Beating Unemployment Taxes
April 1, 2002 Jeff Jones
The national unemployment rate climbed to 5.8 percent in December, but Northeast Counseling Services (NCS) anticipates saving $32,085 in state unemployment insurance (SUI) costs for 2002.
NCS, a Pennsylvania community mental health center, expects to save money because it exited the SUI tax system. NCS will, instead, reimburse the state dollar for dollar for only benefits paid to former employees. Leaving the SUI tax system is an under-used and sometimes unknown long-term cost cutter for nonprofits.
SUI tax rates vary by state, but are generally based on formulas that consider employers’ unemployment claims experience, taxable payroll and reserve account balances. Nonprofits make quarterly payments to the state based on an assigned tax rate.
A federal law passed in 1972 permits nonprofits to opt out of paying SUI taxes and reimburse the state only for actual unemployment benefits paid. This option appeals to nonprofits that experience low turnover.
The switch to reimbursement fit well for NCS. Of its 320 employees — 200 of whom receive benefits — it averages only one or two unemployment cases a year and doesn’t expect layoffs or terminations in 2002. NCS would have paid $52,046 SUI taxes in 2002, said Marge Matisko, NCS human resource director.
“We do very well on our unemployment claims,” Matisko said. “We don’t have a lot of unemployment cases.” Matisko said NCS had been paying more in SUI taxes than actual unemployment claims cost in past years.
NCS joined the Chicago-based unemployment trust First Nonprofit Unemployment Savings Program LLC (FNUSP), which performed a free tax analysis for NCS. First Nonprofit Mutual Insurance Company is the parent of FNUSP.
FNUSP operates in nine states with approximately 325 nonprofit members. It is one of at least three major unemployment saving programs for nonprofits in the United States. Unemployment Services Trust (UST) is based in Santa Barbara, Calif., and has 1,922 nonprofit members in about 43 states. 501(c) Services operates from Cupertino, Calif. and administers three trusts with about 1,400 nonprofit members in 46 states.
These trusts were created to help nonprofits better manage SUI costs. Trusts make reimbursement payments on behalf of nonprofits, provide claims management and offer a consistent quarterly charge. SUI taxes are often high early in the year until an agency reaches its taxable wages limit.
Trusts base nonprofits’ contribution rates on claims experience, anticipated costs and other variables. UST members’ contributions are based on an assigned rate and actual taxable wages.
After the initial year, UST calculates a nonprofit’s contribution rate using a formula that includes its contribution and unemployment claims history, outstanding claims, and operating expenses, according to UST’s Web site.
Nonprofits are also charged an administration fee by trusts, but contribution rates usually include that fee. The Boys and Girls Club (BAGC) in Kenosha, Wis., paid approximately $13,000 in unemployment costs in 2001 through the Joint Agencies’ Trust (JAT), which 501(c)Services administers, said Wally Graffen, BAGC executive director in Kenosha. That figure included JAT’s administration fee. BAGC would have paid at least $18,000 in SUI taxes.
Trusts also make available, for a price, stop loss insurance that protects agencies from unforeseen layoffs – a significant risk for reimbursers. Stop loss insurance covers agencies by giving them a predetermined deductible and paying additional costs up to a certain amount.
For example, an agency with a $300,000 payroll would receive a $10,000 deductible from FNUSP. The stop loss insurance would cover unemployment costs between $10,000 and $40,000, protecting the agency from unexpectedly absorbent SUI costs.
Before accepting members, unemployment trusts analyze nonprofits’ past SUI claims and produce a cost-saving estimate, helping nonprofit executives decide if reimbursement is a good choice. Trusts usually find significant SUI tax overpayment. In Texas, SUI tax overpayment for all businesses was more than $175 million in 1999, according to JAT’s Web site.
“Generally speaking if you’re in the tax system you pay $2 for every $1 you pay for benefits,” said Jim Claitor, vice president of 501(c) Services. “It’s a critical part of the budget.”
JAT saved members more than $5 million in 2000, according to its 2000 Report to Members. UST saves participants about 50 percent the first year and an average of 30 percent each additional year, its Web site said. FNUSP’s Pennsylvania members save about 50 percent, Ohio members save about 40 percent and Illinois members save about 20 percent, an FNUSP official said.
