Federal laws/regulations; Connecticut laws/regulations;

OLR Research Report

January 25, 2000





By: Laura Jordan, Associate Attorney

You asked how employer unemployment compensation (UC) taxes are calculated, what the UC Fund pays for, why the state issued bonds in 1993 to repay federal UC loans, what UC eligibility requirements and benefit levels are, and why UC benefits continue to be paid in a strong economy.

What UC taxes do employers pay and how are taxes determined?

Connecticut employers are assessed for (1) state UC taxes, (2) bond repayments related to the 1993 bail out of the state's UC Trust Fund (the “Fund”), and (3) federal UC taxes.

State UC Taxes

An employer's state UC tax liability depends on three factors: (1) the amount of wages it paid that are included in the taxable wage base set by the state, (2) the amount of unemployment benefits paid to the employer's workers over a specified period of time, and (3) the solvency of the Fund.

The Taxable Wage Base. Both federal and state laws establish a level of wages subject to taxation. The Federal Unemployment Tax Act (FUTA) taxable wage base is $7,000 (i.e., the first $7,000 paid to each employee of each year) (26 U.S.C. 3306(b)(1)). States' taxable wage base must be at least this high. Connecticut's taxable wage base is currently $15,000. Historically, it was $9,000 in 1994; $10,000 in 1995; $11,000 in 1996; $12,000 in 1997; and $13,000 in 1998.

The state's definition of taxable wages automatically includes all remuneration subject to FUTA (CGS 31-222(b)(3)). Certain types of employer payments are excluded under both laws.

The Charged Rate. FUTA requires states to use an experience rating system to assess employers for UC taxes and requires that the experience period be at least three years (26 U.S.C. 3303(a)). Within these constraints, states may structure their own tax systems. The two most popular systems are the reserve and benefit ratio systems. Connecticut uses the latter system, along with 14 other states. Under the benefit ratio system, tax rates are based on the ratio of an employer's benefit charges over a certain period (three years in Connecticut) to its payroll over the same period. Under the reserve ratio system used by 32 states, all benefits ever charged to an employer are subtracted from all the taxes it has ever paid into the fund. The result is then divided by the employer's average payroll for the preceding three years.

The maximum experience rate yields a standard percentage of 5.4% in Connecticut. This is also the maximum federal experience rate and the maximum FUTA credit (26 U.S.C. 3302(b)). Federal law requires that a new employer pay taxes at the maximum experience rate until it has accumulated sufficient experience to allow its taxes to be computed in accordance with that experience (26 U.S.C. 3304(a)(3)). Originally, FUTA required new employers to pay the maximum for at least three years. In 1954, states were permitted to lower the requirement to one year, and in 1970 FUTA was amended to allow states to assign reduced rates to new employers on a reasonable basis as long as the experience rate was not less than 1%.

Connecticut law requires new employers to pay a set experience rate until their experience account has been chargeable with benefits for at least one full experience year. The state's experience year runs from July 1 to June 30. The experience rate for new employers is 1% or the state's average five-year benefit-cost rate, whichever is higher, up to a maximum of 5.4% (CGS 31-225a(a) and (d)). If a business is transferred to another employer during the year and the successor has no previous experience rate, the old employer's experience rate is continued under the new employer.

The Fund Balance Rate. On top of the charged rate, each employer is charged the same flat tax rate known as the fund balance rate. This rate is tied into the solvency of the state's Unemployment Compensation Fund and is set each December 30 by the labor commissioner. As of January 1, 2000, the rate is 0%.

In 1993, the General Assembly increased the maximum fund balance tax rate from 1% to 1.5% until January 1, 1999, and 1.4% thereafter. It capped the permitted reserve in the Fund at 0.8% of the state's total annual payroll and required the fund balance tax rate to be reduced if the fund balance exceeds the cap (PA 93-243). The total annual payroll is the total wages paid to employees covered by the UC law by employers who pay unemployment taxes each year. If the fund balance exceeds that percentage on December 30 of any year, the labor commissioner must reduce the tax rate enough to eliminate any surplus.

