Employer Options for Unemployment Coverage
By: Ellen Johnson

California’s unemployment is at an all time high. This is probably going to impact all employers in the unemployment tax system, beginning as early as 2010. But, no matter what is decided, the nonprofit employer has an option for unemployment coverage they may not be aware of.

Federal law mandates that nonprofit agencies can opt out of their state unemployment tax system and simply pay back the state EDD department for any claims paid to former employees—this is called being a reimbursing employer.

“We didn’t realize that there was an option for Open Door, as a nonprofit clinic, to get out of the state unemployment tax system and become a reimbursing employer,” said Hermann Spetzler, CEO, Open Door Community Health Centers, Arcata, California.

The advantages of paying the unemployment taxes is that your claims are always covered (but if claims rise, probably your tax rate will too).  The disadvantage is that the tax rate can increase whether or not your agency had claims.  Most nonprofits end up paying more in taxes than the state pays in claims.

In California, the tax rate can be as high as 6.2% of the taxable payroll (right now at $7,000 per wages of each employee).  For a nonprofit with low claims, this is money out of your program dollars.

Advantages of Reimbursing for UI Claims

Nonprofits can reimburse on their own by contacting the California EDD department and requesting the paperwork to change from taxpayer status to reimbursing employer status.  You will be given a new State ID number. As a reimbursing employer you will want to budget for potential layoffs, audit claims, and protest all appropriate claims to keep your costs low.  California nonprofits can opt out of the tax system at any quarter, but have to stay out of the tax system for a minimum of five years.

Another option is to save money by reimbursing, but use a third-party unemployment program, generally set up as an unemployment trust.  Managed unemployment trusts help nonprofits take advantage of the reimbursement option while providing services and insurance to reduce the financial risk. 

Things to look for in a good unemployment trust are customized plans to help budget for claims and build a reserve account to pay the state for the claims; a dedicated claims management team that handles all audits and protests and a stop-loss insurance policy that will protect your assets against any unplanned and catastrophic claims.

Regardless of whether an employer pays unemployment tax to the state, or reimburses the state, unemployment benefits are paid to former employees exactly the same way by the EDD Department.

With unemployment at an all-time high, it makes sense to evaluate your options to see what is the best way for your nonprofit clinic to save money.

For more information on evaluating your options, please contact the CSRHA partner, 501(c) Agencies Trust, Ellen Johnson, 800/442-4867 ext 160 or by email at Ejohnson@501c.com.