In late 2009, President Obama signed Executive

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1 Unemployment Insurance Integrity: What Employers Need to Know By Tammy Mullin and Greg Good Tammy Mullin and Greg Good explore the trend of shifting unemployment insurance integrity from the states to employers Tammy Mullin is Senior Director of Product Management for Unemployment Cost and Tax Management Services at Equifax Workforce Solutions. Greg Good is Director of Product Marketing for Employer Services at Equifax Workforce Solutions. In late 2009, President Obama signed Executive Order with the purpose of significantly increasing efforts to eliminate improper payments in programs administered by the federal government. As a result, the Department of Labor (DOL) and state workforce agencies, which historically monitored the integrity of the Unemployment Insurance (UI) Program, have followed suit and placed a strong focus on this initiative moving forward. Because UI Integrity continues to be regarded as one of the programs performing at an unacceptable level, the DOL followed up on the President s Order with a Call to Action in 2011 ensuring that payment integrity remains a top priority. This directive provides the expectation that every state will assess root causes of improper r benefits efits and implement men specific action plans to reduce these payments. In nlate 2012, 2, the DOL awarded approximately $169 million in supplemental budget requests for state projects related to the reduction of improper benefit payments. 1 Furthering this objective, core strategies and pilot tests have been developed around such programs as supplemental UI messaging, the State Information Data Exchange System (SIDES), cross matching of claims against employment and financial databases, Employer Service Registration, and others. State agencies, however, cannot effectively address this issue on their own, as employers play a key role in UI Integrity as well. To ensure continued federal funding, as well as the successful implementation of these federal mandates, states are beginning to shift responsibility for UI Integrity to employers by enforcing more stringent penalties for noncompliance moving forward T. Mullin and G. Good 43

2 Unemployment Insurance Integrity: What Employers Need to Know Benefit Accuracy Measurement The integrity of a state unemployment program can be measured, in accordance with state regulations, by the accuracy of unemployment benefit payments and denied claims. With the level of government spending on unemployment benefits recently hitting historical highs, states are under increasing pressure to ensure benefit claims are adjudicated correctly, while improper benefits are kept to an 44 weekly benefits, which currently averages just under $300 nationwide. 2 Three key measures to consider in determining the overall impact of benefit accuracy on the UI system involve overpaid claims, underpaid claims, and improperly denied claims. Overpaid The number of claimants who were either over or absolute minimum. To ensure continued federal underpaid began increasing substantially in 2008 The DOL Benefit Accuracy Measurement as we saw record claims funding, as well as the successful (BAM) Program monitors implementation of these federal filed in response to the UI Integrity with a series of audit procedures mandates, states are beginning economic downturn. In to shift responsibility for UI 2011, total UI overpayments represented $5.11 designed to determine the accuracy of paid and Integrity to employers by enforcing billion versus $4.2 billion paid in This, denied claims. For claims more stringent penalties for that were determined to noncompliance moving forward. however, has decreased have been administered from the $7.1 billion paid improperly, BAM determines the following: declines in improper payments may be indicative in These recent The cause of the error and the responsible party of not only the recent reductions in overall unemployment claims, but of a renewed focus on UI error was detected Integrity as well. Relevant evan actions taken by the agency and em- In relation to total benefits paid, the percentage of ployers prior to the error claimants receiving too much or too little in payouts The point in the UI claims process at which the It is important to note that t these measures are had remained consistent prior to As the volume reported din accordance with varying state regulations. However, no judgment is rendered as to the percent of benefit overpayments has also risen, albeit of claims increased after the economic downturn, the sufficiency of the amount a claimant receives in erratically, over the last several years. It is interesting tin to note,,however, that this figure edeclined dto o10.67 Figure 1. Overpaid Benefit Accuracy Improperly Denied Underpaid percent in 2011 (see Figure 1 below). While there is currently a tremendous amount of focus on UI Integrity and benefit accuracy, it remains to be seen whether this most recent decline in overpayment rate is the beginning of a trend or simply continued annual fluctuation. Either way, it is becoming imperative that employers take steps necessary to ensure UI Integrity compliance and avoid penalties and increases in denied claims protests. Causes of Benefit Overpayments Investigating the causes of unemployment benefit overpayments can be extremely helpful in minimizing this component of unemployment cost. While they may vary, the most common cause (which has risen to more than 30 percent) is due to either unreported or misreported earnings (shown as Benefit Year Earnings

