The congressional battles regarding the extension of unemployment benefits, the weekly unemployment insurance claimsreports, and the monthly reporting of the national unemploymentrate has kept the topic of unemployment in the news.

However, a related topic that has not received as much attentionis the precarious state of the unemployment insurance system andhow the underfunded status will affect employers, who pay for thismandated benefit.

According to UWC, an association of national and state businessorganizations, the costs of unemployment insurance (UI) foremployers has increased from $31 billion in 2008 to $160 billion in2010.

Nevertheless, most people don't know much about this benefit,including human resources professionals. Therefore, theobjective of this article is to provide a basic overview of theunemployment insurance system in the United States.

According to a historical summary on the Social SecurityAdministration’s website, the high unemployment rates during theGreat Depression of the 1930s was a key impetus for the August 1935enactment of the Social Security Act, which established themechanism to create an unemployment insurance system in all States.Many supported a nationally administered program, but there wereconstitutional concerns since Wisconsin had already established anunemployment insurance program in 1932. Titles III and IX arethe unemployment insurance provisions of the Social SecurityAct. Title III appropriated funds “for the purpose ofassisting the States in the administration of their unemploymentcompensation laws” and stated the required provisions each State’sunemployment insurance program should include while Title IXimposed an excise tax of a percentage of the wages paid byemployers.

Today, this basic structure remains intact, and almost all wageand salary workers are now covered by an unemployment insuranceprogram. The unemployment compensation program is afederal-state partnership that is funded by federal and state taxespaid by employers. The federal government sets requirements,monitors compliance, and holds and invests the money in theunemployment trust fund account until it is drawn down by statesfor the payment of compensation. Within the framework of thefederal requirements, each state designs it ownprogram. Therefore, each state is responsible foradministering claims, defining its benefit structure (eligibilityand disqualification provisions and benefit amounts), and settingstate tax rates. All states primarily finance theirunemployment programs through employer contributions, but inAlaska, New Jersey, and Pennsylvania, employees are also requiredto contribute.

The Federal Unemployment Tax Act currently imposes a federal taxon covered employers of 6 percent of wages up to $7,000 a year paidto an employee. However, if the employer timely pays stateunemployment taxes, it may be eligible for a federal tax credit ofup to 5.4 percent. As of July 1, the federal tax rate actuallydropped from 6.2 percent to 6.0 percent, but both stateunemployment taxes and the effective tax rate for many employershas substantially increased as a result of high unemploymentrates. Claims skyrocketed during the recession and forced 32states to take out loans totaling approximately $43.6 billion fromthe Federal Unemployment Account (FUA). Under federal law,states may not repay the interest on these loans from their stateunemployment trust fund accounts, but to avoid the need for futureloans, many of these states have raised or are attempting to raisestate unemployment tax rates. Also, 19 states are recoupingthese interest fees via special assessments on employers. Moreover,according to UWC, although the American Recovery and ReinvestmentAct of 2009 (ARRA) waived interest payments and the accrual ofinterest on advances to the State Unemployment Trust Fundthrough Dec. 31, 2010, without an extension of the waiverthrough 2012, employers in up to 32 states and jurisdictions arelikely to see up to $3.6 billion in increased state unemploymenttaxes. Furthermore, the federal tax credit is reduced foremployers in states that have failed to repay theseloans. Consequently, UWC projects that FUTA taxes on employerpayroll in half of the states will increase by $2.5 billion for2011 and by $3.0 billion for 35 states for 2012.

In summary, high employment rates are resulting in substantialincreases in unemployment taxes, and unfortunately, unless federaland state legislators change the laws and regulations to offeremployers relief, the portion of the tax formula described abovewill not change. However, there is a portion of thisskyrocketing cost equation which human resources professionals candirectly assist in controlling. Although the formulas used for ratedetermination vary significantly by state, all state laws determineindividual employers’ contribution rates on the basis of their“experience” with unemployment. In other words, the moreformer employees that utilize the unemployment insurance program,the higher the employers’ unemployment taxes. Therefore, costsavings can be realized if human resources professionals protecttheir employers’ experience ratings. Fundamentally, humanresources can positively affect the experience rating by helpingmanagers both select and retain good employees. Additionally,effectively training managers in performance management,strategically managing terminations, and establishing an effectiveUI claims management program are also important ways to lower UIclaims.

Although human resources professionals cannot directlyaffect all aspects of the unemployment insurance costequation, it's important for us to become more knowledgeableabout the unemployment insurance system so that we can help ouremployers manage skyrocketing unemployment insurance costs.