UNEMPLOYMENT INSURANCE TAXES

Voluntary Contribution Option Could Save You Money

           A little used provision in Kentucky’s unemployment insurance (UI) law allows employers to buy down their UI tax rate. This so-called “voluntary contribution” permits an employer to make an additional payment into its reserve account to either reduce a deficit balance or to increase a positive balance. Since UI tax rates are based in part on the reserve account balance, increasing the funds in your account can result in a lower tax rate. Although the provision allowing additional payments is available to all employers, only a few have taken advantage of the voluntary contributions to reduce their tax rate.

          Based on information provided to members of the Unemployment Insurance Task Force, a small number of Kentucky employers—approximately 200 out of the 85,000 employers in Kentucky— made voluntary contributions in 2009. The number of employers using the option has remained consistent over the past several years. Although there is a voluntary contribution section on the rate notice employers receive each year from the Division of Unemployment Insurance that tells them their UI tax rate for the calendar year, it appears that many employers are not familiar with the option. 

          UI tax rates are based on the employer’s reserve ratio (the percentage calculated by dividing the employer’s reserve account balance by its three-year taxable payroll). Information compiled by the state agency and provided members of the Task Force indicate that one employer made a two dollar ($2) voluntary contribution in 2009 that yielded more than $400 in UI tax savings by reducing the tax rate from 2.7 percent to 2.3 percent while another employer made a $23 voluntary contribution and saved more than $3500 by lowering its rate from 2.3 percent to 1.8 percent.  In total, the 200-plus employers that made voluntary contributions in 2009 reduced the UI taxes they paid by more than $3 million.

          Kentucky employers receive a “Notice of Contribution Rate” each year from the state agency that indicates their UI tax rate for the current year. These notices, normally issued in February, include instructions for determining if a voluntary contribute will reduce the listed rate and, if so, how much additional payment would be required. The voluntary contribution must be made within 20 days of the mailing date of the rate notice in order for the current year tax rate to be recalculated.   

Gay Dwyer
Senior Vice President, Government Affairs
Kentucky Retail Federation