[Federal Register Volume 61, Number 105 (Thursday, May 30, 1996)]
[Notices]
[Pages 27101-27104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-13565]



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DEPARTMENT OF LABOR

Employment and Training Administration


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 22-96

    Federal law requires that all money received in the unemployment 
fund shall, immediately upon receipt, be paid over to the Secretary of 
the Treasury to the credit of the Unemployment Trust Fund. This 
provision is referred to as the ``immediate deposit requirement.'' 
Federal law also contains a ``withdrawal standard'' which, with limited 
statutory exceptions, requires that all money withdrawn from the 
unemployment fund of the State shall be used solely in the payment of 
unemployment

[[Page 27102]]

compensation. This UIPL puts forth the Department of Labor's 
interpretation of when monies are received in the State's unemployment 
fund and when they cease to be a part of such fund.

    Dated: May 23, 1996.
Timothy M. Barnicle,
Assistant Secretary of Labor.

U.S. Department of Labor, Employment and Training Administration, 
Washington, D.C. 20210

Classification: UI
Correspondence Symbol: TEURL
Date: May 22, 1996

Directive: Unemployment Insurance Program Letter No. 22-96
To: All State Employment Security Agencies
From: Mary Ann Wyrsch, Director, Unemployment Insurance Service
Subject: The Immediate Deposit and Withdrawal Standards

    1. Purpose. To advise States of the Department of Labor's 
interpretation of Federal law concerning the applicability of the 
immediate deposit and withdrawal standards to State unemployment fund 
moneys.
    2. References. Sections 3302(a)(1), 3304(a)(3), 3304(a)(4), 3306(f) 
and 3306(h) of the Federal Unemployment Tax Act (FUTA); Sections 
303(a)(1), 303(a)(4), 303(a)(5), and 904 of the Social Security Act 
(SSA); Cash Management Improvement Act of 1990, Public Law No. 104-453 
(1990).
    3. Background. Over the years the Department of Labor has 
corresponded with many States concerning the handling and use of moneys 
in State unemployment funds. Questions which frequently arise include 
when moneys are ``received in'' the unemployment fund and when moneys 
cease to be a part of the fund. This UIPL is issued to inform States of 
the Department's interpretation of Federal law requirements concerning 
these matters.
    4. Federal law provisions. The relevant provisions of Federal law 
follow.

    Rescissions: None
    Expiration Date: Continuing

    a. Section 3302(a)(1), FUTA, provides that: The taxpayer may, to 
the extent provided in this subsection and subsection (c), credit 
against the tax imposed by section 3301 the amount of contributions 
paid by him into an unemployment fund maintained during the taxable 
year under the unemployment compensation [henceforth ``UC''] law of a 
State which is certified as provided in section 3304 for the 12-month 
period ending on October 31 of such year.
    b. Section 3304(a)(3), FUTA, requires, as a condition of employers 
in a State receiving credit against the Federal unemployment tax, that: 
all money received in the unemployment fund shall * * * immediately 
upon such receipt be paid over to the Secretary of the Treasury to the 
credit of the Unemployment Trust Fund established by section 904 of the 
Social Security Act.
    This ``immediate deposit'' requirement is also found in Section 
303(a)(4), SSA, as a condition for a State receiving administrative 
grants.
    c. Section 3304(a)(4), FUTA, requires, as a condition of employers 
in a State receiving credit against the Federal unemployment tax, that: 
all money withdrawn from the unemployment fund of the State shall be 
used solely in the payment of unemployment compensation, exclusive of 
expenses of administration * * *.
    This ``withdrawal standard'' is also found in Section 303(a)(5), 
SSA, as a condition for a State receiving administrative grants. Both 
provisions contain exceptions not germane to this UIPL.
    d. Section 3306(f), FUTA, defines the term ``unemployment fund,'' 
in relevant part, as meaning: a special fund, established under a State 
law and administered by a State agency, for the payment of 
compensation. Any sums standing to the account of the State agency in 
the Unemployment Trust Fund established by section 904 of the Social 
Security Act * * * shall be deemed to be a part of the unemployment 
fund of the State, and no sums paid out of the Unemployment Trust Fund 
to such State agency shall cease to be a part of the unemployment fund 
of the State until expended by such State agency. An unemployment fund 
shall be deemed to be maintained during a taxable year only if 
throughout such year * * * no part of the moneys of such fund was 
expended for any purpose other than the payment of compensation 
(exclusive of expenses of administration) and for refunds of sums 
erroneously paid into such fund * * *.
    e. Section 3306(h), FUTA, defines the term ``compensation'' as 
``cash benefits payable to individuals with respect to their 
unemployment.''
    f. Section 303(a)(1), SSA, requires, as a condition for States 
receiving administrative grants, that an approved State law include 
provision for: [s]uch methods of administration * * * as are found by 
the Secretary of Labor to be reasonably calculated to insure full 
payment of unemployment compensation when due.
    g. Section 904, SSA, establishes the Unemployment Trust Fund (UTF) 
and places specific requirements on the U.S. Secretary of the Treasury 
for its management and investment. Specifically, Section 904(b), SSA, 
in pertinent part, provides that: [i]t shall be the duty of the 
Secretary of the Treasury to invest such portion of the Fund as is not, 
in his judgment, required to meet current withdrawals. Such investment 
may be made only in interest-bearing obligations of the United States 
or in obligations guaranteed as to both principal and interest by the 
United States * * *.
    5. Discussion. a. In General. The management of the funds from 
which UC was to be paid was given considerable attention by the 
drafters of the SSA of 1935. Federal investment was adopted over State 
investment as it was feared that liquidation of State investments on a 
falling market would worsen the severity of an economic downturn and 
cause the States to sell securities at a loss in order to pay UC. A 
Senate committee report described the advantages of Federal investment:
    Securities will not have to be dumped on the markets in order that 
the reserve funds may be liquidated. Instead of increasing the tendency 
toward deflation, the handling of the reserve funds in the manner 
provided in the bill [i.e., the SSA] will make possible their use to 
promote stability. When depression sets in, the funds can be liquidated 
without actual sale of the securities on the markets, and since they 
will be used to pay compensation to unemployed workmen, the net effect 
will be to maintain purchasing power without any offsetting effects 
toward deflation. [S. Rep. No. 628, 74th Cong., 1st Sess. 15 (1935) 
(henceforth ``Senate Report'').]
    As a result, the current trust fund \1\ system was established. The 
Senate Report makes it clear that a trust fund limited to a specific 
purpose was intended: ``The States can draw upon the employment trust 
fund solely for unemployment compensation purposes * * *.'' (Senate 
Report at 15.) The Senate Report also states that: [Section 904(a)] 
establishes in the Treasury of the United States a trust fund with the 
Secretary of the Treasury as trustee and with the respective State 
Agencies, administering the State unemployment

