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501(c)(3) Not-for-Profit Organizations—Act Now to Potentially Save Money on Unemployment Taxes

As we struggle through this economic downturn, unemployment inevitably begins to rise. And as unemployment rates rise, so do unemployment compensation claims. Those benefits are paid through unemployment insurance tax premiums. As the number of benefit payouts increases, employers have to pay more in unemployment insurance tax premiums. Ultimately, charitable organization employers who participate in state-run unemployment compensation programs will see higher premiums.

So, although it might involve some extra effort, it's a smart idea to start thinking outside your normal management routine. One such option is to leave your state unemployment system. Doing so could save your organization thousands of dollars per year.

Please note that in Illinois there is only an option to opt out of the state program once a year and this annual deadline is December 31 to be effective January 1 the following year.

A Brief History of Unemployment Insurance

Unemployment compensation is a mandated benefit—every employer (business, government or not-for-profit) must provide it. Most employers have only one option—the state-operated risk pool into which they pay a percentage of their payroll. However, 501(c)(3) not-for-profit organizations and government agencies have the option to switch from contributing into the state tax system and becoming reimbursers of their own unemployment claims.

In the 1970s, the federal government recognized that not-for-profits play a special and important role in an open society with a market-based economy. Charitable organizations harness the altruistic impulse to do work where businesses fear to tread (i.e., where there is not enough profit) and where government is too bulky, slow or uncreative to succeed.

Since not-for-profits do work that others won't, the federal government granted 501(c)(3) charitable organizations an exemption from participation in state-mandated unemployment insurance programs. Charitable organizations can choose to be self-insured and opt out of the state-run risk pool. Charitable organizations are still responsible for paying unemployment benefits for their staff, but by opting out, they can save on average up to 40% off state unemployment costs. Of course, there might be some risk, so organizations must plan carefully.

Alternate Options and Managing Risk

Many not-for-profits are hesitant to leave the state program due to the serious risks involved. For instance, in a year when a not-for-profit loses funding and runs into unanticipated layoffs, the dollar amounts of filed claims could potentially devastate an organization. However, there's a safe alternative to paying state unemployment insurance taxes: You can join an administration program.

Such programs are safer than self-insurance and more affordable than state plans. In an unemployment administration program, you don't subsidize the high rate generated because of turnover in the for-profit industry. And with a good unemployment administration program, you won't be paying a fixed rate every year as you do with the state program. Instead, you reimburse the state dollar for dollar.

Potential Savings

By reimbursing your own claims, on average you may save up to 40% of your current payments to the state system. With the state, you pay a fixed amount every year whether your unemployment claims reach that amount or not. So year after year, you could be overpaying the state system, and that money is never refunded.

So, becoming a reimburser and paying only for your claims can definitely save you money. Many organizations are unaware that they have other options and that they could potentially save a significant amount of money by withdrawing from the state program.

For example, in Illinois, most employers pay $1.70 for every $1.00 of benefit recouped from the state unemployment risk pool. A not-for-profit in Illinois could instead choose an unemployment insurance administration program that would only cost $1.18 for every $1.00 of benefit they recoup. That's a significant savings—and a significant help to a not-for-profit budget.

How Can You Take Advantage of This Opportunity?

Once you've elected to take advantage of this tax break, find an unemployment program specialist to help you transfer from state-paying to reimburser status. When choosing an unemployment program, look for the following features:

• Expert claims advice
• Expert claims investigation
• Stop-loss protection in the event of unforeseen financial circumstances
• Interest on your account
• A program administrator dedicated to not-for-profit organizations
• A program in which each not-for-profit is individually evaluated
• A growing membership

Again, please note that in Illinois there is only an option to opt out of the state run unemployment program once a year and this deadline is December 31.

For more information, please contact Lu Ann Trapp at 312-980-3281 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.