Insuring Against Unemployment

September 26, 2014       Mark Hrywna      

Unemployment insurance isn’t exactly top-of-the-pile material. But with un­em­ployment claims reaching record highs after the Great Re­cession, some new rules — and potential changes — it should be on your radar.

The federal Unemployment Insurance In­teg­rity Act was spawned from incorrect payments made through unemployment insurance of as much as $4.5 billion during 2013, roughly 11 percent of payments. It wasn’t always a result of fraud but some was because of basic errors and some because employers were not always reporting information on a timely basis.

In some cases, claims that were awarded were overturned when an employer offered information that was not provided in the state’s initial request.

Employers historically have been inclined to respond to or protest only claims that were considered inaccurate, according to global credit rating agency Equifax. Now they will be required to “respond to all claims, regardless of perceived legitimacy, to remain compliant with emerging state regulations and minimize their financial exposure.”

As part of the Trade Adjustment Assistance Extension Act of 2011, the Unemployment Integrity Act went into effect Oct. 1, 2013, re­quiring employers to provide information for all unemployment claims in response to a state’s initial request.

Nonprofits can opt out of paying state unemployment taxes and instead reimburse actual unemployment claims through a trust. The two largest trusts for nonprofits are the Unemployment Services Trust (UST) and 501(c) Agencies Trust, but there are others.

For organizations with stable employment and 10 to 15 employees, a trust can be a good option, said Donna Groh, UST’s executive director. If an organization has less than 10 full-time equivalent positions (FTEs), it probably should stay in the safety net of the state tax system. “One bad claim could wipe out their reserves,” she said. “When you leave the state tax system, you become completely liable for all claims,” she said. If an organization recently has gone through layoffs, they will have very high claims, Groh said, which could be a good time to leave the state system.

Organizations where there are high claims on an ongoing basis because of the business model – maybe there is seasonality or a high churn rate – probably are being subsidized by other employers in a state’s risk pool and would not be a good fit to be in a trust, she said. On the other hand, nonprofits where there are fewer claims are subsidizing other employers and could save money by leaving the state system, Groh said.

Unemployment reimbursement has been a “mixed bag” since the economy improved, according to Groh. “There’s certainly a higher level of awareness of being a direct reimburser,” she said, noting market research by UST a few years ago that fully one quarter of nonprofits didn’t even know the option was available to them. “Now that’s more the exception. Most organizations do know it’s an option, they just have to figure out if it’s right for them,” she said.

The federal government sets certain basic rules for how states need to run their programs and states have a fair bit of leeway, Groh said. In California and Min­ne­sota, once an organization is out of the system, it must stay out for two years.

California is among the few states that uses the federal minimum taxable wage base of $7,000, meaning employers must pay 1.5 percent tax on the first $7,000 of wages for each employee they have. In Minnesota, the state applies rates on a minimum wage base of almost $30,000. Fewer than 20 states have a base of less than $10,000, according to Equifax.

Most other states that went into debt during the recession imposed surcharges or raised rates or done something to address it, Groh said. Some states have not really addressed their deficits from the recession and are still trying to rebuild their funds, with as many as 14 currently maintaining insolvent trust funds, according to Equifax. “It’s scary when you look at how much money some states are in the hole,” Groh said, adding that projections for some states indicate they won’t be able to rebuild their funds in time for the next recession.

Doug Sauer, CEO of the New York Council of Nonprofits (NYCON), expects unemployment insurance costs to increase about 20 percent this year for his organization but he fears others might face increases of as much as 100 percent. To address structural problems in its unemployment system, New York state boosted the minimum taxable wage base from $8,500 to $10,300 – and about $250 annually for the next decade – on top of an increase in the tax rate. NYCON has been out of the state unemployment system for at least a decade, Sauer said, using Chicago-based First Nonprofit Group.

Florida and North Carolina made what Groh described as some interesting changes to address their deficits, including limiting the amount of benefits or the number of weeks that individuals can receive benefits. Others have imposed surcharges and/or changed rate schedules. Those are things to consider for charities considering moving out of the state tax pool, Groh said.

There’s been talk of doubling the federal minimum taxable wage base to $14,000. That would double the amount of money paid into the unemployment pool.

Darren Bowman, president and CEO of 501(c) Agencies Trust, has been expecting the federal minimum taxable wage to be increased since 2010, so it remains to be seen whether it will occur this year.

If it finally is acted upon and raised, he expects the biggest impact in aggregate dollars would be in California where the state has been running about a $10 billion negative balance with the federal government. “Many states made good progress repaying unemployment debt,” Bowman said, adding that some state legislatures take that minimum taxable wage base and index it up automatically. “The bottom line is, tax rates have been going up and will continue to go up — whether the federal government is going to play a role, that’s tough to predict,” he said.

Generally, it’s a good time to consider trusts because tax rates are high and the economy improved, Bowman said. “I’m not going to say it’s great but OK,” he said, adding that most nonprofits feel financially stable and have built up a rainy day fund.

“When you become a reimbursing employer, you’re taking a bit of a gamble that over the long run, you’ll pay less reimbursing the cost than participating in state system,” Bowman said.

An unemployment insurance fund going into a recession has rather low tax rates, then gets hit by payments, then raises those tax rates to recoup those funds over the next several years. “If you’re a reimbursing employer, the payments look similar,” Bowman said.

The best time as a nonprofit employer to look at becoming reimbursing employer is right after a recession. “That’s when you’re paying the highest taxes but running pretty lean, having made cuts that need to be made, funding sources are stable for the moment and you’re not looking at imminent layoffs,” he said. E