You asked for a description of New Jersey's voluntary prepayment program for unemployment taxes.

SUMMARY

New Jersey law allows an employer to voluntarily prepay unemployment taxes in exchange for a recomputation of its experience rate for the year to which the prepayment applies. While the law has been in place for more than a decade, few employers choose to make prepayments. Of New Jersey's more than 250,000 employers about one-tenth of 1% make advance payments, according to the head of the New Jersey Unemployment Tax Experience Rating Unit.

The law primarily benefits employers who are at specific points in the unemployment tax rate scale. If they are at a higher rate but on the cusp of dropping to a lower one and the prepayment will push them to a lower rate, then the prepayment may be advantageous. But the benefit will be minimal for employers with a good experience rating. Also, the recalculation only lasts for a year, so an employer must be prepared to keep making the prepayment every year or suffer the rate jumping back up when it stops.

CONDITIONS FOR VOLUNTARY CONTRIBUTIONS

At the beginning of each fiscal year any employer whose unemployment tax rate is based on experience can make a voluntary payment to increase its reserve ratio, and therefore lower its tax rate. The New Jersey Department of Labor and Workforce Development (DOLWD)'s Division of Employer Accounts mails a voluntary contribution form to these employers, and those interested must fill out the form calculating their additional contribution and mail it back. The additional contribution must be made within 30 days of sending the form to DOLWD.

Employers who are behind in their unemployment taxes or delinquent in any unemployment reporting requirement cannot participate.

The form includes a work sheet (see Attachment 1) that helps an employer determine whether the prepayment is beneficial. A low experience rating and good reserve balance typically means the employer has few or no former employees who are drawing unemployment benefits. Conversely, a high experience rating and low or zero reserve balance means the employer has a significant number of former employees receiving unemployment benefits.

The extra contribution does not help employers with a low experience rating because they already have a good reserve ratio.

An advance contribution could drop employers with a zero of negative reserve ratio and a high experience rate to a better rate (by establishing a positive or neutral reserve when it had been negative). This would make the advance payment beneficial (see “Example: Minus Reserve Ratio” in Attachment 1). But prepayment won't help many employers with a minus reserve because it won't change their reserve enough to change their experience rating. In other words, not all prepayments result in a change in an employer's experience rating.

“The rating system has some significant steps. If you are on the cusp of being either 3.4 or 2.4 (experience rating) then it helps if it brings you to 2.4,” said Dominic Marchetti, the head of DOLWD's Unemployment Tax Experience Rating Unit.

LOW PROGRAM PARTICIPATION

Marchetti said only about 200 of the state's 250,000 employers participate in the program. There are several reasons for this. As already mentioned, for employers with good experience ratings, the benefits are minimal.

Other reasons include:

1. Most employers are not eager to pay taxes sooner than they have to. Any early payment reduces the cash the business has on hand.

2. Unless the employer is willing to keep making advance payments each year, the benefit can backfire when the advance payments stop and the experience rating jumps back up.

Marchetti also noted that, to his knowledge, the state has never demonstrated how it benefits from the program. In theory, the state could earn interest on the advance payment, but this has never been determined. And considering the major economic downturn all states are facing – and the attendant depletion of the existing unemployment compensation funds built up in recent years – advance contributions will not stay deposited long enough to earn interest.

ATTACHMENT 1

JM:ts