Nonprofits Should Take Note of State Unemployment Fund Issues

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Although the economy is beginning to look up, the increase in unemployment during the recent recession and resulting $40 billion in Federal borrowing to cover state unemployment fund deficits indicates that employers will see a greater unemployment tax burden in the coming years. The Unemployment Services Trust (UST), a nonprofit trust that aids other nonprofits in reducing unemployment costs, says that 501(c)(3) organizations should pay particular attention as their tax options differ from for-profits, and could give them an advantage over these rising unemployment taxes.

These issues are particularly pertinent to nonprofits, since 501(c)(3) employers have an alternative to paying unemployment taxes.

Despite economic improvements across the nation, employers should not look for relief on unemployment taxes over the next decade, as states continue to recover from unemployment fund deficits and millions in federal borrowing.

The Unemployment Services Trust (UST), a grantor trust that helps nonprofits reduce their unemployment costs, has been closely monitoring the status of state unemployment fund practices and how they will impact their nonprofit colleagues and 2,100 nonprofit clients. UST is particularly concerned over the US Treasury report that there are currently 32 states with outstanding Title XII loan balances, totaling $39.8 billion that was borrowed to cover state unemployment benefits. Now, the obligation to repay these loans is forcing most states to increase their unemployment tax revenue through increased tax rates, increased taxable wage bases, or both.

According to a GAO report released in April (GAO-10-440), ineffective state unemployment funding practices over the years will have to lead to longer-term solutions that will affect employers for decades. These include “raising and indexing the taxable wage base under the Federal Unemployment Tax Act (FUTA), which could induce many states to raise and index their own bases...adjusting state tax rates more frequently; raising solvency targets before lowering rates" and the list goes on.

The DOL has also revealed more restrictions on federal short-term “cash flow loans” available to help states pay unemployment benefits when state funds are insufficient. Under the new ruling, in order to be eligible for a cash flow loan a state must: 1) have had a sufficiently solvent unemployment fund balance in at least one of the last five years, and 2) may not have implemented any unemployment tax cuts during the same period. The latter restriction just provides more reason for concern that employers will not be seeing any tax relief in the near future.

These issues are particularly pertinent to nonprofits since 501(c)(3) employers have an alternative to paying state unemployment taxes. Under federal law, they may opt to directly reimburse the state for the unemployment benefits paid to former employees, instead of paying the state tax rate. On average, employers nationwide pay $2.46 in unemployment taxes for every $1.00 in benefits that their workers receive. Under the alternative scenario, nonprofits only pay dollar-for-dollar on their actual unemployment claims. Most nonprofits with ten or more employees and a reasonable unemployment history can benefit significantly from the reimbursable method of unemployment funding.

If you are a 501(c)(3) with 10 or more employees, and you would like more information on how to safely opt out of the state unemployment tax system, please contact Bill Downey of the Unemployment Services Trust at or 888-249-4788. You can also submit a Request for Quote on the web at


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Megan Maulhardt
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