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Colorado Department of Labor and Employment
Unemployment Insurance Operations

SOLVENCY  TAX  SURCHARGE  AND  ITS  IMPACT  ON  TAX  RATES 
FOR  CALENDAR  YEAR  2006

unemployment insurance trust fund and tax rates

The Colorado Unemployment Insurance (UI) Trust Fund consists of all the taxes paid into the UI Program by Colorado employers, less all UI benefits claims that have been paid, plus any interest earned on the balance in the UI Trust Fund through the years. 

The state fiscal year is from July 1 to June 30 of any given year.  July 1 is the computation date for calculating tax rates for the following calendar year.  The tax-rate schedule that is used for any given year is dependent on the amount of money in the UI Trust Fund at the end of the fiscal year.  Based on the tax-rate schedule being used, most employers are assigned a computed tax rate.  Other employers are assigned a standard tax rate.  Most employers are also assessed a tax surcharge.  In addition, when the UI Trust Fund is below a certain monetary level, a solvency tax surcharge is assessed.  For the calendar year 2006, the UI Trust Fund is at a monetary level that requires the additional solvency tax surcharge.

standard and computed tax rates

With the exception of employers in the construction industry, the standard rate for employers newly subject to pay unemployment taxes on or after July 1, 1997, is 1.7 percent (0.0170).  This standard rate applies unless the employer has met the qualifications for a computed rate per the Colorado Employment Security Act (CESA) 8-76-103 (3)(a). 

NOTE:  A successor employer is technically a newly subject employer.  However, the history and experience of a predecessor account and its computed tax rate is assigned to a qualified successor. 

A computed rate is based on a formula using the activity on the employer’s account, which includes length of time as a taxable employer; taxable payroll reported; and taxes paid into and benefits charged out from the UI Trust Fund.  An employer cannot develop a computed rating until tax-and-wage reports have been filed for the previous four quarters in the calendar year prior to the July 1 computation date for UI tax rates.  Employers in the construction industry must file tax-and-wage reports for 36 months prior to the July 1 computation date before qualifying for a computed tax rate.  Once an employer develops enough experience, a computed rate is assigned to replace the previously assigned standard rate as the base rate.

A percentage of excess is used to determine the experience rate.  Employers who have paid in more UI taxes to the UI Trust Fund and have paid out less in UI benefits are assigned a positive percent of excess.  Employers who have paid in less to the UI Trust Fund and have paid out more in UI benefits are assigned a negative percent of excess.  Employers with a positive percent of excess are assigned a lower computed tax rate, while employers with a negative percent of excess are assigned a higher computed tax rate. 

NOTE:  The percent of excess is computed by subtracting the benefits charged to an employer account from the taxes paid to that account and dividing the result by the average annual taxable payroll.  The percentage is computed to the nearest one percent.

standard industry rate

New employers whose business is in the construction industry are assigned a standard industry rate according to their classification in the North American Industry Classification System (NAICS).  These standard rates are assigned based on the activity within these NAICS construction codes and utilize the rate computation formula for assignment of standard rates for the construction classifications per CESA 8-76-103 (III)(E).

BasE tax rate for calendar year 2006

Due to the increase in the monetary level of the Unemployment Insurance (UI) Trust Fund, there is a decrease in the 2006 base tax rates for many employers.  According to the tax rate schedule in the Colorado Employment Security Act (CESA) 8-76-103 (3)(b)(II), the base tax rate is moving two rate schedules to the left.  For example, an employer with a percent of excess of +11 has a base tax rate of .006 in calendar year 2005.  If the same percent of excess is maintained, the same employer has a base tax rate of .004 in calendar year 2006.  An employer with a percent of excess of +2 has a base tax rate of .019 in calendar year 2005.  If the same percent of excess is maintained, the same employer has a .017 base tax rate in calendar year 2006.

tax surcharge

A tax surcharge is added to all employers’ standard tax rates and some of the computed tax rates.  The tax surcharge supports administrative costs.  In addition, the tax surcharge supports a general pool fund for paying UI benefits not directly charged to an employer.  For example, when a full award is granted to pay UI benefits on a job separation that meets the criteria under CESA for domestic abuse, the employer account is not charged for UI benefits paid on the claim.  Instead, paid UI benefits are charged to a general pool fund.

A tax surcharge is not assessed on employers who have had less than a total of $100 charged to their accounts from UI benefits paid out in the last three state fiscal years prior to the July 1 computation date for calculating computed tax rates for the following year.

