After six years of insolvency, New York’s unemployment fund is finally debt-free. This should lead to lower tax contributions for employers — including nonprofits — into the State Unemployment Insurance (UI) fund. And while a solvent UI fund will mean better preparation for the next economic downturn, some nonprofits have found that opting out of state unemployment insurance altogether is a safer bet for them long-term.
According to Governor Cuomo’s announcement: “Employers have already saved an estimated $200 million through the early repayment of federal debt with each saving, on average, an estimated total of $1,200 or $84 per employee. As a result, the Unemployment Insurance contribution rate schedules have been adjusted downward, further reducing costs and saving employers up to an additional $42.80 per employee.”
Governor Cuomo cited several factors leading to the lower unemployment costs for employers, including reforms put in place in 2013, along with record jobs growth and controlled government spending. “Over the past five years, New York State employers paid higher contribution rates because the Unemployment Insurance Trust Fund’s deficit and the Great Recession’s high unemployment rates.”
The volatility of the state’s UI Fund was not felt by all employers though. Stated Donna H. Groh, Executive Director of UST, a national nonprofit unemployment program created by and for nonprofits, which serves as an alternative to the state UI system:
Nonprofit employers in New York, specifically 501(c)(3)s, have long had the ability to exercise their federal right to opt out of paying into the State Unemployment Fund. Since 1972, in fact.”
This federal alternative allows nonprofits to avoid the volatility of the state’s fund solvency and other employers’ hiring (and firing) practices that may strain the fund balance. Instead, they pay dollar-for-dollar only when a former employee claims benefits.
Depending on how frequent claims are for an employer, this alternative can yield significant savings when exercised properly.
In comparison to the savings provided by the recent reforms in New York, almost 80% of New York nonprofits who were evaluated by UST last year were found to have a combined potential savings of $1 million if they exercised the option to reimburse for claims instead of paying into the NY Unemployment Fund. The other 20% were better off remaining in the state’s Unemployment Fund due to either the volatility of their claims or being too small to see any benefit. Groh explained that usually those with under 10 employees are best served in the state UI tax system.
The nonprofit agencies for which UST identified potential unemployment savings (by opting out of the State UI system) represented 7,526 employees — an average savings of $128.33 per employee.
Governor Cuomo’s Unemployment Insurance Reform “has also led to the implementation of new fraud detection and prevention measures to help combat Unemployment Insurance fraud. This helps to…ensure that employers are not charged for a former employee’s claim when that employee is responsible for the loss of employment.” Improper unemployment payments in New York totaled $196,947,678 over the last few years, or about 6% of payments.
Nonprofits who have exercised their federal right to reimburse for unemployment claims will directly benefit from better fraud detection, as it will directly lower their out of pocket costs.
UST has also provided fraud and error prevention efforts for its member New York nonprofits for over 30 years by auditing each claim as it comes through. Last year UST mitigated $1,486,045.75 in improper unemployment claims and state errors it identified through audits for New York nonprofits. Groh added:
With tax savings and audits combined, that’s $2.5 million in unemployment savings identified by UST for reimbursing New York nonprofits last year.”
With the UI fund solvent and a stabilizing economy, now is the time for New York nonprofits to benchmark their unemployment costs and ensure they are paying the lowest cost that aligns with their unemployment claim activity. Nonprofit employers trying to determine whether they should remain in the State Unemployment Fund or opt out for additional savings as a reimbursing employer should have a professional review their claims and tax rate to determine the best option.
UST offers nonprofits with 10 or more employees a free unemployment cost evaluation to benchmark their unemployment costs and provide a recommendation from a UST Unemployment Cost Advisor.