Federal-State Unemployment Compensation Program: Unemployment Insurance Program Letters Interpreting Federal Unemployment Insurance Law

DEPARTMENT OF LABOR

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 17-95

Public Law 103-465, commonly known as the legislation on ``GATT''--

The General Agreement on Tariffs and Trade, included a provision that

affects the Federal-State unemployment compensation program. Under this

legislation, States will be required to deduct and withhold Federal

income tax from unemployment compensation if the individual so elects.

In addition, State will have the option of withholding State and local

income taxes from unemployment compensation if the individual elects to

have such actions taken. This UIPL explains the change in unemployment

compensation law, discusses its effective date and provides model

language for States to use in amending State unemployment compensation

law.

Dated: March 17, 1995.

Doug Ross,

Assistant Secretary of Labor.

U.S. Department of Labor

Employment and Training Administration, Washington, DC 20210

Classification UI

Correspondence Symbol TEURL

Date: February 28, 1995

Directive: Unemployment Insurance Program Letter No. 17-95

To: All State Employment Security Agencies

From: Mary Ann Wyrsch, Director, Unemployment Insurance Service

Subject: Withholding of Income Tax From Unemployment Compensation--

Amendments Made by Public Law 103-465

1. Purpose. To advise State agencies of the provisions of Public

Law (P.L.) 103-465 pertaining to the withholding of Federal, State and

local income taxes from unemployment compensation (UC).

2. References. The Internal Revenue Code of 1986 (IRC), as amended,

including the Federal Unemployment Tax Act (FUTA); Title III of the

Social Security Act (SSA); Section 702 of P.L. 103-465; Section 301 of

P.L. 102-318; 31 U.S.C. Section 6503 as amended by P.L. 101-453; 31

C.F.R. Part 205; and Unemployment Insurance Program Letters (UIPLs) 25-

89, 45-89 and 45-92.

3. Background. On December 8, 1994, the President signed into law

P.L. 103-465. Although the short title of this law is the ``Uruguay

Round Agreements Act,'' it is commonly known as the legislation on

``GATT''--the General Agreement on Tariffs and Trade. Under this

legislation, States will be required to deduct and withhold Federal

income tax from UC if the individual so elects. In addition, States

will have the option of withholding State and local income taxes if the

individual so elects. This UIPL addresses these new provisions

pertaining to income tax withholding.

Rescissions: None.

Expiration Date: February 28, 1996.

4. Discussion.

a. In General. The ``withdrawal standard'' of Section 3304(a)(4),

FUTA, and Section 303(a)(5), SSA, limits withdrawals (with specified

exceptions not relevant here) from a State's unemployment fund to

payments of ``compensation.'' The term ``compensation'' is defined in

Section 3306(h), FUTA, as ``cash benefits payable to individuals with

respect to their unemployment.'' Due to its restrictive nature, the

withdrawal standard has prohibited States from deducting and

withholding any form of income tax from payments of UC. For a detailed

discussion of the limitations on the use of unemployment fund moneys,

refer to UIPL 25-89 (54 FR 22973 (May 30, 1989)) which transmitted the

Secretary's decision in a conformity proceeding involving the deducting

and withholding of State UC taxes from UC and UIPL 45-89 (55 FR 1886

(January 19, 1990)) concerning permissible deductions from UC.

P.L. 103-465 amends Federal law to provide for ``voluntary

withholding''--that is, withholding at the taxpayer's election--of

income taxes from a variety of payments made pursuant to Federal

[[Page 15795]] law as well as from UC. The joint Senate report

describes the reason for this withholding:

Some taxpayers find it burdensome to make quarterly estimated tax

payments. These taxpayers may find it more convenient to elect to have

Federal taxes withheld at the time specified payments are made to them.

[S. Rep. No. 412, 103rd Cong. 2d Sess. 137-138 (1994).]

b. Discussion of Amendments. Section 702(b) of P.L. 103-465 amended

Federal law to require State law to provide for the voluntary

withholding of Federal income tax from UC. Specifically, new paragraph

(18) of Section 3304(a), FUTA, was added to require, as a condition for

employers in a State to receive credit against the Federal unemployment

tax, that:

Federal individual income tax from unemployment compensation is to

be deducted and withheld if an individual receiving such compensation

voluntary requests such deduction and withholding.

