Savvy Nonprofits Create a Solid Funding Strategy
The opportunity for nonprofit organizations, governmental entities, and tribal enterprises to save substantially by opting out of paying the state unemployment tax (SUTA) is very real and may initially seem like a windfall. But such action is not without its hazards.
Protecting these new savings dollars and carefully guarding against future losses requires:
• A clear understanding of the impending short and long-term liability and risk,
• a diligent, rigorous annual evaluation and subsequent re-evaluations, and
• a solid strategy that minimizes costs and is insured against prospective unexpected losses.
The election by a nonprofit to opt out of paying SUTA and “reimburse” the state for future unemployment benefit charges is essentially choosing to self-insure that risk. Once such a decision is made, going back to paying the tax is not difficult, except to do so may be cost prohibitive.
So the progressive nonprofit making the reimbursing election must thoughtfully consider their level of risk tolerance and choose a funding strategy that meets their budget capability while providing the highest level of downstream protection. Because all unemployment reimbursing costs are unknown, establishing a solid funding strategy requires:
1. Complete understanding and analysis of previous (normally three years history) unemployment losses matched against similar time-period employee populations and payroll,
2. Careful monitoring and cost management of the current year’s budget for unemployment activity, and
3. Thoughtful consideration of projected funding, budget constraints and risk tolerance in the next budget year.
Those who pay SUTA have no choice to make other than from what pot of money the funds for the fixed tax rate will be paid. To enjoy the privilege of lowering SUTA costs by reimbursing, proactive managers will explore what tools are available to establish the best funding strategy available for their organization. Nonprofit organizations should think of the reimbursing method as paying for SUTA as they go, and then remember how volatile and mutable their own funding can be.
Content presented by First Nonprofit Group, the leading provider of state unemployment insurance solutions for 501(c)(3) nonprofit employers.
Source: First Nonprofit Group’s “Financial Mechanics of Funding SUTA” series
Next article, “Understanding SUI Risk Transfer”