What is Unemployment Insurance, and How Does it Work?

Unemployment Insurance (UI) is a program that gives financial support to people who lose their jobs through no fault of their own.

To qualify for unemployment insurance benefits, you must meet all of the eligibility requirements of the New Jersey Unemployment Compensation Law. Those who meet the requirements may receive benefits for up to 26 weeks during a one-year period.

What Is Unemployment Insurance (UI)?

Unemployment insurance (UI), also called unemployment benefits, is a type of state-provided insurance that pays money to individuals on a weekly basis when they lose their job and meet certain eligibility requirements.

Those who either quit their jobs or were fired for a just cause are not eligible for UI. In other words, someone separated from their job due to a lack of available work and at no fault of their own usually qualifies for unemployment benefits.

Each state administers its own unemployment insurance program, despite it being federal law. Workers must meet their state’s work and wage requirements, including time worked. The benefits are primarily paid out by state governments and funded by specific payroll taxes collected for that purpose.

The federal government established provisions designed to help unemployed Americans during the coronavirus pandemic. These additional benefits were put in place after President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020.

They were extended after the passing of the Consolidated Appropriations Act of 2021 and were extended again when President Joe Biden signed the $1.9 trillion American Rescue Plan Act of 2021 on March 11, 2021. The additional benefits expired on September 6, 2021.

KEY TAKEAWAYS

  • Benefits under unemployment insurance, also called unemployment compensation, typically last up to 26 weeks, depending on the state in which you live and have worked.
  • You do not qualify for unemployment insurance if you quit your job or are fired for cause.
  • The U.S. Department of Labor oversees the unemployment insurance program.
  • Three programs established by the 2020 CARES Act were designed to help out-of-work Americans, including those who ordinarily would be ineligible to access unemployment funds.
  • The American Rescue Plan Act of 2021 extended COVID-19-related unemployment benefits that were expanded by the Consolidated Appropriations Act of 2021 through Sept. 6, 2021.

Understanding Unemployment Insurance (UI)

The unemployment initiative is a joint program between individual state governments and the federal government. Unemployment insurance provides cash stipends to unemployed workers who actively seek employment.

Compensation to eligible, unemployed workers is through the Federal Unemployment Tax Act (FUTA) along with state employment agencies.

Each state has an unemployment insurance program, but all states must follow specific guidelines outlined by federal law. Federal law makes unemployment benefits relatively ubiquitous across state lines. The U.S. Department of Labor oversees the program and ensures compliance within each state.

Workers who meet specific eligibility requirements may receive up to 26 weeks of benefits a year. The weekly cash stipend is designed to replace a percentage of the employee’s regular wage, on average.

States fund unemployment insurance using taxes levied on employers. The majority of employers will pay both federal and state unemployment FUTA tax. Companies that have 501(c)3 status do not pay FUTA tax.

Three states also require minimal employee contributions to the state unemployment fund. Reportable income includes freelance work or jobs for which unemployment insurance recipients were paid in cash.

Out-of-work people who do not find employment after a 26-week period may be eligible for an extended benefits program. Extended benefits give unemployed workers an additional number of weeks of unemployment benefits.

The availability of extended benefits will depend on a state’s overall unemployment situation. If you have become unemployed due to the coronavirus pandemic, see below for details of the various programs.

Who is eligible for Unemployment Insurance?

To be eligible for this benefit program, you must meet all of the following:

  • Unemployed through no fault of your own, and
  • Worked during a specified period, usually up to 18 months, and
  • Earned a minimum amount of wages as determined by each state, and
  • Actively seeking work each week you are collecting benefits.

States may have specific requirements determined by state law.

Requirements for Unemployment Insurance (UI)

An unemployed person must meet two primary requirements to qualify for unemployment insurance benefits. An unemployed individual must meet state-mandated thresholds for either earned wages or time worked in a stated base period.

