Unemployment Insurance is Not Really Insurance

March 11, 2015

Unemployment Insurance is Not Really Insurance

But it can act like it is!

In the world of for-profit companies, State Unemployment Insurance is a payroll tax assessed on employers to fund unemployment benefits. It is habitually and imperfectly called “unemployment insurance” or SUI (aka SUTA). Insurance Commissioners in nearly every state differentiate other forms of insurance from this employer tax assessed by their state to collect funds to pay for unemployment “insurance” benefits. In fact, those tax payments are often referred to as “employer contributions” in much of the unemployment literature published by the various state agencies.

However, in the world of 501c3 nonprofits, tribal enterprises and governmental employers, SUI actually provides the option to either elect to pay that tax, or opt out and reimburse, or essentially self-insure the cost of re-paying the state for benefits paid out in the future. Oddly enough, accountants practicing double entry accounting might see reimbursement payments to a state as both a liability and an expense of business operations. In reality, every type of future liability presents an occasion for risk transfer and/or insurance coverage.

As a straightforward financial transaction, making the reimbursing election seems easy enough and it nearly always is immediately cheaper. But how a nonprofit funds future unemployment benefit losses turns out to be anything but simple.

For nonprofit organizations, at the core of the problem is the natural human inclination to pay small financial losses that are sure to occur, in favor of avoiding much larger losses that are less likely to happen. When applied to a recognized insurance product, this means that many people would often rather pay premiums, i.e., small but certain losses (SUI tax, or some other pooled risk), even if it exposes them to potentially disastrous future losses.

Insurance experts often opine that people would make better decisions about their future risk if they understood that a place still afire from a lightning strike is as likely to be struck again as any other. Rather than regarding premiums paid for insurance that doesn’t immediately appear to pay a claim as an uncompensated loss, it is, in fact, financial protection against future ruinous loss.

So, having a thoughtful financial strategy utilizing some level of solid, established coverage of future unknown risk is an excellent business practice. First Nonprofit Group brings nonprofits, tribal enterprises and governmental employers to speed on the benefits of having both a solid financial strategy and coordinated cost control measures that meet a variety of diverse needs now and in the future.

For more information about First Nonprofit Group unemployment services, please contact us.


Source: First Nonprofit Group’s “Financial Mechanics of Funding SUTA” series

Next article: “Savvy Nonprofits Create a Solid Funding Strategy

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Working with Marshal Whittey at First Nonprofit has been a great experience. He handles our request as a priority and goes above and beyond to resolve any issues we have in a timely manner. Marshall follows through to the end and ensures our needs are met. He has been a great resource for LSC and our “go to” for any tax questions we may have. With LSC transitioning several facilities into one federal tax identification number, First Nonprofit was able to assist and provide guidance with best practices resolving claims to each entity. Additionally First Nonprofit provided knowledge (information materials) and one on one training to HRS group with best practices to handle claims state adjudicated, fraudulent claims, and appeals. And processing information in the First Nonprofit [unemployment claims] system allows for timely information can be collected.

Lutheran Services Carolinas, Salisbury, NC

My experience with FNP has been wonderful. Unemployment in general is quite confusing and FNP has simplified the process for us. Everyone we have reached out to or worked with has been very helpful and follows up to be sure we understand the information. I am so happy we made the switch to FNP!

Stone Valley Community Charter School, Huntingdon, PA

First Nonprofit smoothed the unemployment perils for our organization during Covid. Without the ability to cap our UI exposure, we would not have been able to weather the storm. The program worked perfectly and we have come out of the pandemic ready to forge on. Thanks FNP!

Jewish Silicon Valley, Los Gatos, CA

My experience with the FNP has been fantastic. The idea of setting funds aside for the unemployment tax liability is a bedrock for nonprofit organizations like mine, namely ASHBA; what is even more advantageous is having the FNP as a custodian of those funds. 100% recommended!

American Saddlebred Horse & Breeders Association, Inc., Lexington, KY

I would like to comment on my experience with FNP….to date our District has saved $1,000’s of dollars by being enrolled in the First Nonprofit program. My only regret is that we did not know about this method of paying unemployment tax years ago….as I had figured about five years

ago, had we enrolled 15-20 years ago, we could have saved our small school district upwards of $500,000 in payments to IDES. Also we would have had a pretty hefty sum of money in our Reserve Account. Thankfully I attended a workshop hosted by First Nonprofit back in 2015 which got the ball rolling!

Beardstown Community Unit School District 15, Beardstown, IL

I have worked with the First Non-Profit Team for many years, and I appreciate the quick response and care that Cecilia and the team provides anytime I have questions. While there are other providers that may provide like services, First Nonprofit will always be my first choice! I appreciate you!

Innovative Services, Inc., Green Bay, WI

First Nonprofit has been easy to work with and makes the administrative process easier and smoother. We enjoy working with you.

Visually Impaired Preschool Services, Louisville, KY

Luckily for us, our interactions regarding any issues with staffing has been very minimal! I can say that all other interactions with regards to billing, 941 reporting, etc. have been extremely pleasant, accommodating and easy to work with. Kim Ghanayem is always prompt, professional and friendly. Thank you so much!

Neurologic Music Therapy Services of Arizona, Phoenix, AZ