Premium v. Reimbursement
Under the Tennessee Employment Security Law, all state and local government units and political subdivisions that have covered employees, including municipalities, are required to participate in the state’s unemployment insurance program as liable employers. The program generally provides up to 26 weeks of unemployment insurance benefits to eligible Tennessee workers who, through no fault of their own, lose their jobs and meet the statutory wage and availability requirements.
Private sector employers that are liable under Tennessee law fund the program by paying unemployment insurance tax (premiums) to the Tennessee Department of Labor and Workforce Development. These premiums are experience‑rated, so an employer whose employees (or former employees) have had a higher amount of chargeable unemployment benefits generally pays a higher premium rate than employers with lower claim experience.
State and local governments in Tennessee, including municipalities, have a choice that is not available to most private sector employers. At their option, cities may designate themselves as either a “premium‑paying” employer or a “reimbursement” employer, and this choice has direct implications for the city’s annual budget and cash‑flow planning.
A “premium‑paying” municipality is one that elects to finance unemployment compensation through the traditional method of paying quarterly unemployment insurance premiums to the Tennessee Department of Labor and Workforce Development. Similar to the program mandated for private sector employers, premium‑paying cities remit a quarterly premium to the state, and in return the state pays unemployment insurance benefits on compensable claims filed against the city. Each city’s premium is based on its experience rating and may increase or decrease as its claims history changes over time.
A municipality’s alternative to paying premiums is to designate itself as a “reimbursement employer.” This option essentially allows a city to self‑insure its unemployment compensation liability. Reimbursement employers do not pay ongoing unemployment insurance premiums to the state of Tennessee but must reimburse the state for 100 percent of the unemployment insurance benefits paid to former employees that are chargeable to the city’s account.