The state must also determine that the eligible person is unemployed through no fault of their own. A person may file an unemployment insurance claim when fulfilling these two requirements.

Individuals file claims in the state in which they worked. A participant may file a claim by phone or on the state unemployment insurance agency’s website. After the first application, it generally takes two to three weeks for the processing and approval of a claim.

After approval of a claim, the participant must either file weekly or biweekly reports on that test or confirm their employment situation. Reports must be submitted to remain eligible for benefit payments. 

An unemployed worker cannot refuse work during a week, and on each weekly or biweekly claim, they must report any income that they earned from freelance or consulting gigs.

$2 trillion

The amount of emergency stimulus in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, part of which was designed to aid people who are out of work.

What Benefits Does Unemployment Insurance Provide?

Workers receive unemployment benefits from the state where they were employed, even if they reside in a different state.  When someone applies for benefits — typically over the phone or online — the state determines whether the person is eligible and the number of benefits for which he or she qualifies. 

The benefits provided to any particular individual will vary in two respects:  the number of weeks that they are last and their weekly dollar amount.

A number of weeks.  While some states simply provide the same number of weeks of benefits to all unemployed workers, most states vary the number of weeks according to the amount of a worker’s past earnings, whether the worker had earnings in each of the four calendar quarters that make up the base period, and how evenly those earnings were distributed over the base period. 

In most states, workers are eligible for a maximum of 26 weeks, although many UI recipients qualify for fewer than the maximum number of weeks because of uneven earnings or brief work history. 

In normal economic times, most workers find new jobs before using the maximum number of weeks available; before the recession that began in December 2007, the average duration of benefits for UI recipients was 15 weeks.

Dollar amount.  The average unemployment benefit is a little more than $300 per week.  However, individual benefit levels vary greatly depending on the state and the worker’s previous earnings.  In addition, in several states, workers receive higher benefits if they have dependents. 

State laws typically aim to replace about half of a worker’s previous earnings up to a maximum benefit level.  The maximum state-provided benefit in 2014 ranges from $133 in Puerto Rico and $235 in Mississippi (the lowest for a state) to $679 ($1,019 with dependents) in Massachusetts.

Because the benefit is capped, UI benefits replace a smaller share of previous earnings for higher-wage workers than lower-wage workers. 

In 2013, the most recent year for which data are available, the average UI recipient nationwide got a benefit that replaced 46.6 percent of his or her earnings, but that “replacement ratio” ranged from 33.9 percent in Alaska to 54.3 percent in Hawaii.

Special Considerations

On March 11, 2020, the World Health Organization (WHO) declared COVID-19, the illness caused by a novel coronavirus, to be a pandemic. and businesses across the U.S. closed down, causing massive unemployment.

Lawmakers agreed on the passage of the CARES Act, to landmark legislation that, in part, expanded states’ ability to provide UI to millions of workers affected by COVID-19, including people who aren’t ordinarily eligible for unemployment benefits. The bill was passed and signed into law in March 2020.

Three specific programs were designed to help Americans who were out of work because of the coronavirus. A fourth program was established through an August 8, 2020, memorandum issued by President Trump in response to the expiration of the Federal Pandemic Employment Compensation program.

Federal Pandemic Unemployment Compensation (FPUC)

The Federal Pandemic Unemployment Compensation (FPUC) provided an extra weekly benefit on top of regular unemployment insurance (UI).

The original benefit provided an additional $600 weekly under the CARES Act, but that benefit expired on July 31, 2020. The FPUC was modified and extended as part of the Consolidated Appropriations Act in December 2020.

Unemployed individuals receive an additional $300 per week in benefits (replacing the $600 weekly benefit) beginning after Dec. 26, 2020.

Another extension of the FPUC was approved after President Joe Biden signed the $1.9 trillion American Rescue Plan Act of 2021 on March 11, 2021. Under the plan, FPUC benefits expire on Sept. 6, 2021.

