All organizations, including nonprofits, must fund unemployment benefits. Nonprofits benefit from a federal exemption that allows them flexibility in their approach to covering unemployment claims made by employees.¹

Rather than contributing taxes to a State Unemployment Insurance (SUI) program, a nonprofit can reimburse the state for any unemployment claims made by its employees, dollar for dollar, as “reimbursable employers.” With many states raising tax rates on unemployment funds that dwindled during the COVID-19 pandemic, nonprofits may be paying as much as $2 in unemployment taxes for every $1 its employees make in claims. In fact, one study estimates that more than 85% of nonprofits with budgets over $2 million are overpaying for unemployment insurance.²

However, there are risks with opting out of a SUI program. Nonprofits paying the tax should compare the annual cost of the taxes against the actual amount of claims paid during that same period. Organizations also should understand the various risk transfer and service options available to them. These include:

Commercial “first dollar” insurance. In this scenario, a licensed, admitted commercial insurer accepts 100% of the unemployment risk in return for an annual premium.

• Pros: Insurer handles all claims via a third-party administrator (TPA). These programs offer fixed costs and handle the administration of state invoices.
• Cons: Insurer appetite for risk depends on the current marketplace. Policy premiums may vary and organizations need to be mindful of exclusions. This coverage also can be expensive.

Stop-loss insurance. Similar to “first dollar” commercial coverage, an organization choosing stop-loss coverage would self-fund its state obligation up to a set threshold, beyond which the unemployment insurer would cover any overage up to the stop-loss policy limit.

• Pros: Stop-loss protection transfers the risk of catastrophic loss. This option is most appropriate for nonprofits with low turnover and high payroll.
• Cons: The nonprofit is responsible for managing all state invoices. These policies tend to have high self-insured retentions and include exclusions.

Grantor trust. A nonprofit using a grantor trust contributes to an unemployment trust funded collaboratively with other nonprofits, based on their projected loss experience. The trust acts as a bank account to pay its participants’ unemployment benefits.

• Pros: Operating as a service provider, the trust handles invoices, claims and administrative duties. This option is attractive for nonprofits operating in multiple states with high turnover and low-level employees.
• Cons: No insurance protection and costly administrative fees.

Bonded surety. In this arrangement, a nonprofit contracts with a surety to guarantee 100% of its unemployment obligations.

• Pros: The service provider agrees to pay unemployment benefits and the work is guaranteed by a surety bond.
• Cons: These agreements are unregulated by state departments of insurance, and surety agreements allow the surety to cancel the agreement mid-service.

Full self-insurance program. A nonprofit may also elect to fund 100% of its unemployment costs.

• Pros: The nonprofit is in complete control and can choose a TPA to manage claims if needed.
• Cons: The organization will be entirely unprotected against large claims. A failure to reimburse the state for unemployment can have severe repercussions to the nonprofit and its board members, including liens placed against personal assets.

Contact HUB International’s nonprofit insurance experts to learn more about how to save on unemployment insurance.

https://www.hubinternational.com/