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Premium v. Reimbursement

Reference Number: MTAS-879
Reviewed Date: 08/29/2023

Every municipality in Tennessee is required to participate in the state’s unemployment insurance compensation program. The program provides for up to 26 weeks of subsistence funds to Tennessee workers who, through no fault of their own, are laid off or terminated for any reason other than gross misconduct. Private sector employers are required to purchase unemployment compensation insurance from the Tennessee Department of Labor and Workforce Development at premiums based upon each employer’s claims history. An employer whose employees (or former employees) have filed a high number of claims for unemployment insurance compensation will pay a higher premium than other employers whose claim experience is lower.

State and local governments in Tennessee, including municipalities, have a choice, however, that is not available to private sector employers. At their option, cities may designate themselves as either a “premium paying” or a “reimbursement” employer. A municipality’s choice in this matter has implications for its annual budget.

A “premium-paying” municipality is one that elects to provide a program of unemployment compensation through the traditional method of paying insurance premiums to the Tennessee Department of Labor and Workforce Development. Similar to the program mandated for private sector employers, “premium-paying” cities pay a quarterly insurance premium to the state and in return, the state pays claims for unemployment insurance filed against the city. As in the private sector, each city’s insurance premium is based upon its claims history and, therefore, such premiums may increase or decrease accordingly.

A municipality’s alternative to paying premiums is to designate itself as a “reimbursement employer.” This option essentially allows cities to self-insure their unemployment compensation liabilities. Consequently, “reimbursement employers” are not required to pay unemployment compensation insurance premiums to the state of Tennessee but must pay 100 percent of all claims for unemployment compensation filed by employees (or former employees).