California and the Virgin Islands have applied to the U.S. Department of Labor (DOL) for a Benefit Cost Rate (BCR; sometimes referred to as Benefit Cost Ratio) add-on waiver by the, deadline. California and the Virgin Islands are on the DOL’s updated list of potential Federal Unemployment Tax Act (FUTA) credit reduction states for 2017 [DOL, Potential 2017 Federal Unemployment Tax Act (FUTA) Credit Reductions, rev. July 2017]. States had until July 1, 2017, to apply for a waiver.
What Is BCR Add-on?
The BCR add-on is in addition to the 0.3% per year FUTA credit reduction (see The Payroll Source®, p. 7-8). The additional tax varies by state and is based on a complex calculation. The calculation compares the average benefits that have been paid out by the state, the taxable wages, and the average tax rate on taxable wages in the state.
California and the Virgin Islands continue to have outstanding Federal Unemployment Account (FUA) loans, and, therefore, will likely be subject to a 2017 FUTA credit reduction. The credit reduction was also predicted in the spring, with the potential total credit reduction remaining 2.1% for California and 3.2% for the Virgin Islands unless it receives the BCR waiver.
Note that California may not have been subject to the BCR add-on for 2017. The calculation is based on the difference between a state’s average total Unemployment Insurance (UI) benefits paid over the past five years and the state’s average UI tax rate in the previous year. The calculation, using estimated wages, came out to zero for California because its average tax rate was greater than its average UI benefits for the past five years. However, the state applied for the waiver, “just in case.”
Deadline For Credit Reduction
The final determination of FUTA credit reductions will not be made until the November 10, 2017, repayment deadline.
Pay News Now will continue to monitor any updates to the FUTA credit reductions.
Courtesy of American Payroll Assoc.