Unemployment Overpayments: Fraud or flawed system?

By Pamela M. Prah, Stateline.org

View article at www.Stateline.org

When the Obama administration revealed that more than $17 billion in jobless benefits had been paid out improperly, a stream of headlines suggested that cheats were bilking the unemployment insurance system.

The reality is a lot more complicated, as the U.S. Department of Labor itself noted when it reported state-by-state numbers last month. While fraud was responsible for a small part of the overall “improper payments” figure, much of the total came from less devilish glitches, such as failing to provide proof that a payment went to the right person. The total also included cases where beneficiaries were underpaid, in addition to the cases where the government paid them too much.

Louisiana is one state that has found itself on the defensive. Federal figures showed that 44 percent of its unemployment insurance payments were “improper.”

“The numbers being reported … for Louisiana are not all overpayments,” Curt Eysink, executive director of the Louisiana Workforce Commission, said in a statement. “Nor should those amounts be collectively viewed as ‘waste, fraud and abuse.’” Eysink notes that what the federal government called “overpayments” largely went to unemployed workers who were eligible to receive unemployment benefits; the problem was that the state couldn’t prove that these people had formally registered with the state to say they have searched for jobs.

Crunch time for unemployment insurance

The issue is a sensitive one for state unemployment offices, which have been crushed by heavy workloads as joblessness remains stuck above 9 percent nationally. In the first year of the recession, states saw a 120 percent increase in claims from unemployed workers.

The program, run jointly by the federal government and the states, provides monthly benefits to workers who become unemployed through no fault of their own. Most states have had to borrow money from the federal government to keep checks going to the jobless; last month, states had to start paying interest on those loans.

The stepped-up scrutiny of jobless benefits is part of the Obama administration’s government-wide effort to reduce the $125 billion in “improper payments” the government made in 2010. Unemployment insurance was named one of the “high-error” programs. That was partly because the error rate of 11 percent was more than double the 5 percent rate that the administration set as a doable goal. The enormous size of the program, which paid out $156 billion in benefits last year, also was a factor.

Nationwide, Indiana and Louisiana had the highest error rates, with improper payments accounting for more than 43 percent of the total amount paid in both states. Others that landed high on the list include Arizona (20 percent), Colorado (17 percent) and Virginia (18 percent). There’s no financial penalty for states with high error rates, but until they get their error rates down below 10 percent, they’re subject to greater federal scrutiny and reporting requirements.

States say the federal campaign has left the perception that fraud is primarily to blame for their error rates. In fact, the federal government’s own estimate says that 2.4 percent of unemployment insurance benefits were overpaid due to fraud in 2010.

By and large, factors other than fraud are driving error rates. For example, many of the states under federal scrutiny are experiencing “work search” errors that they say are a result of dramatic changes in how people today file for unemployment benefits and look for jobs. Gone are the days when people had to step into a state unemployment office to fill out the paperwork and sit down with a case worker to talk about which employers they applied to for jobs. Nowadays, unemployment insurance applications and job searches are done online and employers don’t always save the hundreds of résumés they receive electronically.

Kevan Kaighn, of Arizona’s Department of Economic Security, suggests the reporting mechanisms may not have kept up with the times. “Arizona has historically asked employers to confirm that a claimant did apply,” Kaighn says. “If the employer was not able to provide verification … the Department would count the claim as an error.”

Complaints of unfairness

Some states also say they are being faulted for having stricter standards than the feds. Nearly 80 percent of Indiana’s improper payment problem was due to difficulties tracking things that the state requires but the federal government doesn’t. For instance, the unemployed in Indiana must show they have looked for work with three employers. If a recipient lists only one job or lists incomplete information for the other two, those are counted as errors, explains Valerie Kroeger of the state’s Department of Workforce Development.

The U.S. Department of Labor says it has been working with states since last year on these kinds of issues. The department says it’s only fair to assess states based on their own rules, but agrees that the wide variation in state unemployment systems may make it misleading to compare different states on their payment accuracy rates. “States with stringent or complex provisions tend to have higher improper payment rates than those with simpler, more straightforward provisions,” the department says on its website.

The private sector also has a role in improving the accuracy of payment information. One of five overpayments nationwide occurs because the worker’s last employer didn’t provide the state accurate or timely information about layoffs or hiring. The result can be people receiving benefits that they may not be entitled to. “We are trying to get the message out to employers how important this is,” says Joyce Fogg of Virginia’s Employment Commission.

Nationally, the leading cause of overpayments is when once-unemployed workers find jobs and continue to claim jobless benefits. On this front, the Labor Department encourages states to check the information from unemployment claims against a large national database of all new hires. Washington State, which has been doing this for years but nevertheless posted an error rate of 14 percent, estimates that these matches uncovered half of all its fraud-related claims. According to the National Employment Law Project, an advocacy group, states typically recover about half of the money lost to improper payments.

James Sherk of the Heritage Foundation says states have a point that the headline numbers would lead people to believe that more fraud occurs than actually does, but says states still need to fix the problems. “The state should not be continuing to send checks to workers after they have returned to work, and it should be verifying the work-search requirements are met,” Sherk says. “Those and other requirements exist for a reason and need to be enforced.”

Outdated technology blamed

What many states say they need most is money to replace outdated computers, which they say account for many of the problems. Arizona and Colorado are part of four-state consortium that was recently awarded $72 million in federal funds to replace archaic systems. “This represents a desperately needed modernization,” says Kaighn of Arizona, who says the state is currently using 1980s mainframe technology.

Washington State estimates it will cost more than $100 million to replace its two main computers involved in processing unemployment claims. The state is spending $54 million to replace the main tax computer and has set side another $30 million for the benefits side. According to Sheryl Hutchison, a spokeswoman for the state’s Employment Security Department, it will probably take up to eight years for those projects to finish.

