From the “Every Little Bit Helps” Department, here’s one area nonprofits could explore to save money: Change unemployment insurance coverage.
OK, perhaps it’s an odd time to think about a switch, given most nonprofits are facing difficult financial futures, and some face attrition or even layoffs.
It was news to me that nonprofits even had an option to opt out of the state unemployment insurance program. I got the tip from the Minnesota Council of Nonprofits (MCN), a founding member of California-based UST, a nonprofit trust whose sole purpose is to reduce unemployment costs for its 501(c)(3) owner-members.
Cheryl Jones, UST account executive, gave me the background.
Prior to 1972, nonprofits and religious organizations were exempt from the unemployment insurance system. If nonprofit employees lost their job through no fault of their own, they didn’t get unemployment benefits. In 1972, the federal law changed, requiring nonprofits to provide the benefit to former employees.
Nonprofits can reimburse
There was a caveat. The legislation allows 501(c)(3) organizations to reimburse the state unemployment systems for actual claims. This allowed nonprofits to opt out of the state system and become direct reimbursers. Some large nonprofits self-insure. Others chose UST or other organizations to manage the program, such as Chicago-based First Nonprofit Insurance Company or California-based 501(c) Agencies Trust.
Not every agency is a good fit for UST, Jones wrote in an email. If they have less then 12 full-time equivalent employees or have had a history of high unemployment claims, UST doesn’t encourage agencies to switch. “Our goal is to have a partnership with our members that results in long-term savings.”
Agencies have time to explore their options. If they are a part of the state system, they can opt out once a year, Jan. 1.
No surprise: Unemployment is up
UST has 267 participating Minnesota nonprofits, many in the human-services field. They have a collective 16,044 full-time-equivalent employees. Nationally, UST serves 2,100 nonprofit organizations in 47 states and Washington, D.C.
UST’s Minnesota-specific unemployment claims data puts hard numbers on a trend that is probably self-evident to most in the field. From June-December 2007, UST reimbursed the state $1.78 million for its members’ unemployment claims. For that same period in 2008, it reimbursed the state $2.24 million — a 25 percent increase. While some of that increase was due to membership growth (UST typically grows 5 percent a year) most was due to increasing unemployment.
“All indications point to increased unemployment claims through 2009,” Jones said.
Why it saves money
Even with the economic swoon, some nonprofits could still save money by opting out the state system. Jones explained why.
Nonprofit and for-profit employers in the state unemployment insurance system end up paying the benefits to individuals whose companies go out of business. They also pick up costs for companies which should be paying higher unemployment insurance rates but don’t, because the state sets a maximum rate. And if the state’s trust fund drops too low, employers pay a surcharge to build it back up.
Nonprofits that do direct reimbursement pay only their actual costs.
MCN started direct reimbursement in 1990 with a UST forerunner. Sondra Reis, MCN’s associate director, is a former UST trustee and explained how it works. Instead of paying a tax to the state once a quarter, MCN deposits money with UST once a quarter. If MCN lays off someone, that expense gets drawn from the account. “The amount of money we have had to pull from that account has been minimal throughout the years,” she said. “There is a nice balance in it.”
UST actuaries review claims histories and reserves of individual nonprofits. In the best cases, members see their rates drop. Reis said some nonprofits with high reserves even get money back at the end of the year, called an “experience credit.”
UST screens new applicants, asking about projected changes in funding and staffing. Jones said if agencies expect to downsize this year, but most of it will happen in the first two quarters, it still might make sense to switch to direct reimbursement in 2010.
Even in this economy, UST is adding new members.
Jones offered examples of three agencies joining UST in 2009. During the first two years of participation, one is projected to save $14,449 (81-employee agency), another $1,424 (22-employee agency), and the third $4,092 (23-employee agency). Savings vary based on taxable wages and unemployment claims history.