The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020, to mitigate the effects of the coronavirus pandemic on businesses, including nonprofit organizations. Due to cut-backs attributable to the Coronavirus outbreak and the need for social distancing and reduction of non-essential workforces, many nonprofit organizations found themselves having to furlough, reduce hours, or terminate some or all of their staff. Particularly hit hard were arts and cultural organizations. Unfortunately for many nonprofit organizations, they had opted out of the State Unemployment Insurance coverage, choosing instead to reimburse the State for any unemployment claims incurred. Typically, nonprofits do not have a high level of turnover, so this has historically resulted in lower unemployment costs. However, the large level of lay-offs have resulted in significant claims to the nonprofit sector.
In an effort to assist the nonprofit sector, the CARES Act included Section 2103, allowing nonprofits to be reimbursed up to 50% of the cost of unemployment claims they incur if they had opted out of State Unemployment Insurance coverage. These guidelines state that non-for-profits must pay 100% of their claims before they are able to receive their 50% reimbursement. These reimbursements apply to all payments between March 13, 2020 and December 31, 2020, even if their unemployment is not related to Covid-19. Unfortunately for nonprofits, there is no timetable for when they will receive the 50% reimbursement, putting further strains on cash flow.
While payments to the State Insurance Fund for unemployment are considered a State or local tax and therefore an allowable use and potentially forgivable payroll cost for PPP loan expenditure and forgiveness, there is no clear guidance if reimbursement to the State by nonprofits for insurance claims paid by the State are afforded similar treatment. Furthermore, should these payments be permissible, the 50% that will someday be reimbursed to the nonprofit is clearly not a forgivable cost, as the nonprofit will receive this amount.