[[Page 27103]]

compensation laws, as beneficiaries of the trust. [Senate Report at 
47.]
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    \1\ According to Black's Law Dictionary, a ``trust fund'' is a 
``fund held by a trustee for the specific purposes of the trust; in 
a more general sense, it is a fund which, legally or equitably, is 
subject to be devoted to a particular purpose and cannot or should 
not be diverted therefrom.''
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    Unlike many other trust systems, the UC system involves active 
participation by the beneficiaries: States collect amounts due the 
trust and make the actual payment of UC. To assure that the States 
administered these activities in accordance with the purpose of the 
trust, the immediate deposit and withdrawal standards place specific 
requirements on the States.
    b. The Unemployment Fund. Both the immediate deposit and withdrawal 
standards apply to moneys in the State's unemployment fund. The 
definition of ``unemployment fund'' in Section 3306(f), FUTA, begins by 
emphasizing the States' participation in the UC program: the 
unemployment fund is ``a special fund, established under a State law 
and administered by a State agency, for the payment of compensation.'' 
The unemployment fund includes ``[a]ny sums standing to the account 
of'' the State in the UTF. Further, ``no sums paid out of the 
Unemployment Trust Fund to such State agency shall cease to be a part 
of the unemployment fund of the State until expended by such State 
agency.'' (Emphasis added.)
    Due to the active participation of the States in collecting and 
expending trust moneys, the parts of the unemployment fund used for 
these purposes reside in and are managed by the States. A State's 
unemployment fund consists of three main parts: a clearing account for 
the temporary and immediate deposit of all moneys paid to the fund, the 
State's account in the UTF (as provided in Section 3306(f), FUTA), and 
a benefit payment account consisting of all money requisitioned from 
the State's account in the UTF for the payment of unemployment 
benefits.\2\
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    \2\ For example, Section 10(b) of the Manual of State Employment 
Security Legislation, Revised September 1950, provides that the 
State ``shall maintain within the [unemployment] fund three separate 
accounts: a clearing account, an unemployment trust fund account, 
and a benefit account.''
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    c. When Moneys Become Part of a State's Unemployment Fund. Moneys 
need not be in any of the three main parts to be in the fund. The exact 
time moneys become part of the State's unemployment fund is statutorily 
controlled by the immediate deposit requirement which requires the 
payment by the State of ``all money received in the unemployment fund 
and * * * immediately upon such receipt'' to the Secretary of the 
Treasury to the credit of the UTF.
    The Department interprets the phrase ``received in the unemployment 
fund'' to mean that any money received for purposes of the trust (i.e., 
the payment of UC) is ``in'' the State's unemployment fund at the 
instant of its receipt by the State or its agent. This interpretation 
assures that transfers of moneys in a State's possession are not 
delayed, thereby giving effect to the immediate deposit requirement 
that all moneys be immediately \3\ paid over to the UTF and assuring 
the beneficiary has forwarded moneys to the trustee for investment.
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    \3\ The Department's interpretation of ``immediate'' is 
implemented in the performance levels it has established for 
measuring the promptness of (1) depositing contributions received by 
the State into the clearing account and (2) transferring such 
contributions from the clearing account to the UTF.
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    This interpretation also assures that an employer paying 
contributions will receive credit for these payments against the 
Federal unemployment tax under Section 3302(a)(1), FUTA, which allows 
the credit to be taken by an employer only for ``the amount of 
contributions paid by him into an unemployment fund.''
    As an example, employer and employee UC contributions are 
``received in'' the State's unemployment fund at the instant of receipt 
by the State or its agent and the State must immediately place such 
moneys in the clearing account for immediate transfer to the UTF. As 
another example, if the balance over a certain level in a penalty and 
interest account is required to be transferred to the State's 
unemployment fund on a certain date, then the amount required to be 
