Guest Article: Unemployment Insurance for Risk Averse Nonprofits

22 Aug 2019

Nonprofit organizations undertake some of the most noble work in our society, serving those in need or advancing research that help create a better world. They also typically operate on thin budgets, working to drive as much money as possible back to their missions. While staff can be significant, they may have no more than one or two employees dedicated to human resources.

One way nonprofits can operate more efficiently is by looking at their state unemployment tax expenditures and unemployment benefit charges. In fact, the Federal Unemployment Tax Act of 1972 allows 501(c)(3) nonprofits to opt out of paying the state unemployment tax to become “reimbursable employers.” When an organization operates in this way, it reimburses the state dollar-for-dollar for unemployment benefits paid out to former employees rather than paying taxes.

However, there is also significant risk in an already overburdened organization taking on the sole responsibility of reimbursing the state in the event of layoffs. In addition, the amount of time it takes to file paperwork, attend hearings and monitor benefits paid to former employees can place a serious burden on small human resources departments, further detracting from the organization’s mission.

It makes great sense in most cases where nonprofits are more risk averse to seek private unemployment insurance options. It can provide nonprofits with a truly supportive, low-risk and cost-saving way to avoid overpayment. It also protects the nonprofit from the burdens that come from managing unemployment claims and navigating state systems.

Unemployment insurance providers offer an alternative approach with solutions tailor-made to the realities of a nonprofit’s organizational structures, employment trends and budgetary realities. A good unemployment insurance provider will determine a fixed rate based solely on that organization’s individual claims history and future expectations. This alone can result in significant savings for the average nonprofit as the money spent applies directly to the organization’s own unemployment compensation expenditures rather than subsidizing employers with higher expenses, such as in a state unemployment pool.

Unemployment insurance providers also prepare the nonprofit for an unexpected round of layoffs due to restructuring or funding losses. That’s because, in addition to cost savings and security, unemployment insurance providers remove administrative hassles from the desks of time-strapped HR departments. These insurers typically handle all the administration that goes along with unemployment claims, including paperwork, attending hearings, and managing appeals. The insurer also helps audit claims as they are paid, which could result in additional savings for the organization – a time commitment that most nonprofit human resources staff cannot afford. Eliminating these constraints on already limited staff resources and the resulting potential costs savings could lead to increased efficiency and improved cash flow.