Employers Hit by Unemployment Tax Hikes

By Tami Luhby

Read the article at CNNmoney

NEW YORK -- Companies have yet another reason not to boost hiring: rising unemployment taxes.

Employers around the nation are getting socked with higher state unemployment tax bills as states are forced to shell out more than $1 billion in interest payments this month. More than 30 states have had to borrow billions from a federal fund to cover unemployment benefits for their jobless residents in recent years.

And this is only the first of two tax spikes employers are contending with, on both the state and federal level. Come January, companies in 24 states could have to shell out between $21 and $63 more per employee in federal unemployment taxes.

These hikes are the latest in a series of unemployment tax increases as states look to replenish their unemployment trust funds devastated by the Great Recession.

Last year, employers paid 27.8% more in state jobless taxes, said Doug Holmes, president, UWC Strategic Services on Unemployment & Workers' Compensation, a business trade association.

"Unemployment taxes, which were a relatively low bottom-line cost in 2008, are now becoming a significant cost," Holmes said. "It discourages companies from electing to hire new employees."

9 hard-to-fill jobs

This is the first time during this economic downturn that states have had to pay interest on their federal borrowing, which currently totals nearly $38 billion. The 2009 stimulus act waived interest payments for two years, giving both cash-strapped states and their employers some breathing room.

Both groups lobbied Congress last year to extend the relief for another two years, but lawmakers declined.

So states were forced this year to make some tough decisions on how to handle the interest charges at a time when they were struggling to balance their own budgets. Some dipped into other state funds or borrowed money, but most shifted the burden to employers.

New York, for instance, sent its companies a bill in mid-July requesting a lump-sum payment of up to $21.25 per employee to cover its $95.4 million interest charge due September 30.

Companies were not pleased, said Mike Durant, New York state director for the National Federation of Independent Business. For small employers, even a couple of hundred dollars in unexpected expenses can hurt, he said.

For Margery Keskin, an executive at four construction-related companies in upstate New York, the extra $2,000 her companies had to shell out means less money goes to bonuses or profit sharing for her roughly 40 employees. And she will have to think twice before she hires anyone.

"We try not to hire because we will be socked by a bigger tax bill for unemployment insurance," said Keskin.

Other states, however, have tried to spare their employers.

California, for instance, borrowed its $303.3 million interest payment from a disability insurance fund. Texas issued bonds at a lower interest rate to wipe out its balance before the interest came due. And Ohio dipped into tobacco settlement funds to settle a roughly $70 million interest bill.

"We did not want to increase the tax burden on job creators," said Ben Johnson, spokesman for Ohio's Department of Job and Family Services.

Even in states trying to shield companies, employers could see their taxes rise next year. That's because federal unemployment taxes are scheduled to go up for firms located in states that have been borrowing in recent years.

In most of these states, the 2012 federal levy will rise by $21 per worker. But that amount increases the longer the state has been borrowing. Michigan companies, for example, will have to pay $63 per employee next year.

While states have been slowly paying down their balances by hiking taxes and curtailing benefits, many are likely to have loans outstanding for years to come, experts said. That will help prompt companies' federal unemployment tax levy to soar by 89% by 2016, according to U.S. Labor Department estimates.

During the recessions of the 1970s and 1980s, it took states eight years to pay off their loans, said Rich Hobbie, executive director of the National Association of State Workforce Agencies. This go-around will be worse.

"We're going to struggle longer than that," he said.

From the Wall Street Journal

by Sara Murray

View the Article at WSJ

Nearly $19 billion in state unemployment benefits were paid in error during the three years that ended in June, new Labor Department data show.

The amount represents more than 10% of the $180 billion in jobless benefits paid nationwide during the period. (See a map of improper payments by state.) The tally covers state programs, which offer benefits for up to 26 weeks, from July 2008 to June 2011. Layers of federal programs that help provide benefits for up to 99 weeks weren't included.

Sortable Chart of Each State's Overpayments

The figures were released Wednesday as the Obama administration promotes its bid to reduce waste at federal agencies. The federal government foots the bill for administering the programs, and states are supposed to pay for the benefits. Many states exhausted their unemployment insurance trust funds during the long recession and slow recovery, prompting them to borrow from the federal government to replenish their funds.

Improper payments most often occur when recipients claim benefits even though they have returned to work; employers or their administrators don't submit timely or accurate information about worker separations; or recipients don't correctly register with a state's employment-service organization.

The Labor Department launched a plan to crack down on the improper payments, targeting Virginia, Indiana, Colorado, Washington, Louisiana and Arizona in particular for their high error rates. Those states will undergo additional monitoring and technical assistance until their error rates dip below 10% and remain there for at least six months, according to the Labor Department.

"The Unemployment Insurance system is a unique partnership between the federal government and the states. States bear the responsibility of operating an efficient and effective benefits program, but as partners the federal government must be able to hold them accountable for doing so," Labor Secretary Hilda Solis said in a release.

Indiana had the highest error rate, with improper payments accounting for more than 43% of the total amount paid. But Mark Everson, commissioner of the Indiana Department of Workforce Development, said the differences in error rates stem from variations in state programs.

"To characterize it as waste, fraud and abuse is just manipulative," Mr. Everson said. "There's no way in the world you could cut the 43% of people off."

Mr. Everson pointed out that in Indiana, benefit recipients are required to list three work searches. If a recipient fills out only two of the three searches correctly, there are cases when the recipient can still receive benefits. But that counts as an error.

The Labor Department noted, "it may be misleading to compare one state's payment accuracy rates with another state's rates… States with stringent or complex provisions tend to have higher improper payment rates than those with simpler, more straightforward provisions."