Section 702(c) of P.L. 103-465 also amended the withdrawal standard

of FUTA and SSA (and the definition of ``unemployment fund'' in Section

3306(f), FUTA) to permit ``the withholding of Federal, State, or local

individual income tax.''\1\ As amended, the withdrawal standard in

Section 3304(a)(4)(C), FUTA, now reads: nothing in this paragraph shall

be construed to prohibit deducting an amount from unemployment

compensation otherwise payable to an individual and using the amount so

deducted to pay for health insurance, or the withholding of Federal,

State, or local individual income tax, if the individual elected to

have such deduction made and such deduction was made under a program

approved by the Secretary of Labor * * *.

\1\The amendment to the definition of ``unemployment fund'' also

contained a technical amendment concerning the exception pertaining

to the withholding of health insurance premiums. This exception was

already contained in the withdrawal standard. Another technical

amendment renumbered old subparagraph (18) of Section 3304(a), FUTA,

as (19).

---------------------------------------------------------------------------

Section 303(a)(5), SSA, also reads similarly. These amendments to

the withdrawal standard and the definition of ``unemployment fund''

have an effect on the new voluntary withholding requirement of Section

3304(a)(18), FUTA. Under the withdrawal standard amendments, any

deducting and withholding from UC may be made only if ``such deduction

was made under a program approved by the Secretary of Labor.'' The

requirements necessary for approval of a program are contained in item

4.e of this UIPL.

c. Withholding of Federal Income Tax. New IRC Section 3402(p)(2),

which was added by Section 702(a) of P.L. 103-465, concerns voluntary

withholding of UC and affects the FUTA and SSA provisions concerning

deducting and withholding income tax. This section applies to payments

of UC ``as defined in section 85(b),'' IRC. Section 85(b) defines UC as

``any amount received under a law of the United States or of a State

which is in the nature of unemployment compensation.'' The effect of

this definition is that, if the payment of UC is taxable under the IRC,

then the State must provide for voluntary withholding of Federal tax

from that amount.

Section 3402(p)(2), IRC, also provides that the amount of Federal

income tax withheld from UC ``under this chapter [Chapter 24 of the

IRC, Collection of Income Tax at Source on Wages] * * * shall be an

amount equal to 15 percent of such payment.'' As a result, the amount

of Federal income tax to be withheld from UC by the States must be

equal to 15 percent of the UC payment.

Since Section 3402(p)(2), IRC, is administered by the Federal

Internal Revenue Service (IRS), the IRS has the authority to interpret

these provisions.

d. Withholding of State and Local Income Taxes. States will decide

whether to allow State and/or local income taxes to be deducted and

withheld from UC at an individual's election. A State may decide to

deduct and withhold only State income taxes, only local income taxes,

both, or neither. It is left to the State to decide whether the

percentage of the payment to be deducted and withheld shall be a

uniform amount established by the State law or determined by the

individual. The mechanisms for transferring amounts deducted and

withheld from the unemployment fund to the State or locality will also

be established by the State, subject to the requirements of items e.(2)

and e.(3) below.

Although a State has the authority to deduct and withhold State and

local income taxes from UC for other States and for localities outside

the State, Federal law does not require a State to do so. A State may,

therefore, restrict the taxes to be deducted and withheld to taxes

subject to its laws or to individuals who plan to file a tax return

against that State.

e. Approved Program. As noted in item 4.b, the amendments to the

withdrawal standard concerning the withholding of income tax require

that any deduction must be made under a program approved by the

Secretary. Rather than requiring each State to submit a plan describing

its program, the Department has determined that States using the draft

legislative language contained in Attachment II to this UIPL may

consider their withholding programs to be automatically approved.

(States are free to delete optional language, such as that pertaining

to State and local taxes and to make nonsubstantive modifications,

including taking into account State usage and formatting.) States not

using the draft language will need to submit a plan describing its

program to the appropriate regional office.

