[Federal Register Volume 61, Number 105 (Thursday, May 30, 1996)]
[Notices]
[Pages 27101-27104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13565]
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DEPARTMENT OF LABOR
Employment and Training Administration
Federal-State Unemployment Compensation Program: Unemployment
Insurance Program Letters Interpreting Federal Unemployment Insurance
Law
The Employment and Training Administration interprets Federal law
requirements pertaining to unemployment compensation as part of its
role in the administration of the Federal-State unemployment
compensation program. These interpretations are issued in Unemployment
Insurance Program Letters (UIPLs) to the State Employment Security
Agencies (SESAs). The UIPL described below is published in the Federal
Register in order to inform the public.
UIPL 22-96
Federal law requires that all money received in the unemployment
fund shall, immediately upon receipt, be paid over to the Secretary of
the Treasury to the credit of the Unemployment Trust Fund. This
provision is referred to as the ``immediate deposit requirement.''
Federal law also contains a ``withdrawal standard'' which, with limited
statutory exceptions, requires that all money withdrawn from the
unemployment fund of the State shall be used solely in the payment of
unemployment
[[Page 27102]]
compensation. This UIPL puts forth the Department of Labor's
interpretation of when monies are received in the State's unemployment
fund and when they cease to be a part of such fund.
Dated: May 23, 1996.
Timothy M. Barnicle,
Assistant Secretary of Labor.
U.S. Department of Labor, Employment and Training Administration,
Washington, D.C. 20210
Classification: UI
Correspondence Symbol: TEURL
Date: May 22, 1996
Directive: Unemployment Insurance Program Letter No. 22-96
To: All State Employment Security Agencies
From: Mary Ann Wyrsch, Director, Unemployment Insurance Service
Subject: The Immediate Deposit and Withdrawal Standards
1. Purpose. To advise States of the Department of Labor's
interpretation of Federal law concerning the applicability of the
immediate deposit and withdrawal standards to State unemployment fund
moneys.
2. References. Sections 3302(a)(1), 3304(a)(3), 3304(a)(4), 3306(f)
and 3306(h) of the Federal Unemployment Tax Act (FUTA); Sections
303(a)(1), 303(a)(4), 303(a)(5), and 904 of the Social Security Act
(SSA); Cash Management Improvement Act of 1990, Public Law No. 104-453
(1990).
3. Background. Over the years the Department of Labor has
corresponded with many States concerning the handling and use of moneys
in State unemployment funds. Questions which frequently arise include
when moneys are ``received in'' the unemployment fund and when moneys
cease to be a part of the fund. This UIPL is issued to inform States of
the Department's interpretation of Federal law requirements concerning
these matters.
4. Federal law provisions. The relevant provisions of Federal law
follow.
Rescissions: None
Expiration Date: Continuing
a. Section 3302(a)(1), FUTA, provides that: The taxpayer may, to
the extent provided in this subsection and subsection (c), credit
against the tax imposed by section 3301 the amount of contributions
paid by him into an unemployment fund maintained during the taxable
year under the unemployment compensation [henceforth ``UC''] law of a
State which is certified as provided in section 3304 for the 12-month
period ending on October 31 of such year.
b. Section 3304(a)(3), FUTA, requires, as a condition of employers
in a State receiving credit against the Federal unemployment tax, that:
all money received in the unemployment fund shall * * * immediately
upon such receipt be paid over to the Secretary of the Treasury to the
credit of the Unemployment Trust Fund established by section 904 of the
Social Security Act.
This ``immediate deposit'' requirement is also found in Section
303(a)(4), SSA, as a condition for a State receiving administrative
grants.
c. Section 3304(a)(4), FUTA, requires, as a condition of employers
in a State receiving credit against the Federal unemployment tax, that:
all money withdrawn from the unemployment fund of the State shall be
used solely in the payment of unemployment compensation, exclusive of
expenses of administration * * *.
This ``withdrawal standard'' is also found in Section 303(a)(5),
SSA, as a condition for a State receiving administrative grants. Both
provisions contain exceptions not germane to this UIPL.
d. Section 3306(f), FUTA, defines the term ``unemployment fund,''
in relevant part, as meaning: a special fund, established under a State
law and administered by a State agency, for the payment of
compensation. Any sums standing to the account of the State agency in
the Unemployment Trust Fund established by section 904 of the Social
Security Act * * * shall be deemed to be a part of the unemployment
fund of the State, and no sums paid out of the Unemployment Trust Fund
to such State agency shall cease to be a part of the unemployment fund
of the State until expended by such State agency. An unemployment fund
shall be deemed to be maintained during a taxable year only if
throughout such year * * * no part of the moneys of such fund was
expended for any purpose other than the payment of compensation
(exclusive of expenses of administration) and for refunds of sums
erroneously paid into such fund * * *.