Nonprofits have proven more resilient in the recent economic downturn than many expected. According to a new report from the Johns Hopkins Nonprofit Economic Data Project, they fared even better than their for-profit counterparts.

"While other sectors are shedding jobs, nonprofit organizations boosted their employment by nearly 1 percent between 2009 and 2010," reports the project, which analyzed U.S. Bureau of Labor Statistics data from 45 states. In 2008 and 2009, nonprofit employment had an even greater upswing, causing total growth in nonprofit jobs from 2007-2010 to reach 5%. Compared to for-profits, who experienced a total job decline of 8% over the same years, this growth is quite noteworthy.

This is not to say that nonprofit job growth has not faltered over the years under economic pressure. U.S. nonprofits jobs growth fell from a rate of 2.6% in 2008 to a 0.8% growth in 2010. But overall, nonprofits have shown better employment trends throughout the decade compared to for-profits.

The UST Division of Nonprofit Research has seen similar employment trends among the Unemployment Services Trusts' 2,100 nonprofit members. Says Donna Groh, Executive Director of UST, "Although the recent Great Recession hit nonprofits the hardest we've seen in UST's 28 year history, we've always seen that they weather the economic storms better than the for-profit sector."

In fact, in 2010 surging unemployment caused many states to increase unemployment taxes on employers, a trend that is expected to continue as states try to recover from unemployment fund deficits. As a result, there were a large number of nonprofits who realized that it didn't make sense for them to continue paying a tax rate that subsidized the unemployment costs of all employers across their state. While for-profits are locked into paying state unemployment taxes, nonprofits are allowed by federal law to opt out of the state UI tax system and only pay for their own workers' unemployment claims.

"Since many nonprofits realized their claims were much lower than other employers', there was an opportunity for them to save, and open up more of their unrestricted funding" says Groh. The result? UST had some of the largest growth in membership they'd had in years. Many of UST's new members in 2010 were looking for help opting out of the state UI system, while others realized they needed help monitoring the unemployment claims and more HR support as direct reimbursing employers.

With more nonprofits realizing that their employment history doesn't warrant the type of unemployment tax increases they are seeing from the state, UST expects that even more nonprofits will exercise their right to opt out of the UI system and become reimbursing employers in 2011. With many states tacking on special assessment fees in order to help pay for all of the unemployment fund borrowing over the past few years, there's little question that employers across the nation will see their unemployment costs go up. And as Groh says, "Nonprofits are getting smarter and savvier from the financial crisis... This is one cost they're learning they can save on."

Infographic: A due date nears on unemployment trust fund loans

by Carla Uriona and Mary Mahling at Stateline.org

View the story at http://stateline.org/live/details/story?contentId=597982

"Later this month, states will have to make the first interest payment on the money they borrowed from the federal government to keep sending unemployment checks to workers who’ve lost their jobs. Some 28 states have outstanding loans with the federal government. According to a May estimate by Federal Funds Information for States, the total interest due by September 30 is $1.3 billion. The federal stimulus package had provided interest-free loans to states, but that grace period has expired. Earlier this year, President Obama asked Congress to waive those interest payments for another two years, but the idea went nowhere. The proposal could resurface when Congress returns this month and takes up the president’s jobs package."

Summary: A partnership with the newly-formed association Washington Nonprofits will increase potential savings for many nonprofits in the state of Washington, reports the Unemployment Services Trust.

Santa Barbara, CA, September 8, 2011 -- The Unemployment Services Trust (UST) and Washington Nonprofits are pleased to announce their new partnership agreement that will help nonprofits in Washington state save money on their unemployment expenses, helping reduce operating costs for members long-term.

Unemployment tax rates are expected to continue rising over the next decade because even though unemployment is decreasing, demands on state funds are driving taxes up. Washington legislation allowed the state to lower unemployment taxes for about 80,000 small businesses (those in rate classes 1-34) after large tax hikes last year. While tax breaks have provided relief to many nonprofit employers, there are still many recovering from the recession and looking for new funding and ways to free up more of their funds to support their mission.

Since 1991 Northwest Nonprofit Resources has partnered with UST to help nonprofits save money and receive support on unemployment claims. Now Washington Nonprofits, which formed just last year, will also work with UST to help nonprofits save money on unemployment expenses. “UST exists to save money for nonprofits so they can use those funds to advance their missions. Now, more than ever, nonprofit organizations need to maximize their resources. UST will work with members of Northwest Nonprofit Resources and Washington Nonprofits to do just that,” states Sandra Gill, director of NNR.

Donna Groh, Executive Director of UST stated: “Building on our history of working with NNR to assist nonprofits save money to put towards their mission, we are very pleased to enter into this new partnership with Washington Nonprofits to bring the benefits and cost savings of the Trust to even more organizations throughout Washington.”

UST, a national unemployment trust, helps 501(c)(3) organizations in Washington and across the country to opt out of the state unemployment tax system, as they are allowed by Federal law. Once out of the system, they are able to simply pay back the state, dollar-for-dollar, any time a former employee files for unemployment. UST provides them with asset protection and unemployment claims monitoring to safeguard their cash flow from volatile or unwarranted unemployment claims, and helps create a savings program so that they have the reserves to pay for claims when they need it. Because they own their accounts, nonprofits who join UST can consider their account an asset instead of a state tax liability.

The UST program is just one of the many resources available to members of Washington Nonprofits. To learn more about the organization and its benefits, visit www.WashingtonNonprofits.org. For more information about UST, visit www.ChooseUST.org.

Summary: Employers across the U.S. are being asked to make payments to help compensate for the states’ shortfall in unemployment funding, and resulting interest owed to the Feds, reports the Unemployment Services Trust.