The following necessary elements of the program are discussed

within the context of the draft language:

(1) Notification. Section 301 of P.L. 102-318, the Unemployment

Compensation Amendments of 1992, already requires State agencies to

provide to each individual filing a claim a written explanation of

Federal and State income taxation of UC and the requirements pertaining

to estimated tax payments. See UIPL 45-92 (57 Fed. Reg. 47871, 47875-

47876 (October 20, 1992)). To assure that the individual has the

opportunity to have amounts withheld from all payments, the individual

is to be advised in writing at the time of filing the initial claim

that UC is subject to Federal income tax as well as (if applicable)

State and local income taxes; that requirements exist pertaining to

estimated tax payments; and that income tax may be withheld at the

individual's option.\2\ States will need to revise their initial claims

processes to obtain information concerning whether the individual

elects or declines to have income tax withheld.

\2\UIPL 45-92 interpreted the notice requirement of Section 301

of P.L. 102-318 to provide that the information ``must be provided

at the time the initial claim is filed or at the time the individual

files a claim for the first week.'' UIPL 45-92 also provided that

the notice requirement would be satisfied if the information was

provided at the time of the first payment. Once Section 3304(a)(18),

FUTA, becomes effective, this position becomes obsolete as the

notice must be given at the time of filing the initial claim.

---------------------------------------------------------------------------

Section (1) of the draft language addresses notification and other

matters. It permits the deduction and withholding of Federal, State and

local income taxes. The general reference in Section (1)(C) to the IRC

assures that State law will always correspond to whatever percentage

Federal law authorizes for deductions. Since the States are not

required to deduct and withhold State and local income taxes from UC,

the draft language pertaining to such withholding is at the State's

option. The language permits specified percentages of State and local

income taxes to be withheld under State law [[Page 15796]] since this

method will likely be the easiest to administer. The State may,

however, modify the draft language to allow the individual the option

of electing the percentage or dollar amount to be deducted and

withheld. As discussed in item 4.d. above, the State may also add

language restricting the State and local withholding option.

The final issue addressed in Section (1) is the individual's option

to change withholding status. The individual's anticipated tax

liabilities may change due to, for example, a change in the tax year or

due to work performed during the benefit year, or the individual may

determine that amounts being withheld are needed to meet current living

expenses. Therefore, individuals must also be notified of and provided

an opportunity to change their withholding status.

Although the Department encourages States to allow the individual

to change his or her withholding status several times, it will only

require the States to permit this change at least once during each

benefit year. States are not required to amend their continued claims

forms or processes to accommodate this change in withholding. Instead,

it will be sufficient for the agency to notify the individual at the

time of filing the initial claim that withholding status may be changed

at the individual's request.

Section (1)(G) of the draft language permits an unlimited number of

changes by the claimant. The State may, however, modify the language to

restrict the number of changes to any number greater than or equal to

one.

(2) Amounts to Remain in Unemployment Fund until Transferred to

Taxing Authority. Amounts deducted and withheld from unemployment

compensation must remain in the State's unemployment fund until

transferred to the Federal, State or local taxing authority as a

payment of income tax. Such amounts will remain in the State's account

in the Unemployment Trust Fund (UTF) until such time as they are drawn

down to the State's benefit payment account in accordance with the

State's agreement implementing 31 U.S.C. 6503, as amended by the Cash

Management Improvement Act of 1990, P.L. 101-453, and the implementing

regulations at 31 CFR Part 205.

The Department is currently exploring an alternative to the draw

down approach with the U.S. Department of the Treasury. Under this

alternative, amounts deducted and withheld would be transferred

directly from the State's account in the UTF to the IRS.

(3) Federal Procedures. The State must follow all procedures

specified by this Department and the IRS related to withholding.

The inclusion of the provision in Section (3) of the draft language

assures the Department that States will comply with any IRS procedures

concerning the deducting and withholding of Federal income tax. It also

gives States the authority to follow any procedures concerning

deducting and withholding income tax which the Department or IRS may at

some future date deem necessary. States may change the reference to

``commissioner'' to reference the title of the appropriate State

official or agency.

(4) Priorities. Since UC overpayments, child support obligations

and food stamp overissuances may also be deducted and withheld from UC,

States will need to address the priority of withholding when the

claimant also elects to have income tax withheld. The Department has

previously left to the States the matter of determining priorities when

there are two or more deductions made from UC. The Department is

currently discussing with the IRS whether the provisions of the IRC

which it administers have any bearing on this issue.