Due to the maximum charged and balance rates, the highest UC tax rate any employer will pay in 2000 is 5.4% (maximum charged rate + 0% fund balance rate).

Table 1: Example 1: State UC Tax Determination


If an employer's charged rate is 2.0 in 1999 and his taxable wages are $90,000, his tax liability is $1,890

2.0% (charged rate) + .1% (the 1999 fund balance rate) = 2.1% (the employer's tax rate)

02.1% X $90,000 (employer's taxable wages) = $1,890 (the employer's total tax liability)

Bond Assessments

The state established a fund in 1993, which the state treasurer oversees, to receive revenue from bonds and employer assessments related to the 1993 bail out of the Fund, which owed the federal government approximately $900 million due to the severity of the recession that lasted from about 1989 to 1995.

Employers finance the bond fund through a special tax (sometimes referred to as a bond assessment) scheduled to end in 2001. An employer's advance fund tax rate is determined by multiplying its (1) annually assigned UC charged rate by (2) the annual bond rate set by the state treasurer. This rate, known as the “revenue ratio,” reflects the amount that the treasurer determines is needed to pay a specific year's bond debt. It was .513% in 1998. The 1999 revenue ratio has not yet been determined. The amount an employer owes in taxes is determined by multiplying his tax rate by his taxable wages.

Table 2: Bond Assessment Example


If an employer's taxable wages were $90,000 in 1998 and his charged rate was 2.0, then the amount of advance fund taxes he owed was $923.40.

.513% (the 1998 revenue ratio) X 2.0% (the employer's charged rate) = 1.026%

1.026% (the employer's advance fund tax rate determined above) X $90,000 (employer's taxable wages) = $923.40 (the employer's total bond assessment liability)

Federal UC Taxes

In addition to the two state taxes, employers pay a federal UC tax that the state plays no role in collecting. This tax largely pays for state administrative costs. Connecticut employers receive a federal corporation tax credit of up to 5.4% to offset their state UC taxes.

What do funds from the UC Fund pay for?

The Fund pays exclusively for claimant's UC benefits. Federal law prohibits states from using the Fund for any other purpose. The bond debt service is entirely paid for from an unrelated fund.

Explain what caused the state to issue $1 billion in bonds in 1993 to repay the federal loans for the UC Fund.

In 1993 the Fund had an accumulated debt of almost $900 million, which represented the amount the state had borrowed from the federal government to meet its UC obligations during the last recession. The General Assembly “bailed out” the Fund by authorizing up to $1 billion in state bonds in 1993.

If the state had not paid off its federal debt by September 1, 1993, federal law would have required Connecticut employers to pay interest on the debt at a rate exceeding 7%. In addition, employers would have seen an increase of 0.3% per year in their federal UC tax rate for each year beginning in 1994.

To forestall this result, the General Assembly authorized the state bonding. But it also required employers to pay off the state bond principal and interest through assessments over seven years (final employer assessments take place in August 2000, one year ahead of schedule). The interest rate on the state bonds is approximately 4.1%. The state treasurer estimates that, over the seven-year life of the bonding program, state employers will save $112 million in interest charges.

The state Labor Department reports that as of December 31, 1999 the outstanding principal and interest on the UC bonds was $395 million.

Federal Borrowing

The UC system is a shared federal-state program funded by employer taxes and covered by both state and federal laws. Under federal law, when a state UC fund has insufficient resources to pay UC benefits, it may borrow from the federal UC Trust Fund. If the state fund fails to repay the federal fund within a specified time, the federal government charges interest on the amount borrowed. In addition, the state's employers lose a gradually increasing part of their credit against federal UC taxes for the state UC taxes they pay. The loss of federal tax credit is effectively a tax increase.