Many businesses received letters recently stating they would have to pay supplemental fees to help pay down debt their state governments have racked up in the course of paying out unemployment benefits. Many state unemployment funds are insolvent due to the prolonged recovery of the recent recession, and some state debts continue to grow, reports the Unemployment Services Trust.

In Colorado, where the state borrowed $346 million last year, about 35,000 employers will be required to make special assessment payments. On average, businesses will pay $340 each, totaling $11.9 million to help the state pay the interest owed. Connecticut has borrowed more than $810 million from the federal UI fund, a number that is expected to increase to $1 billion before it begins to shrink. Employers will be required to pay up to $25.50 per employee, which may not sound like much but can really add up quickly. New York has borrowed more than $3 billion to continue paying unemployment benefits and is also requiring businesses to pitch in to pay down the $95 million due to the Fed on September 30. Employers in New York will pay up to $21.25 per employee, a number formulated based on taxable wages for the latest fiscal year. Most states will assess interest payments quarterly until loans are paid off, which, depending on the individual state’s surmounted debt, could take several years.

The news of these special assessments has made employers grow even more wary. Terry Jannsen, President of Jannsen + Company, an accounting firm in Pewaukee, Wisconsin stated in a release, “This may not sound like a big expense to employers, but the negative impact could be substantial for companies already feeling the pinch. If you are a small business, you may not have budgeted for this expense, and don’t have the reserves to make the interest payments. If you are a larger company, the assessment may cost one or more jobs in an already lean economy.”

Employers are hoping that lawmakers pass legislation that would waive the interest fees as they did in 2009 and 2010, however, to date there has been no indication this will happen in 2011. In a time when new job creation is imperative to our economy’s overall health, these special assessments are not only stifling company growth, but sustainability to boot. A few organizations, however have found some relief.

Direct reimbursing employers across the United States are exempt from most special assessments since they fund their unemployment claims on their own, repaying the state each time a claim is filed against the company instead of paying into the state’s unemployment tax system. According to federal law, 501(c)(3) organizations have this distinct opportunity. There are a couple ways to do this:

Nonprofit employers may take it upon themselves to manage, dispute and mediate unemployment claims

Or, they may join an unemployment trust who handles all aspects of the process

Many organizations opt for the unemployment trust in order to lessen the stress on their Human Resources department as the mitigation process can be burdensome. One such trust is the Unemployment Services Trust (UST). With UST, organizations make quarterly deposits into a reserve account that belongs to the organization itself. Each time an unemployment claim is filed against the organization, the Trust reimburses the state for the exact amount that is billed, instead of paying into the state tax system where typically only $1 is paid out in benefits for every $2 that is paid in taxes.

Currently, more than 2,000 nonprofit organizations work with UST to lower unemployment costs and opt out of the state unemployment tax system. For more information about the organization, visit http://www.ChooseUST.org or call (888) 249-4668.

Summary: Partnership creates potential savings for many nonprofits in the state of Maryland, reports the Unemployment Services Trust.

The Unemployment Services Trust (UST) and Maryland Nonprofits are proud to announce that they are joining forces to work with nonprofit organizations in Maryland to help save money on unemployment expenses.

Maryland Nonprofits is the primary source for guidance and assistance on nonprofit management issues for Maryland’s near 1,600-member nonprofit community. Maryland has 255,408 nonprofit employees within all service areas, including: Arts, Culture & Humanities, Education, Environment & Animals, Health, Human Services, and Public & Societal Benefit. Each year, more than 300,000 nonprofit professionals utilize Maryland Nonprofits’ resources, and now Maryland Nonprofits will be better able to assist its members with the help of UST’s cost-saving program.

Donna Groh, Executive Director of UST stated: “We are so pleased to enter into this partnership with Maryland Nonprofits. UST exists to save money for nonprofits so they can use those funds to advance their missions. Now, more than ever, nonprofit organizations need to maximize their resources and UST will work with Maryland Nonprofits’ members to do just that.”

UST, a national unemployment trust, helps organizations opt-out of their state's unemployment tax system. Permitted by federal regulation, opting-out allows nonprofits to handle their own unemployment claims, and save money. UST members own their own account, which is a pre-paid asset used to cover unemployment expenses that occur when an unemployment claim is filed by a former employee. The nonprofit becomes a "direct reimbursing employer," meaning they only pay for unemployment collected by former employees, and are sheltered from rising tax rates. UST offers asset-protection and unemployment claims monitoring that many nonprofits need to safeguard their cash flow from volatile or unwarranted unemployment claims. In addition, UST members benefit from conservative asset investment, stop-loss protection, bonding, and professional human resources support.

UST, founded by nonprofits for nonprofits, is the largest of all national unemployment trusts. Consisting of more than 2,100 member organizations from 47 states (and DC), UST has been helping nonprofits reduce expenses since 1983. UST's long-standing relationship with nonprofit organizations has provided more than $33 million in refunds to trust members; and an additional $35 million in annual unemployment claim savings, presenting organizations with valuable resources to put toward achieving their missions.

For more information about UST, visit http://www.ChooseUST.org or call (888) 249-4788. You can also visit Maryland Nonprofits on the web at http://www.MarylandNonprofits.org.

Summary: The rough economy has left many organizations looking for ways to reduce expenses. According to the Unemployment Services Trust, becoming a direct reimbursing employer is one viable step toward lessening expenditures.

Many nonprofit organizations are continuing to feel the aftershocks of the late Great Recession. The fluctuating nonprofit workforce teamed with contracting budgets and heightened demands for services have these organizations experiencing stresses like never before, reports the Unemployment Services Trust (UST).