3 Figure 2. Unemployment Benefit Overpayment Rate 12% 11% 9% 8% 7% 6% Source: DOL Benefit Accuracy Measurement Data Summary ( ) in Fig. 2 below). This may occur when a claimant goes back to work but continues to collect unemployment benefits or as a result of errors in calculating weekly benefit amounts in situations of partial week employment. Separation issues, which represent the next largest cause of overpayments, accounted for more than 20 percent of overpayments in These are generally ly related ed to voluntary quit claims, where the auditors found that a different determination n should have been reached, given the circumstances of the case. The next largest categories relate e to situations where claimants sf fail to omeet state-specific work search requirements or fail to register for state employment services, but still receive benefits. Another critical component of this analysis involves the source of the information that leads to the determination of the cause. According to BAM program data, claimants provide most of the information that agencies use in determining eligibility for UI benefits. As a result, BAM finds claimants either solely or jointly responsible (with agencies or employers) for overpayments in over 80 percent of the cases. On the other hand, agencies were found to only impact the results in about 26 percent of cases and employers in only 20 percent of cases. 4 However, this does not imply that employers cannot contribute to instances of unemployment benefit overpayment. On the contrary, inaction on the part of employers, including either the failure to respond to state requests for information or simply responding with inadequate information, can contribute significantly to benefit overpayments. Combined, these two situations contribute to 83 percent of the findings in which employers were either solely or jointly responsible for overpayments. Employers Can Reduce Unemployment Costs till ceive benefits. It is important to note that benefit e overpayments ent not only impact employer er state Figure 3. Causes of Unemployment Benefit Overpayments account reserves, but the trust fund balance as a whole. Based on state averages, 35% 30% about 13 percent of benefits paid are never charged to an individual employer account 25% and more than six percent are 20% 2011 charged to inactive employers. 15% 5% 0% As a result, all tax-paying employers share the burden of these unemployment costs. In recent years, states have paid out more in benefits Benfit Year Separation Work ES Base Period Able & Other than they have received in Earnings Issues Search Registration Wage Available Issues Issues Issues Issues Issues unemployment taxes from Source: DOL BAM Annual Report Rate Overpayment by Cause ( ) employers due in part to these overpayments. In fact, JOURNAL OF STATE TAXATION 45

