Not all state UI tax options are equal

October 16, 2013

Not all state UI tax options are equal

Nonprofits are not exempt from paying state unemployment insurance taxes, but  they do have alternative funding options, such as self-insuring or employing full or partially insured alternatives. Self-insuring removes nonprofits from unpredictable SUI tax pools, which have seen tax rates and taxable wage bases grow year after year due to high federal loan debt.

As states struggle to pay back UI debt owed to the federal government, UI tax credits for employers grow smaller each year. Nonprofits that opt out of SUI tax pools only need to reimburse the state for the actual number of claims paid to former employees. SUI tax rates rise regardless of individual employer habits. Many employers pay almost double in taxes the amount that is actually paid out to former employees as UI benefits, making self-insuring an alluring concept. With some states liable for debts of over a billion dollars, self-insuring or insured alternatives would appear to be best practice for most nonprofits.

However, self-insuring creates avoidable unprotected liabilities and can place pressure on an organization's annual fixed revenue. Nonprofits can also join unemployment trusts to mitigate some of the risk of self-insuring, but in many cases such a choice will take them right back to square one. UI group trusts often face many of the same funding challenges as state UI Trust Fund pools.

Drawbacks to group trusts

• Group trusts are able to recoup excessive benefit costs, requiring low-turnover nonprofit agencies to bear some of the costs associated with the higher benefit payouts of other nonprofits. Just like in state pools, some nonprofits would be paying more than the their actual UI claim costs.
• The objective of most trusts is to spread the costs of unemployment beyond high-turnover nonprofit agencies.

Private insurance options

• Membership in private insurance is voluntary, and the risk is separable and transparent.
• Modifications to UI contributions are related to individual member history and future expectations.
• Nonprofits elect full, partial or modified coverage based on risk tolerance, or private group plans structured as a LLC and the only unfunded liabilities are those chosen by the nonprofit.

Content presented by First Nonprofit Companies, the leading provider of a full-range of state unemployment insurance alternatives for 501(c)(3) nonprofit employers.