How it Works

Each state maintains an Unemployment Pool that for-profit and nonprofit employers pay into on a per-employee basis based their state’s taxable wage base and their individual tax rate (based on claims history, etc.). Money in the Pool is combined and used to pay all employer claims. Nonprofit employers generally have lower staff turnover, so in fact end up subsidizing the higher cost of commercial employers in the Pool.

Because of recent high unemployment, most state Pools are insolvent and many have borrowed over $1 billion each from the federal government. See the most recent Insolvency Map here.

Benefit for Nonprofit Employers

Since the mid 1970s, Federal law has allowed 501(c)(3) organizations to opt out of the state unemployment insurance (SUI) tax system and become a reimbursing employer. Reimbursing employers still offer the same unemployment benefits to separated employees, but instead of paying a flat tax, they reimburse their state dollar for dollar.

Why 501(c) Agencies Trust?

The Trust helps nonprofit employers:

1) Opt-out of the SUI system and become reimbursing employers;

2) By managing and auditing all claims with a professional team of unemployment professionals.

3) Save money.

4) Reduce unemployment and unemployment cost risks overall by offering a comprehensive menu of services.

The Federal Unemployment Tax Act

A federal tax law established in 1972 enables 501(c)(3) organizations to opt out of the SUI tax system.

The Federal Unemployment Tax Act (FUTA) is contained in Chapter 23 (sections 3301 through 3311) of Title 26 of the Internal Revenue Code. Under the FUTA, employers are required to pay an unemployment tax, based on payroll, to the federal government [Section 3301].

An employer is given a credit against these tax obligations for contributions made to approved state unemployment compensation arrangements [Section 3302]. The FUTA contains both a procedure and numerous standards for federal approval of state programs [Section 3304].

A special provision of the FUTA [Section 3309(a)] requires that approved state unemployment programs allow a "religious, charitable, educational, or other organization described in Section 501(c)(3), which is exempt from income tax under section 501(a)" to elect whether (a) to contribute to the state program in accordance with state law or (b) to pay into the state program annually an amount equal to the actual unemployment benefits paid out by the state program on account of employment services previously provided to the organization.

For more information about the FUTA, read the full text of the IRS tax code.