transferred is deemed to be ``in'' the State's unemployment fund at the 
instant the transfer is required to be made. Similarly, all 
unemployment fund earnings are immediately part of the fund.
    In some States the UC agency also collects taxes for other 
programs, such as temporary disability insurance. In others, a non-UC 
agency, such as the Department of Revenue, collects UC contributions. 
In both cases, the UC contributions may be deposited in one State bank 
account, transferred to another State bank account and then transferred 
to the UTF. Since UC contributions are in the unemployment fund at the 
instant they are received by the State, that part of any State account 
which these contributions pass through its considered to be part of the 
State's clearing account. Any other interpretation would permit delays 
in the transfer to the UTF and the other problems discussed above.
    d. Withdrawals From a State's Unemployment Fund. Under the 
withdrawal standard, moneys may be withdrawn from the State's 
unemployment fund only for the payment of UC (or another statutorily 
permissible use), and, as provided in Section 3306(f), FUTA, do not 
cease to be a part of the State unemployment fund until actually 
``expended.'' The Department interprets the term ``expended'' to mean 
an amount is actually paid out to a recipient. That is, the State's 
account is debited for the purpose of settling a payment by electronic 
fund transfer and/or redeeming a check, warrant, or other paper 
instrument.
    Put another way, unemployment funds are not expended simply because 
a negotiable instrument is issued. For example, if a claimant fails to 
cash a check within the time specified in State law, there has been no 
expenditure. The State may not, therefore, transfer the funds to the 
State's general account to be used for another purpose.\4\ This 
interpretation assures the purpose of the trust is accomplished since, 
even though a check for the payment of UC may have been issued, the 
unexpended funds remain available for the payment of UC.\5\
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    \4\ UIPL No. 661, dated June 7, 1962, addressed this escheat of 
uncashed checks drawn against unemployment fund accounts.
    \5\ The fact that amounts have not been ``expended'' does not 
preclude the raising of a withdrawal standard issue on the basis 
that amounts are constructively withdrawn for an impermissible 
purpose. UIPL 25-89, 54 Fed. Reg. 22,973 (1989) tranmitted a 
Secretary's Decision stating that such constructive withdrawals are 
inconsistent with Federal law.
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    Similarly, moneys are not expended from the unemployment fund 
simply because they are transferred from one State account to another 
prior to transfer to the UTF or prior to an actual payment of UC or 
other permissible use. Moneys are, however, considered to be expended 
when the transfer to another State account (e.g., the State's general 
account) results in the moneys no longer being available for the 
payment of UC or other permissible use. It should be noted that, under 
Section 3306(f), FUTA, an unemployment fund exists only if all fund 
expenditures from the fund are for the payment of UC (or other 
statutorily permissible purpose.) Therefore, if the State expended an 
amount for an impermissible purpose, then the State would no longer 
have an unemployment fund as provided under Section 3306(f).
    e. Withdrawals from any Unemployment Fund Account are Subject to 
the Withdrawal Standard. The withdrawal standard applies to ``all 
amounts withdrawn from the unemployment fund.'' To assure that 
unemployment fund moneys are properly used and efficiently managed, the 
Department interprets this requirement as applying to

[[Page 27104]]

withdrawals/transfers from one unemployment fund to another. For 
example, except as otherwise permitted by the Cash Management 
Improvement Act, any drawdown from the UTF not needed for the immediate 
payment of UC (or other use authorized by Federal law) is inconsistent 
with the withdrawal standard. Similarly, a transfer from the clearing 
account (except as otherwise permitted under Federal law) to any 
account other than the UTF is inconsistent with the withdrawal 
standard.
    6. Action Required. State agency administrators are requested to 
review existing State law provisions and State procedures to ensure 
that Federal law requirements as set forth in this UIPL are met. Prompt 
action, including corrective legislation, should be taken to assure 
Federal requirements are met.
    7. Inquiries. Direct questions to your Regional Office.

[FR Doc. 96-13565 Filed 5-29-96; 8:45 am]
BILLING CODE 4510-30-M