Reimbursable Employer Solution: The Path to Avoid State Unemployment Tax for Non-profits

Property & Casualty Team

Alternative to Paying State Unemployment Tax for Non-profits | Corporate Synergies & UC Assure

With numerous health & welfare benefit changes taking place each year, and the likelihood of more to come in 2017 given the changes in Washington, the task of keeping up can be more difficult for non-profits. Non-profits face the same challenges as many for-profit businesses, including the rising cost of health insurance. Yet, they are likely managing these changes on a smaller budget and with a smaller team.

Non-profits can OPT OUT of paying state unemployment tax!

Sure, the trend of rising healthcare costs has garnered a lot of press, but what’s missing from the conversation are ways that non-profits can still positively impact their operating expenses. Some relief can be found by electing to opt out of state unemployment tax, an opportunity that all 501(c)(3) non-profits have. Opting out can yield significant cost savings and shouldn’t be overlooked by non-profit employers.

Here’s how it works: The Federal Unemployment Tax Act of 1972 allows 501(c)(3) non-profits to opt out of the state unemployment insurance system to become a “reimbursable employer.” When an organization operates as a reimbursable employer, it reimburses the state for unemployment benefits actually paid to each employee, rather than paying unemployment taxes.

As if their bottom lines aren’t already squeezed enough, non-profits generally pay more into the state unemployment tax program than the benefits they receive. On average, they pay $2 for every $1 paid out because all unemployment compensation payments are pooled together; therefore, 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 non-profits end up funding other organizations’ unemployment benefits and having to pay more than what they use. However, making the transition to a reimbursable employer can save money for non-profits who already operate on thin budgets with small HR teams.

Obviously, opting out of state unemployment taxes means that when employees are laid off, an employer is responsible for paying benefits. One option is to self-fund unemployment insurance and pay out benefits dollar for dollar. Another is to eliminate risk with unemployment insurance that protects a non-profit’s budget and provides a team of professionals to manage the process.

Alternative to Paying State Unemployment Tax for Non-profits | Corporate Synergies & UC Assure

The self-funding option can save non-profits money; however, if a large-scale layoff occurs, the dollar-for-dollar cost could easily become unmanageable. In addition, the amount of time it takes to file paperwork, attend hearings and administer unemployment benefits for former employees takes away from other human resources matters.

Unemployment insurance options help mitigate the risk of unemployment claims, and many solutions also provide help in administering the program. Most often, employers pay a fixed annual premium based on a few years of unemployment claims, payroll and number of employees.

For those who choose a traditional insurance policy, the insurer typically handles all of the administration that goes along with unemployment claims. This could mean handling paperwork when an employee files for unemployment, attending hearings on behalf of the employer and managing appeals. In addition, the insurer also helps to audit claims as they are paid, which could further save employers money. The Department of Labor’s current improper claims rate is 11%.1

Non-profit leaders are already tasked with cutting costs wherever possible, and state unemployment tax might not seem like a place where significant money can be saved. However, it’s a relatively easy expense to investigate, and the cost for some employers can be great, compared to a reimbursable employer solution.

In addition, handing off unemployment claims administration is a straightforward process; putting administration in the hands of someone who not only understands how the system works not only takes a time-intensive task off the employer’s plate but also can provide significant cost savings.

Clearly, the reimbursable employer option for 501(c)(3) non-profits is a good source of “found” dollars by opting out of paying. Contact Corporate Synergies for more information on this program.

1 “Unemployment Insurance: Department of Labor”


©2016 Corporate Synergies Group, LLC. No part of this material may be republished or distributed without prior written consent.

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