MICHIGAN EMPLOYMENT SECURITY ACT: 

ROLLOVER DISTRIBUTIONS

House Bill 5756 as introduced

Sponsor:  Rep. Steven Lindberg

Committee:  Labor

First Analysis (3-10-10)

BRIEF SUMMARY: The bill would prohibit the state from reducing unemployment compensation when certain rollover distributions occur from pension plans.

FISCAL IMPACT: No estimate is available from the Unemployment Insurance Agency as to the impact that adding this exclusion for non-taxable rollover distributions has in determining the level of benefits payable to UIA claimants.  See Fiscal Information for more detail. 

THE APPARENT PROBLEM:

The Michigan Employment Security Act currently mandates coordination of a claimant's unemployment benefits with any pension benefits the claimant receives.  The coordination of one's pension and unemployment benefits is governed by a case decided in June 2002 by the Michigan Supreme Court.

In Koontz v Ameritech Services, Inc. and Unemployment Agency of the Michigan Department of Consumer and Industry Services (formerly Michigan Employment Security Agency) [Docket No. 116366], the Court directed the Michigan Unemployment Agency to coordinate unemployment benefits with pension benefits.  In particular, the court ruled that a lump sum pension settlement (distributed to a laid-off employee who selected retirement rather than distant relocation when a Michigan Bell Office closed its doors in Traverse City) must be prorated to a weekly pension amount, and then a claimant's unemployment benefits must be reduced by that prorated pension amount. 

When unemployment and pension benefits are coordinated in this manner--that is, when there is an offset in unemployment compensation for retirement benefits--the reduction often renders a claimant ineligible to receive any unemployment benefits.

In 2008, the U. S. government enacted the Worker, Retiree, and Employer Recovery Act.  That new act prohibits the states from reducing unemployment compensation when claimants "rolled over" their pension distributions to another non-taxable retirement plan.

To ensure that claimant's unemployment benefits are not improperly reduced by pensions that are "rolled over," legislation has been introduced to bring Michigan's state unemployment statute into compliance with the federal law.

 

THE CONTENT OF THE BILL:

House Bill 5756 would amend the Michigan Employment Security Act to prohibit the state from reducing unemployment compensation when certain rollover distributions occur from pension plans.

As a result of an amendment made by the federal Worker, Retiree, and Employer Recovery Act of 2008, all of the states are now prohibited from reducing unemployment compensation due to non-taxable pension rollover distributions.  In particular, the following new language was added to Section 3304(a)(15) of the Federal Unemployment Tax Act:  "(B)  the amount of compensation shall not be reduced on account of any payments of governmental or other pensions, retirement or retired pay, annuity, or other similar payments which are not includible in the gross income of the individual for the taxable year in which it was paid because it was part of a rollover distribution…"  (Under the law, whether a rollover distribution is "not includible in the gross income of the individual for a taxable year" is determined under guidelines of the Internal Revenue Service.)  House Bill 5756 would add language to the Michigan Employment Security Act to bring the state statute into compliance with the federal law, in order not to impair Michigan employers' full tax credit against the tax imposed by the Federal Unemployment Tax Act.

MCL 421.27

FISCAL INFORMATION:

The bill is necessary to ensure that state law continues to conform with the Federal Unemployment Tax Act (26 USC 3304), as amended by the Worker, Retiree, and Employer Recovery Act of 2008, PL 110-458.[1]  Conformity with the FUTA is required if Michigan employers are to claim a credit against their FUTA tax liability that effectively reduces the tax rate from 6.2% to 1.1% on a taxable wage base of $7,000 per employee. The credit equates to $357 per employee.[2]  If the Michigan Employment Security Act remains out of conformity with federal requirements, Michigan employers would be ineligible for the FUTA credit, thus increasing their tax liability. 

Conformity with federal requirements is also a condition, under Title III of the Social Security Act, for the continued receipt of federal funding to administer the state's unemployment insurance program.  For FY 2010, the year-to-date total spending authorization (line item and boilerplate) in federal UI administrative funds is $170.5 million.  Administrative funds could be withheld by the Department of Labor if the Michigan Employment Security Act were to remain out of conformity with federal requirements.[3]     

No estimate is available from the Unemployment Insurance Agency as to the impact that adding this exclusion for non-taxable rollover distributions has in determining the level of benefits payable to UIA claimants. 

ARGUMENTS:

For:

The Michigan Employment Security Act governs the federal employer-paid unemployment compensation insurance system, a program described in the Federal Unemployment Tax Act, sometimes known as FUTA.  Customarily, whenever the federal law is amended, the state statute is also updated.  State conformity with FUTA is required if Michigan employers are to claim a credit against their FUTA tax liability.  Currently that credit effectively reduces the employers' tax rate from 6.2 percent to 1.1 percent on a taxable wage base of $7,000 per employee. (The credit equates to $357 per employee.)  If the Michigan Employment Security Act remains out of conformity with federal requirements, Michigan employers would be ineligible for the FUTA credit, thus increasing their tax liability. 

POSITIONS:

The Michigan Unemployment Insurance Agency supports the bill.  (3-10-10)

The Michigan Education Association supports the bill.  (3-10-10)

                                                                                           Legislative Analyst:   J. Hunault

                                                                                                  Fiscal Analyst:   Mark Wolf

■ This analysis was prepared by nonpartisan House staff for use by House members in their deliberations, and does not constitute an official statement of legislative intent.

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