State and federal taxes are based on payrolls. When unemployment rates are high and total payrolls correspondingly low, revenue raised from UC taxes can be insufficient to cover benefits paid out. When that happens, states use surpluses built up in their funds during good economic times. If a recession goes on long enough, some states may also have to draw on the federal fund to continue paying benefits. A very long recession, such as Connecticut experienced, also makes it difficult for the state fund to amass sufficient revenues to pay off the federal debt within the required time and avoid interest charges.

In Connecticut, UC benefit payouts began to exceed revenues to the state fund in 1989. The state began borrowing from the federal fund in 1991. As of September 1, 1993, the state owed the federal fund roughly $880 million. This is the amount that the state repaid with revenue from the 1993 General Assembly's special bond authorization.

What amount of unemployment benefits has the Fund paid annually since 1990?

The table below identifies the annual amount of UC benefits the state has paid since 1990. Figures are in millions.

1990 - $429

1991 - $584

1992 - $552

1993 - $512

1994 - $486

1995 - $435

1996 - $418

1997 - $348

1998 - $326

1999 - $361

What eligibility requirements must UC claimants meet and how are benefits calculated?

Eligibility Requirements

Minimum Earnings Requirement. States are permitted to impose minimum earnings requirements before claimants become eligible for UC and all states do so. Connecticut law requires a worker to have earned at least 40 times his weekly benefit amount during his base period. Thus, for example, if a claimant's benefit is $250 per week, he must have earned a minimum of $10,000 in his base period before he can collect (CGS 31-235 (a)(3)).

Under current law, a claimant is disqualified from receiving UC benefits during any week that he receives temporary total disability payments under the workers' compensation law; wages in lieu of notice; or dismissal or severance payments, unless as a condition of receiving the payment he is required to give up a legal right or claim against the employer (CGS 31-236 (a)(4)(A)).

Disqualification for Quitting a Job. States have complete discretion to disqualify employees who quit work without sufficient cause. Under Connecticut law, a claimant is not eligible if he voluntarily leaves suitable work without good cause attributable to his employer. The disqualification lasts until the claimant gets another job and earns at least 10 times his benefit rate.

Six non-work-related reasons for leaving are exempt from this disqualification and are considered “qualifying quits”: leaving (1) to care for a seriously ill spouse, child, or live-in parent; (2) because transportation to work, other than a personal vehicle, was discontinued and there is no other reasonable transportation; (3) work taken while on layoff when recalled by a former employer; (4) solely because of a government law or regulation; (5) part-time work to accept full-time work; and (6) work to protect yourself or a child living with you from domestic violence.

Disqualification for Being Fired. Under Connecticut law, a claimant cannot collect UC if he is fired or suspended for (1) willful misconduct (including deliberately violating a reasonable and uniformly enforced company rule or policy); (2) felonious conduct; (3) stealing services or property worth $25 or more or any amount of currency; (4) just cause; (5) participating in an illegal strike; (6) being disqualified from performing a job because of failing a legally required drug or alcohol test; or (7) being absent without notice at least three separate times within 18 months. A claimant is also disqualified if he is discharged while serving a prison sentence of at least 30 days. In most cases, the misconduct leading to the disqualification must be work-related. The disqualification lasts until the claimant gets work and earns at least 10 times his benefit rate.

Refusal to Accept Suitable Work. A claimant who fails to apply for and accept suitable work, including an employee of a temporary help service who refuses suitable employment offered by the service, is disqualified until he returns to work and earns at least six time his benefit rate.

Special Disqualifications. FUTA requires all states to deny benefits to the following categories of workers: aliens, professional athletes, and employees of educational institutions.


In general, Connecticut's weekly benefit is 50% of the average weekly pay the claimant earned in the two highest-paid quarters of his base period, but for construction workers, it is 50% of the average pay earned in the highest-paid quarter. The minimum weekly benefit is $15, the maximum is 60% of the state average production wage, and the annual increase in the maximum is capped at $18. The current maximum weekly benefit is $382 per week.

