We’ve written in this space before about the condition of various state unemployment insurance funds. (Florida and California are excellent examples.) We’ve also documented the many changes to unemployment insurance programs since the Great Recession. (Oklahoma and Kansas are good examples.) Most of the news about unemployment and unemployment taxes over the past year has been positive. Many states have decreased their unemployment insurance taxes or taxable wage bases and several others have paid back the federal loans they incurred to survive the Great Recession (allowing for many of the rate decreases).
So the system set up by the 1935 Social Security Act, state unemployment insurance, is healthy and ready for the next economic downturn, right?
No. It is not.
Designed to stabilize the economy and alleviate personal hardship stemming from involuntary job loss, our country-wide unemployment insurance system is based on Federal law, but administered by state employees under state law. The federal government taxes employers at a fixed 6.2 percent for the first $7,000 each employee earns and returns 5.4 percent of the money it collects to the state, though each state can apply its own tax rate (in addition to the federal tax) to a larger wage base. The states then administer their own programs with their own unique sets of rules.
The entire system is set up so a pool of money is available for displaced employees. And per federal law, the pool of funds needs to be able to provide money to citizens during slow economic cycles so that entire communities don’t disappear, careers don’t die and families don’t crumble.
However, it is becoming increasing clear that many states are not managing their unemployment trust funds well during this period of economic growth. It appears that if the economy stalls, as some say we should expect it to, many states will once again be forced to increase unemployment taxes, reduce benefits and/or borrow from the federal government.
Ben Casselman has an excellent piece on the current condition of state unemployment insurance funds over at FiveThirtyEight.
Casselman, who writes extensively on unemployment, provides us with some unnerving details,
The federal Department of Labor evaluates the health of state unemployment systems using a measure called the “average high-cost multiple,” which is essentially a measure of how long a state’s trust fund would last in a recession. An AHCM of 1 means a fund would last a year, which the government considers the minimum for a fund to be considered “solvent.” California’s AHCM on the eve of the recession was 0.27, and it wasn’t even the worst in the country. Missouri and Ohio had AHCMs of 0.12. New York’s was 0.09. A total of 20 states had AHCMs of less than 0.5; just three of those states have returned to solvency.
Casselman’s tone is one of exasperation. There are excellent examples of how a state unemployment insurance system should be run. Oregon and Washington did not have to borrow funds to pay claims during the recession like most states. They provide healthy and efficient models.
But for now, all the data seems to suggest that employers should enjoy their current unemployment insurance tax holiday. Because the holiday will probably end the next time the economy slows.
Nonprofits Have Other Options
The above applies to all employers except 501(c)(3) organizations. 501(c)(3)s do not have to pay state unemployment insurance taxes – high or low. Many nonprofits could save as much as 30 percent more on their unemployment cost by opting out of the unemployment insurance tax system – an advantage provided to them by the IRS. Doing so affords nonprofits unique avenues that allow them to strategically handle unemployment claims administration and unemployment insurance taxes in ways that for-profits can only dream about.
Contact us today for more information concerning your nonprofit unemployment insurance tax advantages.