“We find agencies paying $50,000 in taxes (a year) when their turnover and reimbursement costs are only $5,000,” said Cecilia June, FNUSP program director.
Trusts pay claims from members’ individual accounts. This holds every nonprofit accountable for its SUI reimbursements. Surpluses a nonprofit earns go back into its individual account.
Surpluses happen when a nonprofit contributes more than actual claims paid. For example, if a nonprofit contributes $20,000 to a trust, but actual claims are only $17,000, that surplus could go into a reserve account.
In all three trusts, members can access reserves. If they leave, they take that money with them. This differs from the state system, which creates individual accounts but retains exiting nonprofits’ reserves.
At least one other unemployment program is the 501 Alliance, a Michigan unemployment pool with about 400 members. It saves members by undercutting Michigan’s new employer contribution rate of 2.7 percent by 0.45 percent, or a charge of 2.25 percent. And, it considers benefit claims experience for three years, not five, as the state does. This helps a nonprofit move a year of high SUI costs from its claims experience faster.
But unlike the trusts, if a nonprofit leaves 501 Alliance its reserves stay, similar to the state system. Still, if a nonprofit’s reserve account grows, its contribution rate lowers, said Mike Pennanen, 501 Alliance program administrator.
Switching to reimburser status and joining an unemployment program could be beneficial for diversely funded nonprofits employing 10 or more and experiencing low turnover.
Betsy Johnson, executive director of the 860-member Washington Council of Agencies (WCA) in the District of Columbia, helped establish the National Nonprofit Unemployment Trust, which later merged with the Human Services Unemployment Trust to create UST. WCA employs 12, has a $1 million budget and is a UST member.
“We have seen a tremendous decrease in our unemployment (costs) since joining the trust in 1990,” Johnson said.
Sarah A. Reed Children’s Center (SARCC) of Erie, Pa., is one agency choosing to reimburse in 2002 without joining a trust. SARCC employs 240 full-time equivalents and operates with about an $11 million budget. However, it bought stop loss insurance from FNUSP for less than $7,000, said Pauline Carrig, SARCC finance director. SARCC had paid about $63,000-$68,000 in SUI taxes in past years, but averaged claims of only $17,000.
“Assuming our claims history stays consistent with what it’s been the past several years, we stand to make significant savings in unemployment costs,” Carrig said.
Paul Fountain, a program manager at GatesMcDonald, a national unemployment claims management company headquartered in Columbus, Ohio, explained such savings with a hypothetical example:
If a reimbursing nonprofit pays a former employee $100 in SUI for 10 weeks, it receives a $1,000 bill from the state. The same employer, with a staff of 10 would pay the state $1,750 a year in the SUI tax system (based on a formula of 2.5 percent tax rate multiplied by a $7,000 taxable wage base pay per employee.) Becoming a reimburser saves this fictional employer $750 a year.
One other reason to exit the SUI tax system is that states may raise tax rates to cover rising unemployment. In 2002, New York and Texas plan to raise SUI taxes, said Laura Lough, managing editor of PayState Update, an American Payroll Association state compliance newsletter in New York City. It remains to be seen what other states will do.
Not for everyone
For nonprofits with fewer than 10 employees, a budget less than $1 million, or organizations that rely heavily on government contracts, the SUI tax system is probably more cost-efficient. So, if a nonprofit pays $33,000 in SUI taxes, but the state pays $40,000 to its former employees, that nonprofit should stay in the SUI tax system, June said.
Regardless of nonprofits’ situations, switching to reimbursement is a long-term commitment. Once a nonprofit leaves the SUI tax system it can’t join again in most states for two years, said Holly Smith Jones, UST executive director.
“This is a long-term financial decision,” Jones said. “This isn’t a quick fix. It’s not like buying a medical plan and changing carriers each year.”
Fortunately, nonprofit executives thinking about reimbursing have time to decide — most states have a Nov. 30 deadline to switch. To perform a self-tax analysis and determine whether your nonprofit is overpaying SUI taxes, call your state taxing body and ask for your SUI tax contribution rate over the past three years. You can then compare SUI taxes with actual SUI reimbursements you would have paid to former employees over the same period.