Nonprofit employers: It's time to think about state unemployment tax alternatives

With the unemployment rate sitting at 3.7%, the lowest it’s been since 1969, most workers aren’t thinking about joblessness.

Which is why the topic of state unemployment tax, and how much nonprofits are spending on it each year, is probably something that rarely comes up for employee benefits professionals during yearly assessments. But state unemployment tax can actually represent an area of significant over payment for nonprofits and taking the time to evaluate alternatives to the state system can result in real cost savings for these organizations.

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Nonprofit organizations frequently operate on thin budgets, working to drive as much money as possible back to their missions. They generally pay more into the state unemployment tax program than the benefits paid to former employees.

On average, nonprofits pay $2 in unemployment taxes for every $1 in benefits paid. That’s because state unemployment compensation payments are pooled so that all employers share administration costs. Employers in other industries like healthcare or construction get more value out of the state unemployment system simply due to the nature of their work and frequent changes in their workforces. As a result, many nonprofits end up funding other organization's unemployment benefits and paying more than they will ever use. Nonprofits can solve this problem by looking at alternatives to the state system.

Many nonprofits are unaware of the fact that under the Federal Unemployment Tax Act of 1972, 501(c)(3) nonprofits are allowed to opt out of paying state unemployment tax to become reimbursable employers. When an organization operates in this way, it reimburses the state dollar-for-dollar for unemployment benefits paid out to former employees, rather than paying taxes.

This can seem like an attractive option, but there is also significant risk in an already overburdened organization taking on the lone responsibility of reimbursing the state in the event of layoffs. In addition, the amount of time it takes to file paperwork, attend hearings and administer unemployment benefits for former employees can place a serious burden on small human resources departments.

Unemployment insurance tailored to nonprofit organizations can be a win-win. It provides nonprofits with a truly supportive, low-risk and cost-saving way to avoid overpayment. It also protects the nonprofit from the burdens that come from managing unemployment claims and navigating state systems.

Take the case of a nonprofit counseling center that had been self-funding unemployment claims. This setup resulted in constant fluctuations in unemployment expenses, putting constraints on the center’s already restrictive budget. The current process also put pressure on the staff to navigate a complex human resources issue with little training, not to mention putting the center at risk of noncompliance with local, state and federal regulations.

An unemployment insurance provider worked with the center’s staff to create a solution at a fixed annual rate that was well within the organization’s budget. In addition, the counseling center was provided insurance coverage up to $170,000 with no mid-year or year-end adjustments. The insurer provided a hotline, online training programs and compliance documents, at no additional cost, to help the staff be more prepared to manage unemployment claims. Ultimately the counseling center was able to obtain protection against unpredictable funding changes while also streamlining human resources administration so that more time and money could be devoted to mission.

Each nonprofit organization is unique and a good unemployment insurance provider will offer a solution tailor-made to the reality of a an employer's organizational structure, employment trends and budget. They should work with you to determine a fixed rate based solely on the organization’s individual claims history and future expectations and they should offer programs that remove administrative hassles from the desks of already time-strapped HR departments.

Unemployment insurance provides nonprofits with an undiscovered value, especially in today’s environment of low unemployment. And because nonprofits are in the business of giving back, being able to find solutions for a secure, sustainable future benefits everyone.

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