A-133 Compliance Supplement - Unemployment Insurance - Provisional 6/97
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The Regular Compensation, Unemployment Compensation for Federal Employees (UCFE), and Unemployment Compensation for Ex-Servicemembers (UCX) programs provide Unemployment Compensation (UC) to unemployed workers for periods of involuntary unemployment and help stabilize the economy by maintaining the spending power of workers while they are between jobs. During periods of high unemployment, the Extended Benefits (EB) program pays UC for an additional (or extended) period of time to eligible unemployed workers who have exhausted their entitlement to Regular Compensation.

States must ensure full payment of UC "when due," and must deny payments when not due (42 USC section 503(a)(1)).


The structure of a Federal-State Unemployment Insurance (UI) program partnership is provided for by Titles III, IX and XII of the Social Security Act of 1935 (SSA) (42 USC section 501 et seq.) and the Federal Unemployment Tax Act (FUTA) (26 USC section 3301 et seq.). Initially, the UI program consisted solely of the Regular Compensation program. Since its inception, however, the program was expanded to include the payment of UC, or monetary benefits, to other eligible groups. UC coverage was extended to Federal civilian employees in 1954 by the UCFE program (Public Law 83-767), and to ex-members of the Armed Forces in 1958 by the UCX program (5 USC sections 8501-8525; Public Law 85-848). The Federal-State Extended Unemployment Compensation Act (EUCA) of 1970 provided for an EB program (26 USC section 7805; 20 CFR part 615).

The structure of the Federal-State UI Program partnership is based upon Federal law; however, it is implemented primarily through State law. Unless otherwise noted, responsibilities of the U.S. Department of Labor (DOL) include: (1) collection of Federal unemployment taxes (Internal Revenue Service); (2) allocating available administrative funds among States; (3) administering (U.S. Department of the Treasury) and monitoring activities of the Unemployment Trust Fund (UTF); (4) establishing program performance measures; (5) monitoring State performance; (6) ensuring conformity and substantial compliance of State law and operations with Federal law; and, (7) setting broad overall policy for program administration. State UI program operations are conducted by the State Employment Security Agency (SESA; the generic name for the agency which has responsibility for the State's Employment Security function). State responsibilities include: (1) establishing specific, detailed policy and operating procedures which comply with the requirements of Federal laws and regulations; (2) determining the State UI tax structure; (3) collecting State UI contributions from employers (commonly called "unemployment taxes"); (4) determining claimant eligibility and disqualification provisions; (5) making payment of UC benefits to claimants; (6) managing the program's revenue and benefit administrative functions; and, (7) administering the programs in accordance with established policies and procedures. The administrative procedures governing operation of the Federal-State partnership are found in 20 CFR part 601.

Almost 97 percent of all employees are covered by UC programs, which collectively consist of: (1) the Regular Compensation Program; (2) the EB Program; and, (3) UCFE and UCX. Each program has its own eligibility and benefit provisions.

Note: Informal references are frequently made to eligibility for "weeks" of UC. The auditor is cautioned eligibility is actually for AMOUNTS of UC, which is inaccurately referred to as receipt of UC for a given number of weeks.

Program Funding

UC payments to claimants are funded by State UI taxes on covered employers, and reimbursements from Federal entities, certain State governments, political subdivisions and instrumentalities of the States, and qualified non-profit organizations. While "experience-rated" UI taxes on employers are the primary source of revenue, some employers make direct reimbursements to the State for UC payments made on their behalf. State governments, political subdivisions and instrumentalities of the States, and qualified non-profit organizations may reimburse the State for UC benefits paid by the SESA; however, they may elect to be contributory employers (i.e., remit State UI taxes) in lieu of reimbursing the State. Also, States are reimbursed from the UTF for UCFE and UCX paid by the SESA on behalf of various Federal entities. Program administration is funded by a Federal UI tax on covered employers (see below). The employment covered by State UI taxes and Federal UI taxes may not be identical.

State UI taxes and reimbursements are used almost exclusively for the payment of Regular Compensation to eligible claimants. All UI taxes and reimbursements remitted by employers to the States are deposited in State accounts in the UTF. SESAs periodically draw funds from their UTF accounts for the purpose of making UC payments.

