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Program Overview

The unemployment insurance program was established under Title IX of the federal Social Security Act of 1935 (42 USC 1101). Correlative with that act is the Federal Unemployment Tax Act (FUTA) (26 USC 3301 et seq.) Under this law, each state administers a separate unemployment insurance program that must be approved by the Secretary of Labor based on federal standards (42 USC 503; 20 CFR 640.1 et seq.). Federal standards apply because the state programs are made applicable to areas normally regulated by federal law (under labor, commerce, and general welfare clauses). Special federal rules apply for nonprofit organizations and governmental entities.

Under FUTA, a combination of federal and state taxes is levied upon employers. Although they are imposed as “taxes,” the amounts paid are, in reality, akin to “premiums” that are paid for unemployment insurance coverage.

Proceeds from the taxes are deposited in the U.S. Treasury’s Federal Unemployment Trust Fund (the Fund) and each state has a separate account in the Fund. The funds are generally invested by the Secretary of the Treasury in government securities similar to those for social security trust funds. The use of these funds for any purpose other than payment of unemployment benefits is strictly prohibited. (42 USC 1104).

The Fund itself holds revenues in three separate federal accounts:

  • The Employment Security Administration Account covers federal and state administrative costs for unemployment insurance and other employment services, such as for veterans. This account also contains federal grants to states under 42 USC 1101 et seq. for unemployment compensation administration.
  • The Extended Unemployment Compensation Account contains the federal share of revenues which are drawn upon for extended unemployment benefits during periods of high unemployment.
  • The Federal Unemployment Account advances moneys to depleted state trust funds to ensure that benefit obligations are met. These funds are repayable by the states to this account.

As long as a state maintains minimum standards required under the federal Act, it remains eligible to participate in the federal-state collaboration that provides it with access to the above funds and grants (in the form of replenishment of exhausted funds, advances, special assistance when economic crises exist, etc.). While states are not required to conform to every federal statutory provision, they may not preempt federal law with respect to those areas where federal law is express. Thus, while state law generally governs eligibility requirements, amounts received, and maximum eligibility periods for benefits, these provisions must not conflict with any expressed federal provisions.

Inside Program Overview