A recent survey performed by the Nonprofit Finance Fund reported that 2011 will continue to be another tough year as 85% of the 1,900 nonprofit organizations surveyed are expecting an increase in service demands, while just 46% expect to be able to fully meet the increased need for services. Another recent survey performed by the Nonprofit Research Collaborative found that, of the 2,500 organizations examined, 20% stated that their budgets for 2011 are lower than that of 2010, and 7% of nonprofits fear closure due to financial pressures. When organizations predicted budget cuts, the most frequently cited measures to reduce expenditures were cutting program activities, services or operating hours. These measures were planned by 66% of organizations anticipating a budget reduction, while 59% indicated that staff compensation would be cut.

And, not only are total contributions down, but nonprofits are finding that donors who are making contributions are putting their money toward the program itself and not providing funds to be put toward employee salaries or paying for utilities. “One of the hardest things is finding funding for operating support,” stated Ann King, Executive Director of the Tri-Valley Haven in Livermore, California. “Last year, we received more restricted money and less of the important general funds that help us manage the organization.” This spells trouble for many organizations – increased demand for services and less money to put them in action means more volunteer workers, less full-time employees and a potential increase in unemployment claims.

This has left many nonprofit organizations asking: What can we do to better manage our expenses when our budgets are already tight as it is?

Donna Groh, Executive Director of the Unemployment Services Trust, says that becoming a direct reimbursing employer is one option for reducing expenses that can be beneficial to nonprofits in a couple ways. Federal law gives 501(c)(3)s the distinct option to become self-reimbursing employers by removing themselves from the state unemployment tax system and paying dollar-for-dollar for unemployment claims filed against the organization – good news for organizations who are tired of watching their valuable dollars disappear. “When paying into the state unemployment tax system, organizations typically pay $2.00 in taxes for every $1.00 in benefits paid out due to socialized tax rates that force employers to cover the unemployment costs of other employers, so there is a lot of money going to waste.” Groh continued, “Opting out of the state unemployment tax system means that nonprofit employers are not obligated to pay for tax increases that come as a result of hikes in state unemployment, federal borrowing to cover claims or state fund deficits.”

However, when opting out of the state unemployment tax system, organizations must be aware that this creates a heavier work load for their human resources department as they will have to either monitor unemployment claims in-house or outsource them to a claims monitoring service. Unemployment trusts often provide claims monitoring services as an added feature to joining the trust. “Claims monitoring services are very beneficial to the organization in both a financial and a logistical sense, freeing up valuable employee time and resources,” says Groh.

Unemployment trusts provide nonprofits with a rate based on their own claims history and create a reserve for the organization to make quarterly deposits into, which the organization owns and holds as a working asset on their books. When an organization experiences a layoff, instead of jeopardizing its cash flow, the trust will pay the state out of the agency’s account, which will be replenished through future quarterly deposits. The rate given to the organization by the trust is often less than the state unemployment tax rate, which helps nonprofits preserve funds that can be allocated according to the organization’s mission, where they belong.

Currently, more than 2,000 nonprofit organizations work with UST to lower unemployment costs and opt out of the state unemployment tax system. For more information about the organization, visit http://www.ChooseUST.org or call (888) 249-4788.

Summary: A lack of cash-on-hand is troubling many nonprofit organizations, putting them in jeopardy just as costs like unemployment taxes are rising. Operating reserves are a necessary foresight in reducing strain on cash flow, reports the Unemployment Services Trust.

In the ever-changing world of nonprofits, it is general practice to have three months worth of operating costs on reserve to remain solvent during times of dwindling contributions, delays in government funding or unforeseen spikes in expenses. However, escalating state unemployment taxes and unanticipated layoffs have left many nonprofits struggling, reports the Unemployment Services Trust (UST). While the tight pockets of contributors and binding red tape of Uncle Sam are out of the control of the nonprofit, it behooves the organization to set funds aside to be put toward expenses that they are obligated to pay, foreseen or not.

It seems though, that this general practice of keeping the reserve tank fully-funded has gone by the wayside in the wake of the Great Recession. According to a survey performed by the Nonprofit Finance Fund, of the 1,900 nonprofits surveyed, 28% reported having one month or less of operating funds on reserve, and 10% had none. However, the future holds more than doom and gloom for nonprofits, as along with the aforementioned results it was reported that 44% of nonprofits had a surplus at the end of 2010, a 9% increase from the year before and, 35% of organizations reported raising more in 2010 than they had anticipated, while 25% contributed to a reserve fund last year.

One option to help preserve funds, says UST, is to opt out of the state unemployment tax system, which is allowed for 501(c)(3)s by federal law. This can help an organization’s budget in a few ways:

1) As a 501(c)(3), opting out of the state unemployment tax system allows nonprofits to

directly reimburse the state dollar-for-dollar for unemployment claims filed against them,

instead of paying the average $2.00 in taxes for every $1.00 in benefits paid out.

2) Direct reimbursing employers are no longer subject to state rates that are socialized to

cover the unemployment costs of other employers.

3) They are also not obligated to pay for tax increases that come as a result of hikes in state

unemployment, federal borrowing to cover claims or state fund deficits.

Opting out of the state unemployment tax system can be tricky though, in that not all nonprofits are prepared to pay those claims when the need arises. And, even if they do set aside funds in preparation for these costs, claims that are filed against the organization are not always monitored effectively, meaning they could be paying claims they shouldn’t. One strategy in reducing these potential risks is to join an unemployment trust, in which nonprofits are given a rate based on their claims history and quarterly deposits are made into their reserve account. When an organization experiences layoffs, instead of jeopardizing their cash flow, the trust will simply pay the state out of the agency’s account, which will be replenished through future contributions.