Per CESA 8-76-102 (4)(d), the tax surcharge rate is 0.22 percent (.0022). 

solvency tax surcharge for calendar year 2006

In accordance with CESA 8-76-102 (5)(a), a solvency tax surcharge was assigned to ratable employer accounts beginning in calendar year 2004.  This solvency tax surcharge is a result of the UI Trust Fund’s level of solvency decreasing below a level that ensures the ability of the UI Program to pay UI benefits.  The solvency tax surcharge is added to the standard or computed rate when the UI Trust Fund balance on any June 30 is equal to or less than nine-tenths of one percent of the total wages reported by ratable Colorado employers for the calendar year or the most recent available four consecutive quarters prior to the last computation date.  In 2006 the solvency tax surcharge will be in its third incremental year. 

Per CESA 8-76-102 (5)(a), the solvency tax surcharge is a temporary annual increase to the employer’s UI tax.  The solvency tax surcharge is increased incrementally each year until:

·         A maximum solvency tax surcharge, as mandated by law, is reached. 

- or -

·        The UI Trust Fund reaches a monetary level such that the solvency tax surcharge is no longer necessary.

NOTE:  The solvency tax surcharge is not assessed to state and local government agencies, reimbursable and group-rated political subdivisions, and nonprofit organizations that are reimbursable employers.

House Bill 05-1208, Solvency Tax Surcharge Modification

On May 25, 2005, the Governor signed into law House Bill (HB) 05-1208, Solvency Tax Surcharge Modification.  HB 05-1208 uses a comparison of the ratio of the UI Trust Fund balance to the total wages reported by ratable employers on June 30, 2005, to the ratio on June 30, 2004, to determine if the 2006 incremental increase is to be credited back for calendar year 2006.  For rate year 2006, the UI Trust Fund balance is at a level such that the solvency tax surcharge yearly increment is credited back to employers as an adjustment.

NOTE:  If the limit on solvency tax is reached, the adjustment may be less than the 2006 yearly increment.  See CESA 8-76-102 (5)(b) to view the solvency tax surcharge tax rate schedule.

Calculating Your Solvency Tax Surcharge Rate

To calculate your solvency tax surcharge rate for a given year, add the solvency tax surcharge yearly increment for that year, which is based on your percent of excess, to your solvency tax surcharge rate for the previous year.

EXAMPLE:

NOTE:  In accordance with House Bill 05-1208, effective for rate year 2006, the solvency tax surcharge yearly increment is credited back to employers as an adjustment.  In the example above, the 2006 yearly increment of .0060 is credited back to the employer.  Although Item 10 on Form UITR-7, Notice of Employer’s Tax Rate, would show the solvency tax surcharge rate as .0190, due to the 2006 solvency tax surcharge incremental adjustment of .0060, Item 11, the impact to the total combined rate, Item 12, is .0130.  (If the limit on solvency tax is reached, the adjustment may be less than the 2006 yearly increment.  See CESA 8-76-102 (5)(b) to view the solvency tax surcharge tax rate schedule.  An example of this is provided under COMBINED TAX RATE FOR CALENDAR YEAR 2006.)

NOTE:  All new employers will be assessed an initial solvency tax surcharge increment of .0060.  If in 2006 an employer is charged with his or her initial solvency tax surcharge assessment, it will not be credited back.  House Bill 05-1208 applies only to those employers who are seeing an incremental increase to their previous year’s solvency tax surcharge rate.

Combined Tax rate for calendar year 2006

By December 2005 Form UITR-7, Notice of Employer’s Tax Rate, will be mailed informing employers of their combined standard or computed rate, surcharge tax rate, solvency tax surcharge, and solvency tax surcharge adjustment for calendar year 2006.

The following table provides examples of how an employer’s total combined tax rate for calendar year 2006 is established.

NOTE:  The grey section is not shown on Form UITR-7.  The information in the grey section is provided here as additional information.  The yellow section provides an example of an employer who has reached the limit on solvency.  The amount of accumulated solvency tax for each example depends on the employer's percent of excess each year and depends on how many years the solvency tax surcharge has been added to the employer’s tax rate, which is dependent upon when the account was opened. 

If you have further questions regarding the solvency tax surcharge or your tax account, please contact UI Operations at 303-318-9100.  You may also send an e-mail to unemp.tax@state.co.us.  

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