4 Unemployment Insurance Integrity: What Employers Need to Know the state average negative gap between taxes received and benefits paid is approximately 12 percent. 6 In many states, the shortfall is being covered by federal loans that come with additional monetary repercussions if not repaid in a timely manner. There are currently 20 jurisdictions owing the federal government a total of $27 billion, with overpayments contributing prominently to these figures. 7 Fortunately, there are several mechanisms by which employers can prevent unnecessary unemployment benefit overpayments. These include: Providing timely, accurate and complete documentation in response to all claims Providing employee training regarding how to most effectively respond to requests from state agencies Utilizing electronic state data exchanges, which expedite edit the delivery of critical claims informa- tion while supporting data integrity Responding gp promptly ptly to Wage Earning Verifications requests ests Reporting new hires and re-hires to state agencies (including ing the enational Directory of New Hires) within 20 days Adherence to these e guidelines will not only reduce overpayments from state funds, but will help improve the state agencies efficiency in administering the process, lowering the cost of supporting the program as a whole. Underpaid While unemployment benefit overpayments tend to receive most of the focus in UI Integrity, benefit underpayments are also a cause for concern, as claimants were underpaid by about $309 million in Trending in a manner consistent with overpayments, this figure has generally increased from $259 million in 2008, although it is down from $ Figure 4. Causes of Unemployment Benefit Underpayments 80% 70% 60% 50% 40% 30% 20% 0% Base Period Wage Issues Source: BAM Summary ( ) Benefit Year Earnings Deductible Income In recent years, states have paid out more in benefits than they have received in unemployment taxes from employers due in part to these overpayments. Other Issues million in The percentage of underpaid claimants, however, is much smaller than their overpaid counterparts and represents less than one percent of total claimants. Again, it remains unclear whether recent declines in underpayments are more indicative of recent reductions in overall unemployment claims or a renewed focus on UI Integrity. Causes of Benefit Underpayments The causes for underpayments are less varied (Fig. 3), with the vast majority due to either base period wage issues (approximately 60 percent) or benefit year earnings issues. Base period wage issues are primarily the result of data entry errors made when earnings information is not provided electronically. ectr c This ssitua- tion can often be remedied through utilization of the aforementioned state electronic data exchanges. While base period wage issues are the leading cause of benefit underpayments, they actually impact both overpayments and underpayments, resulting in recent annual net overpayments exceeding $100 million (Fig. 4). Again, employers can reduce these error rates and ensure the accuracy of charges to their state accounts through a variety of means, including careful completion and verification of data submitted on quarterly wage reports as well as making sure that accurate information is being submitted to the state on a regular basis.

5 Figure 5. Net Impact of Base Period Wage Issues Sources: BAM Underpayment Rates & U.S. Cause & Responsibility ( ) DOL BAM Annual Report Rate Overpayments by Cause ( ) In contrast to overpayments, employers and claimants are equally responsible, either solely or jointly, for approximately 54 percent of benefit underpayments in In the case of employers, this is primarily due to understated information on quarterly rly wage reports. The responsibility of claimants, on the other hand, is primarily due to errors in reporting weekly earnings, which are used by the state te agencies in adjusting weekly benefit amounts. Though h much less prominent, nt, state te agency errors impact results in nabout t24 percent of the underpayment cases. 9 Figure 6. Separation Issues Monetary Issues Improperly Denied Non- Separation Issues Improperly Denied Errors for improperly denied claims fall into three categories based on eligibility criteria established by state agencies: monetary issues, separation issues, and nonseparation issues. Monetary Issues: are initially denied if the state agency determines that the claimant failed to meet certain minimum wage requirements during their prior employment or the claimant fails to meet certain other monetary eligibility requirements such as earning sufficient wages in a minimum required number of weeks. Separation Issues: To be eligible for unemployment, claimants must be unemployed due to no fault of their own, discharged for non-disqualifying reasons, or must have voluntarily left employment for a non-disqualifying reason provided in state law, such as workplace harassment, domestic violence, or to relocate with a spouse. 10 Nondisqualifying reasons vary by state and are based on specific state regulations. Non-Separation Issues: These criteria include the claimant s ant ability and availability ailab to work, disqualifying and unreported dearnings n and income received during the benefit year, failure to meet work search requirements, failure to report (as required by the state agency) and provide information related to their UI claim, and failure to utilize reemployment services. Error rates for denied claims by category had remained fairly consistent prior to the 2008 economic downturn, but this has changed with the resulting increase in claims volume (Fig. 5). Error rates due to separation reasons have remained less than 10 percent, and errors relating to monetary issues have actually declined to a similar rate. The error rate for non-separation related denials, on the other hand, has risen significantly over the last several years. Responsibility for errors on denied claims is highly dependent upon the category under which the benefit JOURNAL OF STATE TAXATION 47

