Tax Rate Buydown

A law change passed during the 2010 session of the Minnesota legislature provided for a three year reduction in the cost of “buying down” an employer’s tax rate.

Reference: Minnesota Law, 268.051 Subd.7

Employers, who are assigned an experience rating and have had benefits paid to former employees during the experience rating period, can make a buydown payment to cancel all or part of the benefits paid charges on their account, reducing their unemployment insurance tax rate.

A buydown payment:

• Must be made within 120 days from the beginning of the calendar year for which the tax rate is effective, and
• Usually includes a 25 percent surcharge; however, due to a law change passed during the 2010 legislative session, the 25 percent surcharge will not be applied to tax rate buydowns for calendar years 2011, 2012 and 2013.
  
  Note: If you plan to make a buydown payment, make the payment before you submit the first quarter wage detail report. Employers cannot make a buydown payment if they have any debt on their account.

Employers who make a buydown payment, will have their tax rate recomputed using the reduced amount of unemployment benefits.

To decide whether a buydown payment will save the employer money, they should compare the cost of making a buydown payment to get a reduced tax rate to paying tax at their assigned tax rate. To do this:

1. Calculate the total cost (benefits to be canceled plus the 25 percent surcharge) of the buydown payment, then
2. Add to that amount the tax the employer would pay on their estimated total taxable payroll for the current year at the lower rate that would result from the buydown payment.

Benefits paid charges that are canceled by a buydown payment are permanently removed from the employers account. Therefore, a buydown payment may provide tax savings for several years. The full effect of a buydown payment becomes more apparent if the employer can estimate taxable payroll for several years.

Two tools are available in the Minnesota Unemployment Insurance online Employer Self-Service System to help employers with these projections:

• Forecast Tax Calculator
• Process Tax Rate Buydown

NOTE: Employers may want to use the Forecast Tax Calculator several times until they reach the tax rate buydown amount that is the most financially acceptable. Reference the Employer Self-Service System User Guide for step-by-step instructions.

      

This handbook is based on current UI legislation; statements are intended for general information and do not have the effect of law. The Minnesota Unemployment Insurance Law - MN Statutes 268.001 to 268.23 and Administrative Rules 3310 and 3315 - can be accessed through our Web site at www.uimn.org; by clicking on the UI Law link.