ASK THE EDD ATTORNEY WHAT DOES THE EDD’s “UI” RESERVE ACCOUNT MEAN?
By Robert S. Schriebman
A client called me a few days ago. He was nervous and upset. He just received a statement from the EDD with charges to his unemployment insurance (UI) reserve account totaling over $70,000. He did not have the money to pay this “bill” and was afraid the EDD would file a tax lien against his business. He was in the process of trying to get a line of credit from his bank, and he was sure that the EDD “bill” would kill the deal. I took his call as an opportunity to explain to my readers what the EDD’s UI reserve account was all about. There seems to be quite a lack of knowledge about the reserve account not only with the public but within the EDD as well. Later in this article I will tell you what I told my distressed client.
The UI Reserve Account – The Basics
If you are a new employer and you register with the EDD for an employer account number, in addition to receiving your new account number you will also receive an unemployment insurance (UI) rating. This rating is known an “experience rating.” As an employer you are required to make quarterly payments of payroll and withholding taxes. California has four separate withholding taxes as follow:
|SDI||State Disability Insurance|
|ETT||Fund Employment Training Tax|
|PIT||Personal Income Tax|
This article will discuss only the UI. As an employer you must pay over UI payments on the first $7,000 of annual worker’s compensation. How much do you have to pay? The answer depends upon your “experience rating.” If you are a new employer the minimum UI rate is 3.4%. This is the lowest EDD rate possible. New employers are allowed this low rate for the first two or three years of business. By law the EDD automatically establishes for you a reserve account. The purpose of this account is to keep track of your experience with workers filing claims for unemployment benefits. All of this is technically referred to as “employer’s UI contribution rate.” If you have workers who leave your employment and file for UI benefits your reserve account will have “charges.” If, on the other hand, you have little or no worker terminations your reserve account will have “credits.” This is reflected in your own personal reserve account balance.
Each year the EDD will review your reserve account and determine a reserve account balance. The reserve account balance is determined based on the EDD records as of July 31 of each year. Your reserve account balance is determined from June 30 of the previous year to July 31 of the current year. You will receive and annual statement from the EDD entitled Statement of Charges to Reserve Account (EDD Form DE428T). The reserve calculation looks something like this:
|Previous reserve account balance|
|+||Credits to reserve account|
|–||Charges to Reserve Account|
|New reserve account balance|
The lowest UI rate for employers is 3.4%. The rate can only go up from here. The method of determining your UI contribution rate is called “experience rating.” This method uses a formula to measure the stability of your current workforce and the potential for future unemployment. Your UI reserve account could have a credit balance or a charge balance depending upon workers who leave your employment and file for UI benefits.
The following discussion is meant to be an overview. If you wish to know more about how charges and credits are computed you can go online to the EDD web site and download EDD Information Sheet DE231Z “California System of Experience Rating.”
Credits to Your UI Reserve Account
Your UI reserve account is credited with your UI contributions paid from August 1 of the previous year through July 31 of the current year. This may include adjustments and voluntary UI payments. However, payments made in July of the current year for the quarter ending September 30 of the current year will not be included.
Charges to Your UI Reserve Account
Your UI reserve account is charged for benefits paid to your former employees from July 1 of the previous year through June 30 of the current year which may include additional benefits for training or retraining of skills.
Controlling Your UI Contribution Rate
We all want to keep our taxes as low as possible, and we should do everything legally to minimize any type of tax exposure. The UI rate is a tax. An employer can keep the UI rate to a minimum by reducing high turnovers and large fluctuations in payroll. Filing quarterly returns timely and paying your quarterly payroll taxes timely will also help reduce your taxes. The EDD has the following suggestions that will help reduce your UI rates:
- Work with your employees to avoid layoffs and voluntary quits. Every separation has a potential to increase your UI contribution rate.
- Give written warning notices prior to discharging an employee. Keep a copy of these written notices and any supporting information for use in justifying the action taken.
- Respond on time to any claim notices received from the EDD.
- Provide clear answers to phone interview questions from the EDD personnel.
- Bring witnesses with firsthand knowledge of pertinent facts when attending an appeal hearing.
Things You May Not Know About UI Claims
There is much confusion within both the employer and employee communities about UI benefits. I want to share with you some of the frequently asked questions and answers published by the EDD in order to clarify issues such as how long a worker is eligible for benefits and questions concerning how the base period for UI claims is determined. Here are a few key Q&As:
Q. How long is a claimant eligible for UI benefits?
A. Once a claimant is determined eligible for benefits he or she has one year from the date of the claim in which to draw the maximum benefit award.
Q. What is the base period, and how is the base period for a UI claim determined?
A. The base period of a claim is the one-year period of the claimant’s prior earnings that is used to determine the weekly benefit amount, maximum benefit amount, and chargeable employer(s). It is determined by the claim date and may include wages reported up to 18 months prior to the claim date.
Q. Why is my account being charged for people who left my business so long ago?
A. Benefits paid on a UI claim are based on wages reported by all base period employers which could be up to 18 months prior to the claim.
For more information see EDD Publication Form DE428C “Explanation to Statement of Charges to Reserve Account.”
If I Have Charges To My Reserve Account Do I Have To Pay Them?
At the beginning of this article I mentioned my client who just received a large charge to his reserve account of $70,000. This charge represented 16 former employees who filed for unemployment benefits between July 2013 and May 2014. The charges were set forth in the annual Statement of Charges To Reserve Account (EDD 428T).
The reserve account charges represent nothing more than an EDD running account of individuals who filed UI claims. The reserve account charge is strictly an accounting entry done by the EDD for the benefit of the employer. It is not a bill. It does not have to be paid. My client was greatly relieved!
The charges to your UI reserve account may be used by the EDD to increase your experience rating above the minimum 3.4%.
If I Have Credits To My Reserve Account Am I Entitled To A Refund Of These Credits? Should I File a Claim For Refund With The EDD?
As I explained above, reserve account data represents nothing more than an information publication for the benefit of the employer. It is the employer’s internal account with the EDD. The credits mean nothing more than the monies paid in by the employer for UI benefits in the past fiscal year. These credits are not “money in the bank.” You are not entitled to a refund for credits paid in that have not been charged against UI claims. These credits may result in a longer lower UI rate. If you have little or no unemployment claim experience and the EDD wants to raise your UI rates you should consider filing a protest. You have 60 days to file a protest from the date of your annual statement from the EDD. EDD Form DE428C, discussed above, will give you instructions on when and where to file your protest.
An EDD attorney, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD lawyer, Robert S. Schriebman has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.