Self-Funding Your Unemployment, Is It Right for You?

Woody Clark

Sep 4, 2014

Self-Funding Your Unemployment, Is It Right for You?

 In 1972, the Federal Government enacted legislation granting 501(c)(3) nonprofit employers the right to self-fund for unemployment, rather than pay State Unemployment Insurance (SUI) taxes. Today, thousands of nonprofits across the country utilize this little known tax break and save millions of dollars on their unemployment expenses.

Here’s how it works - rather than pay SUI taxes that cover all of their employees in case they become unemployed, nonprofits who self-fund are only responsible for the actual benefits that their former employees collect. This self-funding strategy is also known as “reimbursing,” and typically saves nonprofit employers about 50% a year on their unemployment expenses. 

Although understandably appealing to for-profit employers, this right to choose which unemployment option they use (SUI tax paying vs. Self-funding) is only available to 501(c)(3) Nonprofit employers.

Before becoming self-funded for unemployment however, a nonprofit should first conduct a detailed analysis to see if this option is fiscally sound. Nonprofits with low/moderate turnover are typically ideal candidates for self-funding because they are usually paying much more in taxes than their former employees are collecting. Conversely, nonprofits with high turnover typically, see better results by remaining in their State’s SUI tax system because their former employees are receiving more in benefits than the nonprofit has paid in taxes. 

For example, a nonprofit that was paying $40,000 a year in SUI tax payments but whose former employees were only collecting $10,000 in benefits, would be overpaying by $30,000 a year if they were not self-funding. At the same time, a nonprofit that was paying $40,000 a year in SUI tax payments but whose former employees were collecting $70,000 in benefits, would be better off by continuing to pay SUI taxes because their former employees would be receiving more than that nonprofit had paid in to their State’s unemployment fund.

Two other important points should be kept in mind when considering self-funding for unemployment.  First, nonprofits that want to take advantage of this tax break must typically remain self-funding for anywhere between 2-5 years. This is to ensure that the Nonprofit is not jumping back and forth between SUI tax paying and Self-funding. The length of time your Nonprofit must remain Self-funding is determined by the State in which it conducts its operations. Secondly and perhaps most importantly, is the fact that nonprofits with 20 or more employees are the ones that are typically best served by implementing this self-funding strategy. Those nonprofit employers with less than 20 employees are usually advised to remain in the SUI tax system. 

It should also be noted that, as with any self-funding strategy, employers must be sure to prepare for times when higher than expected expenses pop up. By slowly building a reserve account (rainy day fund), nonprofits can plan for unforeseen periods when unemployment claims are higher than anticipated.

For example, if your nonprofit is self-funding and has budgeted $40,000 per year for unemployment, your agency must be prepared for the possibility that in a particular year (due to a loss of a grant, economic downturn, etc.) that unemployment claims may exceed that budgeted amount. Setting aside additional funds for times when unemployment claims are unusually high is an important safety measure that is highly recommended. 

In addition setting up a reserve account, nonprofits can sometimes purchase an insurance product called “Stop-Loss Insurance” to protect them against unusually high claims. Stop-loss insurance triggers when claims exceed a predetermined attachment point – in much the same way that catastrophic health insurance kicks in after reaching a deductible. Although stop-loss insurance is typically quite expensive and infrequently used, it provides another layer of protection nonprofits can utilize to limit their potential liability.

Lastly, every State allows self-funding for unemployment, but each has a different deadline for when the switch can be made. Most States require that the conversion from SUI tax paying to self-funding happen towards the end of the calendar year (November and December), but some States (like California) allow the switch to occur in any quarter. Be sure to check with your individual State to find out when the drop date for making the switch must occur.

The bottom line? Self-funding for unemployment is one of the best and least known tax breaks available to 501(c)(3) Nonprofits today. Ask your CFO/Finance Manager if, like thousands of other Nonprofits across the country, Self-funding for unemployment is right for your organization too. 

About the Author

For additional information and to see if Self-funding for unemployment would help your Nonprofit save money, be sure to contact:

 

Woody Clark

The Nonprofit Unemployment Fund

888-386-3001 or 888 – FUND – 001

woody@nufund.org

www.nufund.org