DIRECTIVE	:	UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 29-83
TO	:	ALL STATE EMPLOYMENT SECURITY AGENCIES
FROM	:	ROYAL S. DELLINGER Administrator for Regional Management
SUBJECT	:	General Principles of Experience Rating Under Section 3303(a)(1), FUTA

1. Purpose. To explain the requirements of Section 3303 (a)(1) of the Federal Unemployment Tax Act (FUTA) to assist states
   in assuring that employers subject to the experience rating provisions of State laws willqualify for full allowable credits against the Federal unemployment tax.

2. References. Section 3303 (a) (1) , FUTA, P.L. 97-248, and UIPL 4-83.

3. Background. Employers subject to the Federal unemployment tax imposed by Section 3301, FUTA, are allowed two types of credits against that tax, the limit on which will be 5.4 percent in 1985 and thereafter, if certain requirements of the Federal law are satisfied. "Normal credit" is credit granted to each employer equal to the amount paid as contributions by each to an approved State unemployment fund if the State is certified on October 31, of a taxable year under Section 3304(c), FUTA.  "Additional credit" is credit allowed to employers with reduced rates of contributions asthough they had paid contributions at the highest rate under experience rating or 5.4 percent in 1985 and thereafter, whichever rate is lower.

   The objectives of experience rating are (1) the prevention of unemployment by inducing employers to stabilize their operations and thus their employment, and (2) the equitable allocation of the costs of compensable unemployment. Under the first objective, differential contribution rates are taxes to discourage unemployment insofar as employers have the power to control their operations. Under the second objective, sound fiscal policy suggests allocating the cost of doing business to the entities deemed responsible under, the State law for those costs.

   Section 3303(a)(1), FUTA, prescribes the conditions under which States may permit employers reduced rates of contributions payable to their unemployment funds. Any reduced rate must be based on the individual employer's experience with respect to unemployment or other factors bearing a direct relation to unemployment risk. The experience must be measured throughout a period of not less than three years (or less for new or newly covered employers). Various factors have been approved over the years for measuring experience, such as benefits paid. To translate such experience intoa variable contribution rate, it is necessary to have an index to reflect comparisons among employers' individual experience and then to apply the index to actual individual contribution rates. Finally, contribution rates on taxable wages under a State law are the measure of liabilities for contributions.

   The experience of all employers subject to contributions under a State law must be measured by the same factor throughout the same period of time. If there is to be an adjustment to the method of measuring experience or in the computation of rates, the adjustment should apply uniformly; otherwise, there would be a distortion of relative experience.

   The standard rate, as defined in Section 3303(c)(8), FUTA, is the rate from which variations therefrom are computed. Reduced rates are rates lower than the standard rate computed on the basis of an employer's experience as described above.

   Experience is the only available method of adjusting revenues to benefit costs, without amendment of a State law. It is also, however, a method of allowing reduced rates which are not commensurate with benefit costs. It is desirable, therefore, to assure that experience rating not only satisfies the requirements of the Federal law, but also that it produces the revenue needed to finance benefit costs adequately.

4. Action Required. SESAs should assure that in amending the experience rating provisions oftheir State laws to satisfy the amendments of the Federal law effective in 1985 that the State law amendments satisfy the requirements of Section 3303(a)(1), FUTA.

5. nquiries. Question concerning experience rating should be addressed to the appropriate regional office.

6. Attachment. Experience Rating Principles.