FUTA imposes a Federal tax on covered employers. FUTA revenues are collected by the IRS and deposited into the general fund of the U.S. Treasury, which by statute are appropriated to the UTF. FUTA revenues are used primarily to finance Federal and SESA administrative expenses, the Federal share of EB, and advances to States whose UTF account balances are low or exhausted. DOL allocates administrative grant funds to the States based on forecasted workload and costs and adjusted for increases or decreases in workload during the current year.

Currently, the FUTA tax on covered employment (generally employment subject to a State UI tax) is 6.2 percent of the first $7000 of covered employee wages. Employers, however, receive two credits against the FUTA tax. One credit is equal to the amount of State UI tax paid by the employer; the employer receives this credit when the State UI law, and its application, conforms and substantially complies with FUTA requirements. A second credit is awarded only to employers in States which have a federally-approved experience-rated State UI tax system. All States currently meet the Federal criteria for both credits to be applicable to the State's employers. The two credits combined cannot exceed 5.4 percent of taxable employee wages.

Synopsis of Regular Compensation Program

The Regular Compensation program provides UI coverage of most wage and salary workers in each State, the District of Columbia, Puerto Rico, and the Virgin Islands. Except for provisions necessary to comply with Federal law, the provisions of State UI laws vary greatly, including their qualifying requirements and methods used to compute UC amounts.

The period during which a claimant may receive UC is referred to as the "benefit year." A benefit year lasts one year from the effective date of the claim. The total Regular UC that a claimant may receive in a benefit year is computed by the SESA in a dollar amount. A claimant may draw UC against the total UC allowable for the benefit year during periods of unemployment that occur during the benefit year. Under State UI laws, the total (maximum) UC a claimant is entitled to varies within certain limits according to the worker's wages in the base period (see Eligibility). Reduced benefits may be paid for weeks of partial unemployment. In some States, the weekly UC benefit payment is augmented by a dependent's allowance.

The entitlement to UC (both Regular Compensation and EB) is frequently and imprecisely expressed in lay terms as receipt of UC for a fixed number of weeks.

Synopsis of Extended Benefits Program

An interval of high unemployment at a certain level will "trigger on" a period of not less than 13 weeks during which the State will make extended UC (or EB) payments to eligible unemployed workers who have exhausted their entitlement to Regular Compensation (20 CFR section 615.11). With certain qualifications, EB is payable at the same rate as the claimant's Regular Compensation amount (20 CFR section 615.6). The EB period is determined by the State in which the original claim was established (EUCA section 202(a)(2), 20 CFR section 615.2(k)(2)). A reduction in the unemployment rate will "trigger off" the period for the payment of EB.

A claimant may receive EB equal to the lesser of the following amounts: (a) one-half the total amount of Regular Compensation, including dependent's allowances, (b) 13 times the weekly amount of Regular Compensation, or (c) 39 times the weekly amount of Regular Compensation reduced by the amount of Regular Compensation paid to the claimant (EUCA, section 202(a)(2), 20 CFR section 615.7(b)). However, the qualifying and benefit provisions of the EB program change if the unemployment rate assumes a benchmark level established in EUCA. While EB are payable under the terms and conditions of State law, FUTA requires that State UI law conform to certain provisions of EUCA (26 USC section 3304(a)(11)).

States are reimbursed with Federal funds for one-half the cost of EB paid to claimants by the SESAs, with the following exceptions: (1) EB paid to former UCFE and UCX claimants are 100 percent reimbursable from Federal funds; and, (2) EB paid to former employees of the State government, and political subdivisions and instrumentalities of the State, are not reimbursable from Federal funds. Reimbursements will be prorated for claimants who had employment in both the private and public sectors during their "base periods." The first week of EB is reimbursable to the State only if the State requires the first week in an individual's benefit year be an unpaid "waiting week" (EUCA, section 204; 20 CFR section 615.14). The auditor should refer to 20 CFR section 615.14 for a complete explanation of when EB is not reimbursed to the State.

Employer Experience Rating

States annually compute an "experience-rating" for contributing, or tax-remitting, employers. The experience-rating is the dominant factor in the computation of an employer's State UI tax rate. While methods of computation differ, the key factor in most methodologies is the amount of UC paid by the SESA within a time period specified by State UI law, to claimants who are former employees of the employer. Also, various methods are used by the SESAs to identify which one or more of the claimant's former employers will be "charged" with the UC paid to the claimant.

