Many 501(c)(3) nonprofits don’t realize that when considering the option to reimburse state unemployment insurance (SUI), a period of low unemployment is a great time to make the decision. (A period of low unemployment can mean a statewide low or a historically low period for an individual organization.)
Why is this the case? Simply put, what better time to pay for unemployment claims than when they are at their lowest?
State unemployment insurance reimbursing is the process by which 501(c)(3) employers decide to exercise their right, per the IRS, to not pay SUI taxes and to instead pay only for their actual state unemployment insurance claims.
When nonprofits consider reimbursing, they usually focus on the fact that they will no longer be paying SUI taxes. Instead, they need to focus on how little they will be paying in unemployment claims. This change of thinking helps organizations understand that the decision to reimburse or not is really a smart long-term strategy.
The long-term strategy involves replacing an unpredictable and uncontrollable expense—state unemployment insurance taxes—with one that an organization can exercise more control over: unemployment insurance claims.
State unemployment insurance taxes are unpredictable
We are in a period of historically low unemployment in the United States. Logically, one would think that low unemployment means low unemployment taxes. That is not necessarily the case. Some states manage their unemployment insurance systems better than others. Some states amassed huge debts during the last recession and their tax rates have remained relatively high to pay off those debts.
Dissatisfied with their unemployment systems’ performance during the pandemic, a few states are now making adjustments. This can mean changes to taxes, claims payments, and taxable wage bases.
In other states, the taxable wage base is indexed to the average wage or some other method. In those states, the employer will most likely see their costs continue to rise even if their tax rate decreases somewhat. Also, tax rates are based on experience. If an organization has a recent history of no-fault layoffs, their unemployment taxes will increase to match their poor claims history—regardless of statewide unemployment.
Therefore, low jobless rates do not mean low unemployment taxes. Even in states that have lowered their taxes since the last recession, those decreases are only temporary—until the next period of high unemployment.
Claims reimbursing is more financially prudent
What 501(c)(3) employers should focus on instead is their organization’s claims costs. A useful exercise for a nonprofit is to audit the past decade to identify their three worst years for unemployment claims—the historically high claims years. The average of those three high claims years is likely the most an organization would pay any year over the next decade. And most years are going to be far less expensive than the average high year.
By exercising their reimbursing option and through proper HR practices, claims management, and budgeting, an organization can minimize those high claims years and work to make those historic costs the ceiling of their unemployment exposure. An organization can then reserve for a worst-case scenario during limited historical events. This planning allows nonprofits to better forecast their unemployment liability from year to year and decade to decade. Leveraging all of this through reimbursing eliminates any worry associated with varying unemployment insurance tax rates or the state’s current economic health.
In the end, most reimbursing organizations find their ten-year average in claims is more than 50% LESS than their ten-year average of SUI taxes.
With a simple change in focus from taxes to claims, a 501(c)(3) nonprofit can exercise more control over their unemployment risk—and their budget.
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For more than 40 years, 501(c) Services has been a leader in offering solutions for unemployment costs, claims management, and HR support to nonprofit organizations. Two of our most popular programs are the 501(c) Agencies Trust and 501(c) HR Services. We understand the importance of compliance and accuracy and are committed to providing our clients with customized plans that fit their needs.
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.