e. Section 3306(h), FUTA, defines the term ``compensation'' as
``cash benefits payable to individuals with respect to their
unemployment.''
f. Section 303(a)(1), SSA, requires, as a condition for States
receiving administrative grants, that an approved State law include
provision for: [s]uch methods of administration * * * as are found by
the Secretary of Labor to be reasonably calculated to insure full
payment of unemployment compensation when due.
g. Section 904, SSA, establishes the Unemployment Trust Fund (UTF)
and places specific requirements on the U.S. Secretary of the Treasury
for its management and investment. Specifically, Section 904(b), SSA,
in pertinent part, provides that: [i]t shall be the duty of the
Secretary of the Treasury to invest such portion of the Fund as is not,
in his judgment, required to meet current withdrawals. Such investment
may be made only in interest-bearing obligations of the United States
or in obligations guaranteed as to both principal and interest by the
United States * * *.
5. Discussion. a. In General. The management of the funds from
which UC was to be paid was given considerable attention by the
drafters of the SSA of 1935. Federal investment was adopted over State
investment as it was feared that liquidation of State investments on a
falling market would worsen the severity of an economic downturn and
cause the States to sell securities at a loss in order to pay UC. A
Senate committee report described the advantages of Federal investment:
Securities will not have to be dumped on the markets in order that
the reserve funds may be liquidated. Instead of increasing the tendency
toward deflation, the handling of the reserve funds in the manner
provided in the bill [i.e., the SSA] will make possible their use to
promote stability. When depression sets in, the funds can be liquidated
without actual sale of the securities on the markets, and since they
will be used to pay compensation to unemployed workmen, the net effect
will be to maintain purchasing power without any offsetting effects
toward deflation. [S. Rep. No. 628, 74th Cong., 1st Sess. 15 (1935)
(henceforth ``Senate Report'').]
As a result, the current trust fund \1\ system was established. The
Senate Report makes it clear that a trust fund limited to a specific
purpose was intended: ``The States can draw upon the employment trust
fund solely for unemployment compensation purposes * * *.'' (Senate
Report at 15.) The Senate Report also states that: [Section 904(a)]
establishes in the Treasury of the United States a trust fund with the
Secretary of the Treasury as trustee and with the respective State
Agencies, administering the State unemployment
[[Page 27103]]
compensation laws, as beneficiaries of the trust. [Senate Report at
47.]
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\1\ According to Black's Law Dictionary, a ``trust fund'' is a
``fund held by a trustee for the specific purposes of the trust; in
a more general sense, it is a fund which, legally or equitably, is
subject to be devoted to a particular purpose and cannot or should
not be diverted therefrom.''
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Unlike many other trust systems, the UC system involves active
participation by the beneficiaries: States collect amounts due the
trust and make the actual payment of UC. To assure that the States
administered these activities in accordance with the purpose of the
trust, the immediate deposit and withdrawal standards place specific
requirements on the States.
b. The Unemployment Fund. Both the immediate deposit and withdrawal
standards apply to moneys in the State's unemployment fund. The
definition of ``unemployment fund'' in Section 3306(f), FUTA, begins by
emphasizing the States' participation in the UC program: the
unemployment fund is ``a special fund, established under a State law
and administered by a State agency, for the payment of compensation.''
The unemployment fund includes ``[a]ny sums standing to the account
of'' the State in the UTF. Further, ``no sums paid out of the
Unemployment Trust Fund to such State agency shall cease to be a part
of the unemployment fund of the State until expended by such State
agency.'' (Emphasis added.)
Due to the active participation of the States in collecting and
expending trust moneys, the parts of the unemployment fund used for
these purposes reside in and are managed by the States. A State's
unemployment fund consists of three main parts: a clearing account for
the temporary and immediate deposit of all moneys paid to the fund, the
State's account in the UTF (as provided in Section 3306(f), FUTA), and
a benefit payment account consisting of all money requisitioned from
the State's account in the UTF for the payment of unemployment
benefits.\2\
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\2\ For example, Section 10(b) of the Manual of State Employment
Security Legislation, Revised September 1950, provides that the
State ``shall maintain within the [unemployment] fund three separate
accounts: a clearing account, an unemployment trust fund account,
and a benefit account.''
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c. When Moneys Become Part of a State's Unemployment Fund. Moneys
need not be in any of the three main parts to be in the fund. The exact
time moneys become part of the State's unemployment fund is statutorily
controlled by the immediate deposit requirement which requires the
payment by the State of ``all money received in the unemployment fund
and * * * immediately upon such receipt'' to the Secretary of the
Treasury to the credit of the UTF.
The Department interprets the phrase ``received in the unemployment
fund'' to mean that any money received for purposes of the trust (i.e.,
the payment of UC) is ``in'' the State's unemployment fund at the
instant of its receipt by the State or its agent. This interpretation
assures that transfers of moneys in a State's possession are not
delayed, thereby giving effect to the immediate deposit requirement
that all moneys be immediately \3\ paid over to the UTF and assuring
the beneficiary has forwarded moneys to the trustee for investment.