Overall, as more nonprofits realize the importance of operating reserves, and how they can combat unstable costs like unemployment, the greater equipped they will be for the future.

Currently, more than 2,000 nonprofit organizations work with UST to lower unemployment costs and opt out of the state unemployment tax system. For more information about the organization, visit www.ChooseUST.org or call (888) 249-4788.

Summary: As 501(c) organizations, nonprofits are exempt from many taxes. However, in this economy reluctant to recover, nonprofits should be especially cognizant of taxes to which they are still subject in order to maintain their cash flow and tax exempt status. In addition, leaner budgets and rising unemployment tax rates require that they get the most from every dollar, reports the Unemployment Services Trust.

Many nonprofits are still tightening their belts in an effort to recover from a slumped economy and stiffer funding competition. However, taxes may be an overlooked source of unnecessary drain on their budgets reports the Unemployment Services Trust (UST), a group of more than 2,000 nonprofits joined together with the purpose of managing unemployment tax costs.

What taxes do nonprofits pay? Nonprofits are not subject to federal income taxes, and many states provide exemptions to income taxes, property taxes, sales taxes, and others. However, many nonprofits are subject to the following types of taxes depending on their activities, and should closely monitor their status to avoid penalties, cash flow issues, and paying taxes they may not need to:

1. Unrelated Business Income Tax – Under IRS law, nonprofits can be subject to unrelated business income tax, or “UBIT”, if an activity that generates revenue is not related directly to the organization’s mission. If an organization sells items that have nothing to do with their purpose, even if it is used to fund that purpose, it could be considered UBI. Specifically, an activity is considered UBI if it is considered a business or trade, it is a regular or common activity, and it is not significantly related to the mission of the nonprofit. If unsure, a nonprofit should consult with a tax advisor to find out whether their activities would subject them to these taxes.

2. Federal Employment Tax – Tax exempt organizations with employees are still responsible for Federal Income Tax Withholding (FITW) and Social Security and Medicare taxes (under FICA). An organization typically must withhold federal income tax from an employee’s wages, deposit the amount, and pay a matching sum.  Social Security taxes are withheld from an employee’s gross wages until their annual cumulative wages reach the wage base limit. However, all covered wages are subject to Medicare tax, and there is no wage base limit. Unlike UBIT, these taxes are clearly not avoidable for organizations, and must be budgeted for accordingly each year.

3. State Unemployment Tax – An organization that is exempt from income tax under section 501(c)(3) of the IRC is also exempt from FUTA (Federal Unemployment Tax Act). However, this does not exempt them from SUTA, or state unemployment taxes. These taxes can vary across states, and SUTA tax rate maximums exceed 10 percent in a number of states. With unemployment remaining high across the nation, UST and other experts expect that these tax rates will continue to rise over the next decade.

IRS designated 501(c)(3) organizations do, however, have an alternative to paying the SUTA tax under federal law. They can file with the state to leave the SUTA system, and only reimburse the state dollar-for-dollar for benefits paid out if they have an unemployment claim. "Many nonprofits are finding this to be welcome relief from rising tax rates," says Donna Groh, Executive Director of the UST. But some have found that this method, while saving them money long-term, can cause issues if they don’t have the cash flow to pay claims immediately. To remedy this cash flow risk, many nonprofits opt to join an unemployment trust, like UST, where they can deposit a quarterly amount into a reserve account to pay claims. Trusts will often provide other benefits such as claim monitoring, administrative support, and stop-loss protection. UST offers more detail on opting out of the state unemployment tax system at www.chooseUST.org.

In order to maintain tax exempt status and ensure every dollar is budgeted accurately, nonprofits should treat these tax matters seriously, including filing their annual Form 990. They should also consult with a tax expert or tax attorney as needed. The IRS provides a microsite specifically for dealing with these tax topics and more at www.stayexempt.org.

Summary: Charitable giving is looking up again for 2011 but the overall economy is still hindered by high unemployment rates across the U.S.  In addition, rising unemployment costs will directly affect the bottom line for nonprofits. The Unemployment Services Trust (UST) details several tactics nonprofits can utilize to reduce unemployment costs.

Charitable donations rose in 2010, according to the January 2011 issue of Philanthropy Journal. This marks a major sign of recovery from the recession, but with one caveat: Unemployment remains a critical challenge to full recovery. Nevertheless, hopes are buoyed by several key factors:

Charitable giving in the U.S. grew 6.6 percent in 2010 after falling an unprecedented 5.7 percent in 2009, and is expected to grow another 2.5 percent in 2011, reports Philanthromax’s Atlas of Giving website.

Giving totaled $323.86 billion in 2010 and is expected to total $331.96 billion in 2011, according to thewebsite.

The growth in 2010 could be attributed in large part to improved stock-market performance, with the S&P Index gaining more than 15 percent for the year, notes the report.

Ongoing unemployment issues pose a serious long-term threat. Rob Mitchell, CEO of Philanthromax, says, “The impact of unemployment on giving is far-reaching and long-lasting.”

Unemployment is not only affecting giving, but also directly affects nonprofit assets in the form of increased taxes.Because unemployment remains so high across the U.S., the state unemployment taxes that employers – including nonprofits – pay will continue to rise over the next decade. The Unemployment Services Trust (UST) has been following the situation closely. “The good news for many nonprofits is that charitable giving appears to be on the rise again as we work our way out of the recession,” says UST’s Executive Director, Donna Groh. “The bad news is because of continued high unemployment, states are raising unemployment taxes to rebuild their unemployment insurance funds. These taxes will directly impact cash flow and potentially eat up any gains realized from increased giving.”

