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Employer Alert: Solvency Tax on the Horizon

October 29, 2008

If you are a contributing employer for purposes of Michigan's Unemployment Insurance system, you must be alert to a possible add-on to your UI tax rate in 2009. Since it appears Michigan will have outstanding loan repayment obligations to the federal government at 2008 year-end, the Employment Security Act will likely call for the assessment of a Solvency Tax on some employers to assist the State in repaying these obligations.

All contributing employers in Michigan have a "rating account" on record with the Unemployment Insurance Agency. An individual employer's balance in this rating account is a comparison between all benefits ever paid out to employees and former employees (that have been charged to the employer) and all contributions ever paid into the Unemployment Trust Fund by the employer, calculated as of June 30 each year. So the account balance can be positive (contributions > benefits) or negative (benefits > contributions).

The Solvency Tax is calculated pursuant to a prescribed formula and can be as high as 2%. This percentage is then added to the sum of the other 3 tax rate components for any employer who has a negative account balance to establish that employer's tax rate for the calendar year. The employer then pays contributions for the calendar year at that rate on all taxable earnings: [tax rate] X the first $9,000 earned by each employee. If, for example then, the Solvency Tax component of the rate were determined to be 1%, the annual incremental cost to affected employers would be $90 for each employee earning $9,000 or more in wages.

A potentially affected employer does have one possible way to avoid this Solvency Tax: a "voluntary payment," which can be made anytime up to and including the 30th day from the mailing date of the employer's Annual Rate Determination Notice. In other words, the employer can pay off the negative account balance and go forward with a tax rate that does not include this Solvency Tax component. Of course, a cost benefit analysis is necessary to determine if the savings (Solvency Tax % X projected taxable earnings) are sufficient to justify the amount of the necessary voluntary payment.
Either way, the lesson is clear: be vigilant for your Rate Determination Notice and whether it includes a Solvency Tax. If it does, perform the calculation to determine whether a voluntary payment makes sense.

For more information on this issue, contact Dick Hooker at 248/567-7403.

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