Since the issue of priority of withholding has not yet been

resolved, Section (4) of the draft language provides that the priority

for deductions from UC shall be determined in accordance with State

regulations. This will permit the State to accommodate any Federal

position on this matter.

f. Funding. Costs incurred in withholding Federal, State or local

income taxes from UC administrative grants provided under Section 302,

SSA.

g. Effective Date. Under subsection (d) of Section 702 of P.L. 103-

465, the provisions of that section relating to voluntary withholding

``shall apply to payments made after December 31, 1996.'' This means

that, as of January 1, 1997, States must have provisions of law in

effect providing for the voluntary withholding of Federal income tax

and must be permitting the withholding Federal income tax in accordance

with this UIPL.

States should note that the effective date refers to ``payments.''

Therefore, as of January 1, 1997, amounts are to be deducted and

withheld from payments of UC for Federal income tax, if the individual

so elects, even if the payment is for a week of unemployment beginning

before January 1, 1997.

States may not implement the withholding of Federal, State or local

income taxes prior to January 1, 1997, since the withdrawal standard's

limitations remain in effect until that date. We recommend, however,

that States advise individuals filing new claims in the fourth calendar

quarter of 1996 that voluntary holding will become available and that

the State would, if the claimant so elected, begin deducting and

withholding of income taxes as for payments made on and after January

1, 1997.

5. Action Required. States must take appropriate action to assure

legislation authorizing the voluntary withholding of Federal income tax

is enacted by and implemented on January 1, 1997. As noted above in

item 4.e., States not enacting legislation using the draft language

attached to this UIPL will need to submit a plan to the appropriate

Regional Office. To provide adequate time for review and comment, these

plans are due on September 30, 1996.

6. Inquiries. Inquiries should be directed to the appropriate

Regional Office.

7. Attachments.

I. Relevant Sections of P.L. 103-465

II. Draft Language to Implement a Voluntary Withholding Program

Attachment I--Relevant Sections of P.L. 103-465

An Act to approve and implement the trade agreements concluded in

the Uruguay Round of multilateral trade negotiations.

Section 1. Short Title and Table of Contents.

(a) SHORT TITLE.--This Act may be cited as the ``Uruguay Round

Agreements Act''.

* * * * *

TITLE VII--REVENUE PROVISION

Subtitle A--Withholding Tax Provisions

* * * * *

Sec. 702 Voluntary Withholding on Certain Federal Payments and on

Unemployment Compensation.

(a) IN GENERAL.--Subsection (p) of section 3402 (relating to

voluntary withholding agreements) is amended to read as follows:

``(p) VOLUNTARY WITHHOLDING AGREEMENTS.--

``(1) CERTAIN FEDERAL PAYMENTS.--

``(A) IN GENERAL.--If, at the time a specified Federal payment is

made to any person, a request by such person is in effect that such

payment be subject to withholding under this chapter, then for purposes

of this chapter and so much of subtitle F as relates to this chapter,

such payment shall be treated as if it were a payment of wages by an

employer to an employee.

``(B) AMOUNT WITHHELD.--The amount to be deducted and withheld

[[Page 15797]] under this chapter from any payment to which any request

under subparagraph (A) applies shall be an amount equal to the

percentage of such payment specified in such request. Such a request

shall apply to any payment only if the percentage specified is 7, 15,

28, or 31 percent or such other percentage as is permitted under

regulations prescribed by the Secretary.

``(C) SPECIFIED FEDERAL PAYMENTS.--For purposes of this paragraph,

the term `specified Federal payment' means--

``(i) any payment of a social security benefit (as defined in

section 86(d),

``(ii) any payment referred to in the second sentence of section

451(d) which is treated as insurance proceeds,

``(iii) any amount which is includible in gross income under

section 77(a), and

``(iv) any other payment made pursuant to Federal law which is

specified by the Secretary for purposes of this paragraph.''

``(D) REQUESTS FOR WITHHOLDING.--Rules similar to the rules that

apply to annuities under subsection (o)(4) shall apply to requests

under this paragraph and paragraph (2).

``(2) VOLUNTARY WITHHOLDING ON UNEMPLOYMENT BENEFITS.--If, at the

time a payment of unemployment compensation (as defined in section

85(b)) is made to any person, a request by such person is in effect

that such payment be subject to withholding under this chapter, then

for purposes of this chapter and so much of subtitle F as relates to

this chapter, such payment shall be treated as if it were a payment of

wages by an employer to an employee. The amount to be deducted and

withheld under this chapter from any payment to which any request under

this paragraph applies shall be an amount equal to 15 percent of such

payment.

