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. For nonprofit organizations that have opted out of the State Unemployment Insurance coverage, they must reimburse the State for any unemployment claims incurred. The CARES Act provides for a 50% reimbursement of unemployment claims paid between March 13, 2020 and December 31, 2020, regardless if the claim is related to COVID-19. This creates a large potential obligation for certain self-insured nonprofit organizations that have experienced large turnovers or furloughed staff.
As a result of the COVID-19 pandemic, under the CARES Act, all states must provide 13 additional weeks of federally funded Pandemic Emergency Unemployment Assistance through the Pandemic Emergency Unemployment Compensation Program (“PEUC”) to people who exhaust their regular state (26 weeks) unemployment benefits (“UB”), followed by additional weeks of federally funded employment benefits in states with high unemployment through the Extended Benefits Program (“EB”). As of July 2020, New Yorkers qualify for the additional 20 weeks of EB. Under the CARES Act, through December 31, 2020, employees who exhaust all UB (many who have lost their jobs for reasons unrelated to COVID-19), are eligible for Pandemic Unemployment Assistance (“PUA”). No PEUC or PUA benefits will be paid after December 31, 2020.
The following flowchart was issued by the New York State Department of Labor (“DOL”) to explain unemployment benefits available:
Self-insured nonprofit organizations must evaluate the impact on their financial statements of contingent liabilities and liabilities that exist, as of their statement of financial position date, for future unemployment claim payments. Under the New York State Unemployment Insurance Program, self-insured nonprofit organizations do not have to pay quarterly contributions on their payroll and are not required to contribute to the Reemployment Service Fund and will reimburse New York State for claim payments made on behalf of them.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 405 – Liabilities – provides guidance on the accounting for liabilities, including insurance related assessments. In accordance with FASB ASC 405, “If a noninsurance entity’s assessments are based on losses, it shall consider the losses that have been incurred by the entity when determining the liability.” The following criteria applies to the accounting for unemployment claim payments for self-insured nonprofits:
Self-insured nonprofit organizations shall recognize liabilities when all of the following conditions are met:
1.) Probability of assessment – the unemployment claim payments are probable and the information is available before the financial statements are available to be issued.
2.) Obligating event – the event obligating the nonprofit organization to pay (underlying cause of) an imposed or probable assessment has occurred on or before the date of the financial statements.
3.) Ability to reasonably estimate – the amount of the assessment can be reasonably estimated.
Probability of Assessment
FASB ASC 405-25-3 indicates that loss-based assessments are presumed probable when the losses on which the assessments are expected to be based are incurred. In this case, a nonprofit organization will have all the necessary details for determining the potential liability associated with unemployment claim payments. The details needed for determination include knowing who was terminated/separated from, how they separated, what the employee was earning, when the employee was terminated/separated from employment, and when the former employee is eligible to receive UB. Another factor to consider includes, but is not limited to, the length of time the former employees are likely to be out of work before finding new employment.
FASB ASC 405-25-4 indicates that for “loss-based assessments, the event that obligates an entity is an entity’s incurring the losses on which the assessments are expected to be based.” In this case, the “event that obligates an entity” is considered the date of termination or separation from employment. In the event an employee is terminated or separated from prior to a nonprofit organization’s statement of financial position date, the loss contingency should be accounted for at the statement of financial position date.
Ability to Reasonably Estimate
FASB ASC 405-20-25-2(b) indicates that one of the conditions that must exist for the recognition of a liability is that the amount can be reasonably estimated. Additionally, FASB ASC 450-20-25-5 provides that some amount of loss can be reasonably estimated when available information indicates that the estimated amount of the loss is within a range of amounts. “If no amount within the range is a better estimate than any other amount, the minimum amount in the range should be accrued.”
Estimating the Liability
According to FASB ASC 405-30-30-6, “estimates of loss-based assessments shall be consistent with estimates of the underlying incurred losses and shall be developed based on enacted laws or regulations and expected assessment rates.”
In New York State, for 2020, the maximum UB rate is $504 per week and the minimum UB rate is $104 per week. The weekly UB rate equals 1/26 of a claimant’s highest quarter earnings in all covered employment during the base period used to establish the claim unless the claimant’s highest quarter earnings are $3,575 or less. Then, the weekly benefit rate will be 1/25 of these earnings. The base period is the first four of the last five completed calendar quarters prior to when a claim is filed. For additional details, please see this webpage.
Present Value Measurement of Obligation
Based on the current legislation, the maximum benefit period is 59 weeks, which exceeds a calendar year. In accordance with FASB ASC 405-30-30-10 the liability may be recorded at its present value by discounting the estimated future cash flows at an appropriate interest rate. Given the current low interest environment and the maximum benefit slightly exceeding one calendar year, the likelihood that the present value of future cash outflows being significantly different from actual cash outflows is remote.
If accounting for UB payments met all of the reporting criteria, in accordance with FASB ASC 405, a nonprofit organization should recognize the liability and provide adequate disclosure in the financial statements. If a nonprofit organization did not recognize a liability related to UB payments, then the nonprofit organization should provide adequate disclosure using the guidance from FASB ASC 450-20-55 – Loss Contingencies to ensure the organization’s financial statements are prepared in accordance with United States Generally Accepted Accounting Principles.
To ensure adequate evaluation and proper accounting of potential liability, self-insured nonprofit organizations will want to create and maintain a detailed schedule of terminated and separated employees that include the following information:
1.) Employee name
2.) Date of hire
3.) Date of termination/separation
4.) Reason for termination/separation
5.) Quarterly compensation for the 5 most recent quarters
6.) Status of unemployment claim filing (if subsequent information is available)
7.) Weekly benefit payment amount (either estimated/calculated by organization or amount paid subsequently to balance sheet date but prior to financial statements being available date)
8.) Liability/amount to accrue (either estimated/calculated by organization or amount paid subsequently to balance sheet date but prior to financial statements being available date)
9.) Factor (i.e. present value factor or likelihood of liability payment factor)
10.) Cumulative totals for payment/liability amounts
Ted Campbell, CPA, CGFM, CGMA
Ted Campbell, manager in the Not-for-Profit Services group with Cerini & Associates, LLP, has been with the firm since 2020. He has more than fifteen years of experience in providing various audit, review, accounting and consulting services to for-profit and not-for-profit entities.