6 Unemployment Insurance Integrity: What Employers Need to Know Figure 7. Error Rates on Denied State Agency Efforts to Reduce Improper Payments Sources: BAM Denied Accuracy and Error Rates ( ) was denied. While all three parties share responsibility for monetary errors, agencies are primarily responsible for separation errors, and claimants and agencies are primarily responsible for non-separation errors (Fig. 6). As with overpayments and underpayments, employer actions leading to improper denials are primarily i related ed to unreported or misreported earnings son quarterly wage reports, followed by failure to respond or responding with inadequate information to claim filings ings and state requests. ests Figure 8. Improper Denial Responsibility By Type of Denial 50% 40% In response to the record levels of benefit payments incurred over the past several years, efforts to reduce costs that can be controlled, such as improper payments, have increased significantly. In fact, we may very well be at a turning point in the reduction of benefit overpayments resulting from state agency errors. A few of the initiatives currently in place or under review include: Development of a strategic quality service plan to ensure strong UI Integrity program performance, guide key management decisions, focus and prioritize resources, and support new state performance measures focused on overpayment prevention Mandated state use of the national directory for new hires in order to detect individuals still receiving benefits after reemployment Continued increase in the number of states participating in the State Information Data Exchange System (SIDES) in order to improve the timeliness and quality of separation information provided to the states 30% 20% Monetary Separaton Non-Separation 0% Employer Agency Claimant Employer & Agency Employer & Claimant Claimant & Agency Other Source: BAM Improper Denials Responsibility (2011) 48

7 Creation of both claimant and employer messaging campaigns to promote awareness of UI Integrity and deter continued claims filings from claimants who have returned to work Development of technology and solutions designed to address improper payments associated with a claimant s failure to register with the state s employment service or job bank Identification (and pilot testing) of additional employment and payroll deposit databases to be used for early detection of improper payments to claimants who have returned to work Development of the UI Integrity Center of Excellence with the goal of promoting the development and implementation of innovative integrity strategies, including the prevention and detection of fraud, in the UI program moving forward Additional legislation to provide resources for states to perform integrity related functions and improve existing tools to identify and address improper payments Conclusion Prior to the economic downturn of 2008, when state unemployment trust funds were adequately funded, it would appear that the overall impact of benefit accuracy issues on state trust fund balances had not been overly harmful. However, as state trust funds have become depleted and the federal government has been forced to pick up a larger percentage of the cost related to unemployment compensation, this issue has come to garner increasing levels of attention. Moving forward, state programs and processes will remain under scrutiny, with increased pressure to reduce overpayments and control costs. On a more personal level, with continued high unemployment rates and increased duration of unemployment for those who have lost their jobs, the toll taken on employers and individuals whose businesses and lives are impacted by these errors must also be considered. While the integrity of state programs is measured by the states themselves and reported through the DOL, ensuring the integrity of the UI system remains everyone s responsibility. By confirming that quarterly wage reports are filed accurately and on time, and ensuring the accuracy and detail of claim responses to the states, employers can do their part to not only have a positive impact on their own cost exposure, but also the cost and integrity of the system overall. ENDNOTES 1 DOL, Unemployment men Insurance Improper Payments, 2012.,Q Q3/2012. Data Summary: CY CY BAM Overpayment Responsibility by Integ- rity Rate, DOL, Significant Measures of State Unemployment Tax Systems, DOL, Significant Measures of State Unemployment Tax Systems, 2012 (non-weighted avg). 7 U.S. Treasury, Q1/ DOL, Benefit Accuracy Measurement (BAM) Data Summary: CY2008 CY BAM Annual Report Underpayments by Responsibility, DOL, Benefit Accuracy Measurement Data Summary, mary This article is reprinted with the publisher s permission from the JOURNAL OF STATE TAXATION, a bimonthly journal published by CCH, a Wolters Kluwer business. Copying or distribution without the publisher s permission is prohibited. To subscribe to the JOURNAL OF STATE TAXATION or other CCH Journals please call or visit All views expressed in the articles and columns are those of the author and not necessarily those of CCH or any other person. JOURNAL OF STATE TAXATION 49