Additionally, the federal government is proposing an increase in the minimum taxable wage base on which unemployment taxes are based. If this passes, the amount of Unemployment Insurance (UI) tax paid by employers per employee could easily double in many states. “While this may well be in the best interests of long term stability for the UI system,” says Groh, “It will create an immediate burden for many employers.”

Groh recommends nonprofits consider the following steps to combat their rising unemployment costs:

1. Become a Reimbursing Employer. Under federal law, 501(c)(3) organizations exclusively can opt to reimburse the state only when they have an unemployment claim from a former employee. Reimbursing employers pay for their own unemployment costs, dollar for dollar, and no longer pay a tax rate based on the high claims of employers across the state.

2. Manage your human resources wisely. Conduct a thorough assessment for talent before hiring. Always perform detailed reference checks. Provide policies to employees and obtain a signed acknowledgement. Be consistent with progressive discipline and document it. Retain documents for at least 18 months to be prepared for any unemployment hearings.

3. Join an unemployment trust. Because being a direct reimbursing employer is self-funding, it can place added burden on an organization’s human resources capacity and also be risky if a nonprofit has sudden claims it cannot pay. To reduce these risks, nonprofits can join an unemployment trust. A trust can aid in building a reserve of funds and provide stop-loss protection for unexpected claims. In addition, it can help reduce administrative burden by assisting with paperwork and by working with the state on the organization’s behalf. Some trusts, including UST, will also provide claims monitoring and hearing support, which is essential to protecting an organization from the liability of inaccurate claims. Generally unemployment trusts are best for 501(c)(3)s with more than ten employees.

Summary:  According to a white paper released by the Unemployment Services Trust, employers face increased unemployment tax burdens over the next decade. However, federal law provides nonprofits with cost-saving alternatives.

 

While employers across the nation are expected to see rising state unemployment taxes over the next five to ten years, not-for-profit organizations have a unique choice that could save them from bearing much of the same burden.

 

While the recession is said to be over, unemployment still hovers around 9% nationally, further straining already thin state budgets. Nearly all state unemployment insurance funds are facing some kind of jeopardy due to the high payout of unemployment benefits. Thirty-one state unemployment funds have already become insolvent, and thirty-five states are borrowing from the federal government to pay unemployed workers, notes a white paper released by the Unemployment Services Trust (UST) entitled “Rising Unemployment Costs and 501(c)(3) Strategies.”

 

“In order to pay back these loans… most states will be raising either the UI [Unemployment Insurance] tax rate or the taxable wage base, which both effectively raise the taxes employers pay,” cites the UST report.

 

For nonprofit employers however, there is an alternative.

 

501(c)(3) tax exempt organizations are allowed under federal law to leave the state unemployment tax system and only reimburse the state in the event they have an unemployment claim. This can benefit them in two ways:

 

1. Reimbursing nonprofits no longer pay a tax rate adjusted to cover state borrowing and the high claims of other employers.

 

2. They are typically not subject to state surcharges like Federal Loan Interest assessments, Workforce Development (Enhancement) Fees and other similar assessments from the state.

 

For nonprofits with low to average unemployment activity this can provide substantial savings, especially given that “It is expected that [tax] rates will double or triple over the coming few years, and then remain there for at least a decade or more,” according to Douglas Holmes, President of the Strategic Services on Unemployment & Workers’ Compensation (UWC).

 

This does, however, place more liability on an organization to accurately track unemployment claims and protest improper claims if needed. In addition, there is the risk that sudden increases in claims could impair cash flow, as each claim must be paid out as it occurs. These risks must be weighed against the savings benefits.

 

One strategy to reduce these potential risks is to join an unemployment trust. The UST white paper explores how nonprofits can be protected from unexpected claims with a trust’s stop-loss protection, in addition to preserving cash flow by building a reserve account out of which all claims are paid. The services provided by a trust can simplify administration and budgeting for a nonprofit, and also provide the necessary claims monitoring needed to detect inaccurate unemployment claims and support court hearings.

 

There is no single approach that’s right for every nonprofit organization. But a thorough evaluation of the options - becoming a reimbursing employer, joining an unemployment trust, or staying with the state - is indeed warranted, as “the obligation on nonprofits to make every dollar count has never been greater.”

 

To receive a full copy of the “Rising Unemployment Costs and 501(c)(3) Strategies”white paper, email info@chooseUST.org.