``(3) AUTHORITY FOR OTHER VOLUNTARY WITHHOLDING.--The Secretary is

authorized by regulations to provide for withholding--

``(A) from remuneration for services performed by an employee for

the employee's employer which (without regard to this paragraph) does

not constitute wages, and

``(B) from any other type of payment with respect to which the

Secretary finds that withholding would be appropriate under the

provisions of this chapter, if the employer and employee, or the person

making and the person receiving such other type of payment, agree to

such withholding. Such agreement shall be in such form and manner as

the Secretary may by regulation prescribe. For purposes of this chapter

(and so much of subtitle F as relates to this chapter), remuneration or

other payments with respect to which such agreement is made shall be

treated as if they were wages paid by an employer to an employee to the

extent that such remuneration is paid or other payments are made during

the period for which the agreement is in effect.''

(b) STATE LAW MUST PERMIT VOLUNTARY WITHHOLDING OF FEDERAL INCOME

TAX FROM UNEMPLOYMENT COMPENSATION.--Section 3304(a) is amended by

striking ``and'' at the end of paragraph (17), by redesignating

paragraph (18) as paragraph (19), and by inserting after paragraph (17)

the following new paragraph:

``(18) Federal individual income tax from unemployment compensation

is to be deducted and withheld if an individual receiving such

compensation voluntarily requests such deduction and withholding;

and''.

(c) WITHHOLDING FROM UNEMPLOYMENT COMPENSATION OF FEDERAL, STATE,

AND LOCAL INCOME TAXES PERMITTED.--

(1) Subparagraph (C) of section 3304(a)(4) is amended by inserting

after ``health insurance'' the following: ``, or the withholding of

Federal, State, or local individual income tax,''.

(2) Subsection (f) of section 3306 is amended by redesignating

paragraphs (3) and (4) as paragraphs (4) and (5), respectively, and by

inserting after paragraph (2) the following new paragraph:

``(3) nothing in this subsection shall be construed to prohibit

deducting any amount from unemployment compensation otherwise payable

to an individual and using the amount so deducted to pay for health

insurance, or the withholding of Federal, State, or local individual

income tax, if the individual elected to have such deduction made and

such deduction was made under a program approved by the Secretary of

Labor;''.

(3) Paragraph (5) of section 303(a) of the Social Security Act is

amended by inserting after ``health insurance'' the following: ``, or

the withholding of Federal, State, or local individual income tax,''.

(d) EFFECTIVE DATE.--The amendments made by this section shall

apply to payments made after December 31, 1996.

Attachment II--Draft Language to Implement a Voluntary Withholding

Program

(1) An individual filing a new claim for unemployment compensation

shall, at the time of filing such claim, be advised that:

(A) Unemployment compensation is subject to Federal, State and

local income tax;

(B) Requirements exist pertaining to estimated tax payments;

(C) The individual may elect to have Federal income tax deducted

and withheld from the individual's payment of unemployment compensation

at the amount specified in the Federal Internal Revenue Code;

(D) The individual may elect to have State income tax deducted and

withheld from the individual's payment of unemployment compensation at

the rate of ____ percent;

(E) The individual may elect to have local income tax deducted and

withheld from the individual's payment of unemployment compensation at

the rate of ____ percent; and

(F) The individual may elect to have State and local income taxes

deducted and withheld from the individual's payment of unemployment

compensation for other States and localities outside this State at the

percentage established by such State or locality.

(G) The individual shall be permitted to change a previously

elected withholding status.

(2) Amounts deducted and withheld from unemployment compensation

shall remain in the unemployment fund until transferred to the Federal,

State or local taxing authority as a payment of income tax.

(3) The commissioner shall follow all procedures specified by the

United States Department of Labor and the Federal Internal Revenue

Service pertaining to the deducting and withholding of income tax.

(4) Amounts shall be deducted and withheld in accordance with the

priorities established in regulations developed by the commissioner.

[FR Doc. 95-7487 Filed 3-24-95; 8:45 am]

BILLING CODE 4510-30-M