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\3\ The Department's interpretation of ``immediate'' is
implemented in the performance levels it has established for
measuring the promptness of (1) depositing contributions received by
the State into the clearing account and (2) transferring such
contributions from the clearing account to the UTF.
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This interpretation also assures that an employer paying
contributions will receive credit for these payments against the
Federal unemployment tax under Section 3302(a)(1), FUTA, which allows
the credit to be taken by an employer only for ``the amount of
contributions paid by him into an unemployment fund.''
As an example, employer and employee UC contributions are
``received in'' the State's unemployment fund at the instant of receipt
by the State or its agent and the State must immediately place such
moneys in the clearing account for immediate transfer to the UTF. As
another example, if the balance over a certain level in a penalty and
interest account is required to be transferred to the State's
unemployment fund on a certain date, then the amount required to be
transferred is deemed to be ``in'' the State's unemployment fund at the
instant the transfer is required to be made. Similarly, all
unemployment fund earnings are immediately part of the fund.
In some States the UC agency also collects taxes for other
programs, such as temporary disability insurance. In others, a non-UC
agency, such as the Department of Revenue, collects UC contributions.
In both cases, the UC contributions may be deposited in one State bank
account, transferred to another State bank account and then transferred
to the UTF. Since UC contributions are in the unemployment fund at the
instant they are received by the State, that part of any State account
which these contributions pass through its considered to be part of the
State's clearing account. Any other interpretation would permit delays
in the transfer to the UTF and the other problems discussed above.
d. Withdrawals From a State's Unemployment Fund. Under the
withdrawal standard, moneys may be withdrawn from the State's
unemployment fund only for the payment of UC (or another statutorily
permissible use), and, as provided in Section 3306(f), FUTA, do not
cease to be a part of the State unemployment fund until actually
``expended.'' The Department interprets the term ``expended'' to mean
an amount is actually paid out to a recipient. That is, the State's
account is debited for the purpose of settling a payment by electronic
fund transfer and/or redeeming a check, warrant, or other paper
instrument.
Put another way, unemployment funds are not expended simply because
a negotiable instrument is issued. For example, if a claimant fails to
cash a check within the time specified in State law, there has been no
expenditure. The State may not, therefore, transfer the funds to the
State's general account to be used for another purpose.\4\ This
interpretation assures the purpose of the trust is accomplished since,
even though a check for the payment of UC may have been issued, the
unexpended funds remain available for the payment of UC.\5\
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\4\ UIPL No. 661, dated June 7, 1962, addressed this escheat of
uncashed checks drawn against unemployment fund accounts.
\5\ The fact that amounts have not been ``expended'' does not
preclude the raising of a withdrawal standard issue on the basis
that amounts are constructively withdrawn for an impermissible
purpose. UIPL 25-89, 54 Fed. Reg. 22,973 (1989) tranmitted a
Secretary's Decision stating that such constructive withdrawals are
inconsistent with Federal law.
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Similarly, moneys are not expended from the unemployment fund
simply because they are transferred from one State account to another
prior to transfer to the UTF or prior to an actual payment of UC or
other permissible use. Moneys are, however, considered to be expended
when the transfer to another State account (e.g., the State's general
account) results in the moneys no longer being available for the
payment of UC or other permissible use. It should be noted that, under
Section 3306(f), FUTA, an unemployment fund exists only if all fund
expenditures from the fund are for the payment of UC (or other
statutorily permissible purpose.) Therefore, if the State expended an
amount for an impermissible purpose, then the State would no longer
have an unemployment fund as provided under Section 3306(f).
e. Withdrawals from any Unemployment Fund Account are Subject to
the Withdrawal Standard. The withdrawal standard applies to ``all
amounts withdrawn from the unemployment fund.'' To assure that
unemployment fund moneys are properly used and efficiently managed, the
Department interprets this requirement as applying to
[[Page 27104]]
withdrawals/transfers from one unemployment fund to another. For
example, except as otherwise permitted by the Cash Management
Improvement Act, any drawdown from the UTF not needed for the immediate
payment of UC (or other use authorized by Federal law) is inconsistent
with the withdrawal standard. Similarly, a transfer from the clearing
account (except as otherwise permitted under Federal law) to any
account other than the UTF is inconsistent with the withdrawal
standard.
6. Action Required. State agency administrators are requested to
review existing State law provisions and State procedures to ensure
that Federal law requirements as set forth in this UIPL are met. Prompt
action, including corrective legislation, should be taken to assure
Federal requirements are met.
7. Inquiries. Direct questions to your Regional Office.
[FR Doc. 96-13565 Filed 5-29-96; 8:45 am]
BILLING CODE 4510-30-M