Synopsis of UCFE and UCX Programs

For UCFE, the qualifying requirements, determination of UC benefit amounts, and duration of UC are generally determined under the applicable State law, which is generally the State in which the official duty station was located (5 USC Chapter 85; 20 CFR part 609).

The UCX program combines elements of the applicable State law and factors unique to the UCX program, such as "schedules of remuneration" (20 CFR section 614.12), which must be considered by the SESA in making its determinations of eligibility, UC benefit amounts and duration (5 USC Chapter 85; 20 CFR part 614).

States are reimbursed from the UTF for UC paid to UCFE and UCX claimants. On a quarterly basis, States report UCFE and UCX paid to the DOL, which is responsible for obtaining reimbursement to the UTF from the appropriate Federal agencies.


In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 for the details of the requirements.

A. Activities Allowed or Unallowed

Administrative grant funds may be used only for the purposes and in the amounts necessary for proper and efficient administration of the UI program (SSA, section 303(a)(8)).

E. Eligibility

1. Eligibility for Individuals

a. Regular Compensation Program

Under State UI laws, a worker's benefit rights depend on the amount of the worker's wages in covered employment in a "base period." While most States define the base period as the first 4 of the last 5 completed calendar quarters prior to the filing of the claim, other base periods are used. To qualify for benefits a claimant must have worked a certain number of weeks, or have worked a certain number of weeks or calendar quarters within the base period, or meet some combination of wage and employment requirements. A "waiting period" is a noncompensable period of unemployment in which the worker was otherwise eligible for benefits. Most States require a waiting period of one week of total or partial unemployment before UC is payable.

To be eligible to receive UC, all States provide that a claimant must be able and available for work (i.e., must be in the labor force; unemployment must be caused by lack of suitable work; and the claimant must be legally authorized to work). A claimant must not be unemployed for such acts as leaving voluntarily without good cause, discharge for misconduct connected with work, and refusal of suitable work.

b. EB Program

To qualify for EB, a claimant must have exhausted Regular Compensation (20 CFR section 615.4(a)). To be eligible for a week of EB, a claimant must apply for and be able and available to accept suitable work, if offered. What constitutes suitable work is dependent on a required SESA's evaluation of the claimant's employment prospects. An EB claimant must make a "systematic and sustained effort" to seek work and must provide "tangible evidence" to the SESA that he or she has done so (EUCA section 202(a)(3); 20 CFR section 615.8).

c. The UCFE and UCX Programs

For UCFE, the claimant's eligibility and benefit amount will generally be determined in accordance with the UI law of the State of the claimant's last duty station (20 CFR section 609.8). For UCX, a claimant's eligibility is determined in accordance with the UI law of the State in which the claimant files a first claim after separation from active military service (20 CFR section 614.8).

2. Eligibility for Group of Individuals or Area of Service Delivery - Not Applicable

3. Eligibility for Subrecipients - Not Applicable

G. Matching, Level of Effort, Earmarking

1. Matching - Shareable Compensation Program (EB)

From its UI tax revenues, the State is required to pay either zero percent (UCFE, UCX), 50 percent (EB) or 100 percent (Regular Compensation) of the UC paid by the SESA to eligible claimants.

The State is required to provide 50 percent of the amounts paid to the majority of eligible EB claimants (those not covered by Federal law or special provisions of State law) (20 CFR sections 615.2 and 615.14(a)). Those EB amounts paid by the SESA, and which are not the responsibility of the State, are reimbursable to the State from the UTF (20 CFR section 615.14). The first week of EB is reimbursable to the State only if, in addition to other requirements, the State requires the first week of an individual's benefit year to be an "unpaid waiting week" (EUCA section 204; 20 CFR section 615.14).

The 50 percent share of EB for which the State is responsible is prorated for those claimants whose base period includes wages from both public and private sector employment.