Keep in mind that the FPUC benefit was not payable during the gap from July 31, 2020, to December 26, 2020. In other words, the $600 in extra money added to unemployment benefits ended on July 31, 2020. This means the $300 didn’t kick in until after Dec. 26, 2020.

Although FPUC payments ended on Sept. 6, 2021, eligible claimants will continue to receive regular unemployment compensation from their state if they are eligible. According to the U.S. Department of Labor, regular unemployment benefits currently replace about 38% of a worker’s wages, on average.

News outlets reported that while there was some public support, there was very little political appetite for extending FPUC benefits after Sept. 6. In fact, 26 states stopped making FPUC payments ahead of the deadlines.

3.9%

The U.S. unemployment rate as of December 2021 was 3.8 percent. The figure represents 6.3 million people. Over the year, these measures are down by 2.8 percentage points and 4.5 million, respectively.

As of Aug. 20, 2021, the national unemployment rate was 5.4%, down 0.5% over the month and 4.8 points lower than in July 2020.

Pandemic Unemployment Assistance (PUA)

The Pandemic Unemployment Assistance (PUA) expands UI eligibility to self-employed workers, freelancers, independent contractors, and part-time workers impacted by the coronavirus pandemic.

Self-employed workers generally do not qualify for UI, and the PUA helps provide them with financial assistance.

The program was set to expire on Dec. 31, 2020, under the CARES Act, but was extended until March 14, 2021, under the Consolidated Appropriations Act. This gave unemployed American workers a total of 50 weeks of benefits.

The PUA was given new life, adding an additional 29 weeks to the program after the Biden administration passed the $1.9 stimulus package in March 2021. As per the American Rescue Plan Act, the PUA expired on Sept. 5, 2021, after a total of 79 weeks.

Following the PUA expiration, those who received benefits under that program will not be eligible for any other unemployment insurance (UI) program.

Pandemic Emergency Unemployment Compensation (PEUC)

The Pandemic Emergency Unemployment Compensation (PEUC) extended UI benefits under the CARES Act after regular unemployment compensation benefits were exhausted.

The expiration date for this program was originally set for Dec. 31, 2020, but was extended to March 14, 2021. This increased the number of weeks from the original 13 weeks to 24 weeks, meaning 11 weeks were added.

The Biden administration added an additional 29 weeks, extending the benefits under the PEUC program through Sept. 5, 2021. This means unemployed individuals can claim up to 53 weeks of benefits under the American Rescue Plan Act.

Although the PEUC program expired, you may still qualify to transfer to your state’s extended benefits program for 13 to 20 additional weeks of benefits. 

Four states have extended benefits: Alaska, Connecticut, New Jersey, and New Mexico. It’s important to check with your state to determine your eligibility for additional benefits.

Lost Wages Assistance (LWA) Program

The Lost Wages Assistance (LWA) program was a federal-state unemployment benefit that provided $300 to $400 in weekly compensation to eligible claimants.

The Federal government, through the Disaster Relief Fund (DRF), provided $300 per claimant per week, and states were asked to provide the remaining $100. LWA came into existence in response to the expiration of FPUC on July 31, 2020.

The deadline for states to apply for the Lost Wages Assistance (LWA) Program was Sept. 10, 2020. Payments ended on Dec. 27, 2020.

Conclusion

More than 70 years after its inception, unemployment insurance continues to provide a valuable cushion against income losses from temporary unemployment. 

It also serves as an effective automatic stabilizer for the overall economy by shoring up workers’ purchasing power during economic downturns. 

The basic compact that the UI system has embodied since its creation under President Roosevelt in 1935 is that people who have amassed a sufficient record of work, and on whose behalf UI taxes have faithfully been paid, should receive temporary UI benefits if they are laid off and are searching for a new job.  

As the economy emerges from the recession, policymakers will face the challenge of continuing to fulfill this compact while putting the system back on sound financial footing.

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