classes from 32 to 40 will automatically meet the 12 rate-class increase requirement. In addition, most employers that passed on participation in 2004 will meet the other requirement of being able to "buy-down" at least four rate classes. These employers will have only three years savings rather than the normal four had they elected to participate in 2004.
How and When Does an Employer Sign Up?
Employers receive an unemployment insurance experience rating after the second full year with employees. The Employment Security Department will mail to employers who qualify for the program a VCP application at the beginning of the calendar year. The employer then has until Feb. 15 to return to the department the VCP application with full payment.
The VCP application lists the options available to employers. The options shown are based on the minimum payment required to qualify for the option identified. An employer’s participation in the program cancels the amount of benefit charges shown in the option selected. These benefit charges are then removed from an employer’s experience rating account and will not be used for any future rate calculation.
Why Should an Employer Participate in the VCP?
The VCP lowers the contribution rate a predetermined amount in the year of participation. It also acts to reduce contribution rates for the following 3 years, but the amount of the future impact cannot be known with certainty at the time of election. However, the amount of lowered costs can be projected based on an employer’s experience rating.
An employer's experience rating account contains its prorated share of unemployment insurance benefits paid to former employees. The prorated percentage is based on the relative percentage of the claimant's base year wages. Using the amount from an employer's experience rating account for the four-year period and taxable wages reported by the employer for the same four-year period, a benefit ratio is determined. This benefit ratio determines the employer’s contribution rate based on the tax tables.
It will be easier in 2005 for employers to analyze whether to participate in the VCP. The 2003 legislation simplified unemployment insurance costs by eliminating many variables in tax rate calculations. There is no longer a tax table with schedules AA to F with the lowest tax rate ranging from 0.47 percent to 2.47 percent. The law also eliminated rate class assignments based on how an employer’s benefit ratio stacked up against all other qualified employers. The 20 rate classes further divided into letter schedules has been replaced by 40 fixed rate classes. The only variable is the flat social cost factor.
Additional information about unemployment insurance and the VCP is available. For additional information about tax rate calculations, please see the Employment Security Department Web site at www.wa.gov/esd/ui/6097info.htm. The Employment Security Department is also working on a spreadsheet for employers to use to determine whether the VCP will lower tax rates. This spreadsheet is expected to be available on the department website by Jan. 1, 2005.
This article is based on information and assistance provided by the Washington State Department of Employment Security.
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