State law defines the base period as the first four of the five most recently completed calendar quarters preceding the day the claim is filed. For example, if a claimant filed a claim on March 17, 1999 his base period, as illustrated below, is October 1, 1997 to September 30, 1998.

Table 1: Base Period for Claim Filed March 17, 1999

First Quarter of Base Period

Oct – Dec 1997

Second Quarter of Base Period

Jan – March 1998

Third Quarter of Base Period

April – June 1998

Fourth Quarter of Base Period

July – Sept 1998

Fifth Quarter

Oct – Dec 1998 (does not count as base period)

Quarter in Which Claim is Filed

Jan – March 1999 (does not count as base period)


A claimant may receive an additional $15 per week for a nonworking spouse who lives with him and for each dependent child or stepchild under age 18 or, if a full-time student, under age 21. Dependency allowances cannot exceed 100% of the person's weekly benefit rate and the maximum number of dependents for whom allowances may be paid is five, making the maximum weekly amount of dependency allowances $75 (CGS 31-234).

A claimant may receive benefits for up to 26 weeks in a benefit year (CGS 31-231b). In Connecticut, a person is eligible for unemployment benefits if, in a week of part-time work, he earns less than 150% of his weekly benefit amount. In order to provide an incentive for unemployed workers to work part-time, Connecticut offsets only two-thirds of the claimant's part-time wages earned against his benefit amount. Thus, if a claimant receiving a weekly benefit of $250 works part-time in a week and earns $100, his benefit for that week is reduced by $66 to $184.

Disqualifying Income. States may disqualify claimants who are receiving certain kinds of income. FUTA requires states to reduce the weekly benefit amount by the weekly amount a person receives in “governmental or other pension, retirement, annuity or any other similar periodic payment” based on his previous work but only if the plan was contributed to or maintained by a base-period or chargeable employer. States are allowed to apply the deduction on a wider basis if they wish but Connecticut does not. In addition, Connecticut, as FUTA allows it to, disregards pension payments if the base-period employment does not affect eligibility for or increase the amount of the pension.

Finally, although FUTA requires Social Security and Railroad Retirement benefits to be deducted from UC, states do not have to deduct the portion of the benefit that is attributable to the worker's own contributions, and Connecticut does not deduct for this (CGS 31-227(g)).

Why are employers still being taxed for unemployment benefits when the economy is doing so well?

The UC program is not designed to stop issuing benefits during strong economic periods. However, it is designed to respond in a favorable way to employers during good economic times. For example, under state law the fund balance tax automatically decreases to limit the amount of reserve maintained in the Fund. Reserves increase in strong economies because employers are paying taxes on more employees (bringing more money into the Fund) and fewer employees are seeking benefits (less money goes out of the Fund). Since 1998, the Fund balance rate has decreased from 1.5% to .1% to 0%.

Another example is that as the economy remains strong for over three years, as the Connecticut economy has, employer experience taxes decrease. This rate is tied into the number of former employees who receive benefits charged to their former employer's account. Employers who frequently layoff employees have higher experience rates (up to a maximum rate). The experience rate looks back over a three-year period. Since employers have laid off fewer employees over the past three years, experience rates should decrease overall. Of course, this will not be true for some employers, especially those whose business depends on seasonal employment.

Another reason UC benefits do not cease in strong economic periods is that business is dynamic rather than static; individuals continue to lose work through no fault of their own. Even though the state's unemployment rate is one of the lowest in the country (2.6% in December), some employers still need to reduce their workforce to remain competitive. For example, Pratt & Whitney announced last week that it would lay off 1,700 employees in addition to 3,500 lay offs that it announced earlier in the year. For these reasons, the General Assembly has made a policy decision to provide employees with a modest form of income to live on until they are re-employed.