With the current unemployment rate sitting at 3.7%, the lowest it’s been since 1969, most workers aren’t thinking about unemployment.
Which is why the topic of state unemployment tax, and how much nonprofit clients are spending on it each year, is probably something that rarely comes up for brokers, third party administrators and other employee benefits professionals during yearly assessments.
But state unemployment tax can actually represent an area of significant over payment for nonprofits and taking the time to evaluate alternatives to the state system can result in real cost savings for these organizations. While also increasing an adviser’s portfolio of offerings, generating commissions and boosting client loyalty.
Nonprofit organizations frequently operate on thin budgets, working to drive as much money as possible back to their missions. They generally pay more into the state unemployment tax program than the benefits paid to former employees.
On average, nonprofits pay $2 in unemployment taxes for every $1 in benefits paid. That’s because state unemployment compensation payments are pooled so that all employers share administration costs. Employers in other industries like healthcare or construction get more value out of the state unemployment system simply due to the nature of their work and frequent changes in their workforces. As a result, many nonprofits end up funding other organization's unemployment benefits and paying more than they will ever use. As a broker, you can help your nonprofit clients solve this problem by offering them alternatives to the state system.
Many nonprofits — and even brokers — are unaware of the fact that under the Federal Unemployment Tax Act of 1972, 501(c)(3) nonprofits are allowed to opt out of paying state unemployment tax to become reimbursable employers. When an organization operates in this way, it reimburses the state dollar-for-dollar for unemployment benefits paid out to former employees, rather than paying taxes.
This can seem like an attractive option, but there is also significant risk in an already overburdened organization taking on the lone responsibility of reimbursing the state in the event of layoffs. In addition, the amount of time it takes to file paperwork, attend hearings and administer unemployment benefits for former employees can place a serious burden on small human resources departments.
This is where the broker can make a real difference. These mission-driven organizations rely on their brokers to help them break through the complexity of the insurance and benefits worlds, while also finding cost effective ways to manage risk and provide peace of mind. In such situations, offering your nonprofit clients an alternative to both the state system and the risks of being a sole reimburser, means educating them about private unemployment insurance.
Unemployment insurance tailored to nonprofit organizations can be a win-win for both parties. Not only does it allow you to expand your product line and generate commissions, it provides your clients with a truly supportive, low-risk and cost-saving way to avoid overpayment. It also protects the nonprofit from the burdens that come from managing unemployment claims and navigating state systems.
Take the case of a nonprofit counseling center that had been self-funding unemployment claims. This setup resulted in constant fluctuations in unemployment expenses, putting constraints on the center’s already restrictive budget. The current process also put pressure on the staff to navigate a complex human resources issue with little training, not to mention putting the center at risk of noncompliance with local, state and federal regulations.
An unemployment insurance provider worked with the center’s staff to create a solution at a fixed annual rate that was well within the organization’s budget. In addition, the counseling center was provided insurance coverage up to $170,000 with no mid-year or year-end adjustments. The insurer provided a hotline, online training programs and compliance documents, at no additional cost, to help the staff be more prepared to manage unemployment claims. Ultimately the counseling center was able to obtain protection against unpredictable funding changes while also streamlining human resources administration so that more time and money could be devoted to mission.
Each nonprofit organization is unique and a good unemployment insurance provider will offer a solution tailor-made to the reality of a client’s organizational structure, employment trends and budget. They should work with you and your client to determine a fixed rate based solely on the organization’s individual claims history and future expectations and they should offer programs that remove administrative hassles from the desks of already time-strapped HR departments.
Unemployment insurance offers brokers and TPAs a unique opportunity to provide nonprofit clients with an undiscovered value, especially in today’s environment of low unemployment. And because those clients are in the business of giving back, being able to offer them solutions for a secure, sustainable future benefits everyone.