Last week our partners over at the Maine Association of Nonprofits (MANP) published the following article in their e-newsletter and on their blog. We're excited to share this with you because it does an excellent job of breaking down the top 5 things that Maine every nonprofit should know about unemployment insurance. And, because keeping unemployment costs low is vital to so many agencies across the U.S., we've added state-by-state information for taxable wage bases, and a general overview of the unemployment insurance program that applies to all states. MANP Help Desk FAQ: 5 Things Your Nonprofit Should Know About Unemployment Insurance by Molly O'Connell We get a variety of questions related to unemployment tax – also known as unemployment insurance – and encourage nonprofits to be proactive in learning about this system. What is Unemployment Tax? The MDOL provides a helpful overview of the program, and this summary: “Unemployment is an insurance program providing temporary, partial wage replacement to workers who are unemployed through no fault of their own. The program is funded by Unemployment Taxes paid by employers based on the amount of wages paid for covered employment. The Unemployment Tax is paid on the [taxable wage base] an employer pays to an individual in a calendar year.” (Read our overview or see what your state's taxable wage base is.) Is Your Nonprofit Liable? 501(c)3 nonprofits are exempt from federal unemployment taxes, but may be liable for state contributions if they meet something called the “4 for 20″ provision. This provision is triggered when four or more individuals are employed on the same day for 20 weeks in a calendar year, though not necessarily for consecutive weeks. It is important to note that who is considered “employed” for these purposes is not always straightforward – see #4 below. Why You Should Consider Coverage Even If You’re Exempt While many nonprofits in Maine are very small and potentially exempt, MANP encourages all nonprofits – as a best, ethical practice – to pay into the unemployment tax system or alternative coverage (see #5) to protect their current employees. At the very least, your employees should be made aware of whether or not you provide unemployment coverage. Unemployment compensation is a safeguard for people – and our communities as a whole – against the potential economic and emotional domino effects of losing a job. Why Independent Contractors May Still Be Considered Employees There are different rules and tests used by government agencies to determine independent contractor status, because different agencies are responsible for separate aspects of law. For the purposes of unemployment insurance, the Maine Department of Labor uses something called the “ABC test”, which makes it sound simple, but is more complicated when applied to real situations. The ABC Test establishes criteria that an work relationship must meet in order to for the services of that individual to not be considered employment. The three parts of the ABC Test relate to employer control/direction of the worker, place(s) of business or courses of business, and proof that the worker is independently established in the trade. A nonprofit may have to pay unemployment taxes even if IRS or Maine Revenue Services determine that, for income tax purposes, individuals may be independent contractors. Nonprofits should be familiar with this FAQ resource on Independent Contractors, and with this guide about Independent Contractors and the ABC test. Cost-Saving Alternatives The Unemployment Services Trust (UST) provides an alternative to paying into the Maine unemployment tax system, and can be a cost-saving option for nonprofits, especially those with more than 10 employees. Through UST, agencies directly reimburse the state only for the claims of their former employees, rather than paying the state unemployment insurance tax which covers all Maine employees. (You didn't think we'd take this one out, did you?) This post does not constitute official or legal advice. A version of this article originally appeared on blog.nonprofitmaine.org.

The U.S. job market continues to grow after private and government employers added 288,000 jobs in April – achieving the highest monthly total for 2014. And with a slight decline in the unemployment rate, falling by 0.4% to 6.3%, the April Jobs Report marks a milestone on the road to economic repair.

Increased employment affected a wide range of job industries, including professional and business services, retail, construction, and food services. This increase in varied job opportunities provides major worker groups with a variety of employment options, instilling a greater sense of freedom and security.

According to the Bureau of Labor Statistics, 9.8 million Americans are still unemployed. Although the private payroll total remains 98,000 jobs shy of where it was prior to the Great Recession, the U.S. is anticipated to overcome the deficit within the upcoming month.

While the unemployment rate has failed to pick up any momentum over the past 4 months, the unemployment rate has declined by 1.2 percent in the last year. Additionally, the long-term unemployed population dropped by 908,000 within this past year. Even with the slight decrease in long-term unemployment rates, such slow movement remains a substantial concern for the population, as it affects 1/3 of the currently unemployed.

Even with the spike in employment opportunities, the decrease in labor force participation and sluggish movement in the unemployment rate reveals a long road ahead for full labor market recovery. Though the labor market has accumulated a great deal of strength since the Great Recession, the U.S. economy still has a while to go before achieving Congress’s “maximum employment” goal.

Learn more about the April jobs report here and here.

[caption id="attachment_4364" align="alignright" width="346" caption="New audit standards will make your yearly audit more user-friendly."][/caption]

by Guest Blogger Barry T. Omahen, CPA, Managing Partner, Lindquist LLP Certified Public Accountants

The American Institute of Certified Public Accountants (AICPA) has issued new standards that may impact your future audit engagement. Statements on Auditing Standards (SAS) Nos. 122–125 (referred to as “Clarified Auditing Standards” or “Clarity Standards”) introduce changes that go into effect for financial statement audits for periods ending on or after December 15, 2012. For most entities, that means the standards will be effective for the year ending December 31, 2012, or later.

Some changes may affect all audit engagements

Auditors are now required to review the terms of the engagement with you annually, even if you have a multi-year engagement letter.

Management’s responsibilities are spelled out more clearly in the engagement letter as a result of the new standards, but management responsibilities are unchanged.

The audit team is now required to ask you more questions regarding your legal and regulatory framework and to review correspondence with licensing or regulatory agencies, if applicable.

All confirmations are now required to be in writing (verbal confirmation is no longer an option).

Internal control communications (management letters) will now include a description of the potential effect of significant deficiencies or material weaknesses that the auditors identify through their procedures.

The audit report (opinion letter) has changed, with added headings to distinguish each section and a more complete description of management’s responsibilities.

Certain changes may only apply in unusual circumstances

When performing an audit on your organization for the first time, auditors are now required to perform and document various procedures on opening balances and consistent accounting procedures.

If your organization uses a financial reporting framework (previously called basis of accounting) other than Generally Accepted Accounting Principles (GAAP), your auditors will need to discuss the appropriateness of the framework and may perform additional procedures regarding related-party transactions.

Some of the benefits of the clarified auditing standards include enhanced communication between your team and your auditors, improved audit quality and increased confidence in the audited financial statements.

These new standards will require auditors to redo much of the system evaluation work and memorandums that they carry forward from one audit to the next. As such, it’s encouraged that you work closely with your auditor to make these changes as smooth and efficient as possible!

For a more detailed version of this article, refer to Lindquist LLP’s website:  http://www.lindquistcpa.com/AICPA-Audit-Clarity-Standards-11092012.htm

Barry T. Omahen , CPA, is Lindquist LLP's managing partner based in the firm’s San Ramon office.  Barry specializes in serving the audit, accounting and reporting needs of not-for-profit organizations and employee benefit plans. He serves as the partner in-charge of the firm's quality control review and audit and accounting practice.  He can be contacted at (925) 498-1546 or bomahen@lindquistcpa.com .

Lindquist LLP provides this information for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.