THE BEST TIME TO EVALUATE UNEMPLOYMENT REIMBURSING IS WHEN UNEMPLOYMENT IS LOW

By July 20, 2018Blog

When considering the option to reimburse state unemployment insurance many 501(c)(3) nonprofits don’t realize that a period of low unemployment is a great time to make the decision. (A period of low unemployment can mean a state-wide low or a historically low period for an individual organization.)

Why? Well, when is there a better time to just pay for unemployment claims than when unemployment claims 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 state unemployment insurance (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 long be paying SUI taxes. They instead need to focus on how little in unemployment claims they will be paying. 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 is to take an expense that can be unpredictable and uncontrollable – state unemployment insurance taxes – and replace it with an expense 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. But that is not necessarily the case. Some states manage their unemployment 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.

A few states did not enjoy the way their unemployment systems performed during the last recession, so they are tweaking them. 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 state-wide 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 and determine their three worst years for unemployment claims – the historically high claims years. The average of those three high claims years is most 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. All of this leveraged with 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 percent 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.

State Unemployment Insurance Tax Overpayment

The state unemployment insurance (SUI) tax system is designed to pool funds by charging employers more in premiums than they cost the system in claims. To determine your organization’s current SUI overpayment, visit our free online SUI Overpayment Calculator.

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