COVID-19 Pandemic: Unemployment Benefits
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Despite the credits and payments authorized in the CARES Act and the FFCRA, it is inevitble that people will get laid off as a result of this pandemic.
There have been a number of changes to the unemployment system through the above mentioned Acts, but before we get into the changes, it's important to get a basic understanding of the unemployment system.
Our modern system of unemployment insurance has its roots in the latter 1800s. The words 'conservative' and 'liberal' had different means than they do now. In those days, 'conservative' referred to people that wanted to conserve the system of monarchy rule, especially in the face of democratic reform movements that were sweeping through Europe at that time.
German chancellor Otto von Bismarck was no social democrat. He was as conservative as one could get. Yet, he is the architect of the laws that, passed in 1878, would ultimately lead to the programs we now refer to as social security and unemployment insurance. His intention, for enacting these programs, could be seen as something of a 'bribe' to keep his political opponents happy.
Now, more than a century later, here we are.
I start with this look at the history of these programs to point out that flawed programs don't get less flawed over time. It's an imperfect system, but it's the one we have to deal with.
In the State of Maryland, unemployment insurance is administered by the Department of Labor Licensing and Regulation, recently rebranded simply as the MD Dept of Labor.
Here’s how the unemployment insurance system works:
An experience rate is assessed on a wage base. Once that wage base is reached, no further payments need be made. However, reports must be filed quarterly, regardless of whether a payment is due.
For 2020, as it has been for a number of years, the wage base is $8,500. New employers start out with an experience rate of 2.6%. This means that an employer would pay up to $221 per employee, or 2.6% of their wages if less than $8,500.
The 'clock' resets each calendar year.
If, after 6 calendar quarters (18 months), an employer has no claims and doesn't miss a filing, the experience rate is usually dropped and can get as low as 0.3% or $25.50 per employee.
On the other hand, if an employer has a number of claims and/or misses filings, the rate can jump to 7.5% or $637.50 per employee.
I'm taking pains to explain this because in the past week, I've had to assist clients in processing the separation letters (we'll discuss this in a minute) for their employees that have since been laid off, and I believe this will continue.
What I would expect from all this is that the State of Maryland, like many states, will have to both increase the wage base and the range of experience rates to make up for the shortfall of having so many unemployment claims made in such a short time period. This is speculation at this point, but it's not unreasonable.
Having gotten this bit of context out of the way, now we can look at the changes to this system under CARES.
Normally, a business owner would not be eligible for benefits under the unemployment insurance system. States are now relaxing this rule and allowing claims under a 'Pandemic Unemployment Insurance' setup.
Federal unemployment insurance will kick in and sit on top of state administered plans. To put this in perspective, Federal unemployment insurance is a flat 0.6% of the first $7,000 in wages, or $42 per employee (Similar to the state setup, I'd expect these numbers to increse at some point next year.)
Similar to what happened during the GFC in the latter 'aughts, we'd look for an extension of the normal time period for which benefits would normally run.
States, including Maryland, have relaxed the requirement that an employee is actively looking for work. With that said, I don't know if the MD Dep of Labor is still requiring claimants to attend job training classes during the period they are receiving benefits, as would be the case during ‘normal’ times.
Logistics:
An employee files for unemployment through the MD Dep of Labor's website.
The MD Dep of Labor then sends a Separation Information Request Letter to the employer.
There is a very short time frame to respond to these letters. Responses can be made online, using a code that will appear in the top/right corner of the letter.
Not responding to the letter can subject the employer to a fine and an assumption that the employer is liable for the employee's claim. Therefore it is important for employers to check their mail.
Unemployment is paid on a weekly basis, for a certain number of weeks, which as stated above, this time period will be extended.
Once an employee's hours exceed a certain level, they are no longer eligible for unemployment because they are deemed to be employed.
Unemployment benefits are TAXABLE INCOME. The administering agency will issue a Form 1099-G. For this reason, it's important to try and set aside some money to cover the potential tax on these funds.
One alternative to a full layoff would be to consider the MD Dep of Labor's workforce sharing program. In this program an employer would decrease an employees pay by say, 30% and the Dep of Labor would then pick up that decrease. Thus both employer and government would share in keeping the employee's compensation level. Once the employer is able to resume full pay, the employer can resume the salary at full.
If you're an employer considering layoffs, especially due to COVID-19, it's worth a few minutes to at least read up on this program first.
Summary:
If you're an employer, you will be feeling the effects of COVID-19 for a long time.
If you're an employee, you will be feeling the effects of COVID-19 for a long time.
If you're an employer, check your mail in the near term for any Separation Information Requests
If you're an employee, check your mail in January 2020 for the Form 1099-G that will be issued.
Thank you again for this opportunity to serve.
Stay safe and wash your hands.
Sincerely,
Jonathan Rivlin, CPA
President
The Rivlin Group PC
Disclaimer:
The purpose of this article is for informational/educational use only. No client relationship is intended by virtue of your use of this article. This article cannot be relied on for official advice regarding your specific situation, and is meant only to be general in nature. Because the regulatory environment is so dynamic at this time, it is possible that the content in this article will be superseded. This article was drafted on 12th April 2020.