2.1 Level of Effort - Maintenance of Effort - Not Applicable

2.2 Level of Effort - Supplement not Supplant - Not Applicable

3. Earmarking - Not Applicable

L. Reporting

1. Financial Reporting

Instructions for reporting financial and program activities are contained in the Unemployment Insurance Reports Handbook, ET Handbook 401. The SESA may file certain reports electronically.

a. SF-269, Financial Status Report - One SF-269 is submitted for unemployment insurance operations, Trade, and North American Free Trade Agreement (NAFTA) benefits. Separate SF-269s are submitted for UI National Activities (excluding cooperative agreements), NAFTA benefits, and Disaster Relief projects (administration and benefits).

States are to submit the report each quarter for each fiscal year of funds until all resources on order are liquidated and a final SF-269 submitted. The Final SF-269 is to be submitted when all financial activity has ceased. States are to report administrative expenditures on the accrued expenditure basis, per 29 CFR 97.41(b)(2). UI benefit payments for DUA, Trade, and NAFTA are to be reported on the cash basis.

b. SF-270, Request for Advance or Reimbursement - Not Applicable.

c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not Applicable.

d. SF-272, Federal Cash Transaction Report - In accordance with 29 CFR 97.41(c), SESAs are required to submit the SF-272 under the Department of Health and Human Services' Payment Management System. However, SESAs are exempt from submitting the SF-272A Continuation Sheet.

e. ETA 2112, UI Financial Transaction Summary (OMB No. 1205-0154) - A monthly summary of transactions which account for all funds received in, passed through, or paid out of the State unemployment fund. (Page II-1-1 of ETA Handbook No. 401)

f. ETA 581, Contribution Operations (OMB No. 1205-0178) - Quarterly report on volume of SESA work, performance in determining the taxable status of employers, and other information pertinent to the overall effectiveness of the tax program. (Page II-2-1)

g. ETA 191, Financial Status of UCFE/UCX (OMB No. 1205-0162) - Quarterly report on UCFE and UCX expenditures and the total amount of benefits paid to claimants of specific Federal agencies. (Page II-3-1)

h. ETA 227, Overpayment Detection and Collection Activities (OMB No. 1205-0173) - Quarterly report on results of SESA activities in principle detection areas of benefit payment control. (Page IV-3-1)

2. Performance Reporting - Not Applicable

3. Special Reporting - Not Applicable

N. Special Tests and Provisions

1. Employer Experience Rating

Compliance Requirement - Certain benefits accrue to States and employers when the State has a federally-approved experience-rated UI tax system. All States have an approved system. For the purpose of proper administration of the system, the SESA maintains accounts, or subsidiary ledgers, on State UI taxes received or due from individual employers, and the UC benefits charged to the employer.

The employer's "experience" with the unemployment of former employees is the dominant factor in the SESA computation of the employer's annual State UI tax rate. The computation of the employer's annual tax rate is based on State UI law (26 USC section 3303).

Audit Objective - To verify the accuracy of the employer's annual State UI tax rate. To determine if the tax rate was properly applied by the State.

Suggested Audit Procedures

a. Experience rating systems are generally highly automated systems. These systems could contain errors that are material in the aggregate, but which are not susceptible to detection solely by sampling. Or if detected, sampling may not be the most effective and efficient means to quantify the extent of such errors. For this reason, the auditor should have a thorough understanding of the operation of these systems, and is strongly encouraged to consider the use of computer-assisted auditing techniques (CAATs) to test these systems.

b. On a test basis, reconcile the subsidiary employer accounts with the State's UI general ledger control accounts.

c. Trace a sample of taxes received and benefits paid to postings to the applicable employer accounts. Verify the propriety of any non-charging of benefits paid to an employer account.

d. Trace a sample of postings to employer accounts to documentation of taxes received and benefits paid.

e. On a test basis, recompute employer experience-related tax rates.

2. Match with IRS 940 FUTA Tax Form

Compliance Requirement - States annually perform a match of employer tax payments with credit claimed for these payments on the employer's IRS 940 FUTA tax form (IRS Doc. No. 65-81, "Specifications for a Nationwide System for Computerized Certification of State FUTA Credits," Rev. October 1995).

Audit Objective - Determine whether the State performed the required match and followed-up properly on the results of the match.

Suggested Audit Procedures

a. Ascertain the State's procedures for conducting the annual match.

b. Ascertain if the match was performed by reviewing supporting documentation.

c. Ascertain if the proper follow-up action was taken by the State on the results of the match.

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