Payroll Law for Non Profit Organizations – The Unemployment Insurance Reimbursement Method

One of the least understood payroll laws for non profit organizations is the reimbursement method for unemployment insurance. Many states allow non profits to elect the reimbursement method in lieu of paying unemployment insurance tax on every payroll. This article will provide information on the reimbursement method for unemployment insurance in New York and how non profits can apply for the reimbursement method thus saving on their payroll taxes.

What is the reimbursement method?

New York State payroll law allows for non profit organizations covered under section 501(c)(3) of the internal revenue code to elect not to pay in to the unemployment insurance fund, but rather reimburse the state on a dollar for dollar basis for benefits paid to unemployed workers. This means that the employer no longer pays the unemployment tax on payroll but should there be an unemployment claim to their account, the employer will pay the state directly dollar for dollar for the benefits the state paid to an unemployed employee.

Is the reimbursement method worthwhile?

Electing the reimbursement method over the contribution method is a difficult decision non profits have to make. Some of the things to look at are the unemployment claims history against your organization and the future behavior of the organization such as: (a) Are you hiring or firing employees? (b) The potential cost of unemployment claims versus the cost of tax contributions based on current payroll and finally (c) Your tax rate and current account balance with the state.

What is important to remember is that no matter what option you choose, there is no guaranteed way to determine that your selection will save you money in the long run. We have seen organizations with no unemployment claims for years and then switched to the reimbursement method. Then, 3 or 4 claims were filed against their account in one year. On the other hand, even in the above case, thousands of dollars can be saved over the long run. Consider the case of an organization with 50 employees, their annual cost of unemployment insurance at a rate of 4.1% under the contribution method would be $17,425 per year ($8,500 base payroll * 4.1% * 50 employees). Assuming that one or two employees will file for unemployment benefits per year, and the average employee’s payroll is $25,000 per year, the benefit charged to the account under the reimbursement method would be less than $12,500.00 per year.

Once I elect, can I switch from contribution to reimbursement or vice versa?

Yes, but only at the beginning of each calendar year. Keep in mind that switching will not help you with previous claims. You still have to pay your full balance owed for claims filed under the reimbursement method.

If I switch to reimbursement method, what happens to my account balance with the state?

The account balance that you had with the state under the contribution method is kept until such date that you choose to re-elect the contribution method. If you have a positive balance, you cannot use it towards your reimbursement plan; neither can you request the state to reimburse you the amount of the positive balance.

What if my account balance is negative when I switch to the reimbursement method? The balance is kept on account until such time that you choose to re-elect the contribution method. One thing to consider is that if you have a negative balance, your rate of unemployment claims are probably high and chances are that the reimbursement method is not for you.

What happens if I switch either way in the middle of a claim?

Whether the state will view your claim as a reimbursement or contribution claim, depends not on the time the claim is made or paid, but on the base period used to calculate the employee’s unemployment benefits. The base period is the payroll period upon which the worker’s unemployment benefit amount is calculated, generally, the highest quarter wages paid to the worker in the first four of the last five quarters.

For example, if the base period used to calculate an employee’s unemployment benefits is July through June, and you switched to the reimbursement method in January, 50% of the claim will be paid under the contribution method and 50% under the reimbursement method.

Keep in mind that switching will not help you with previous claims. You still have to pay your full balance owed while you were covered the reimbursement method.

How does one apply for the reimbursement method?

A request to elect the reimbursement option can be made when registering with the Department of Labor as an employer using form NYS-100N (New York State Employer Registration for Nonprofit Organizations) filed prior to your first payroll. In addition, the request can be submitted in writing to the Unemployment Insurance Division before the beginning of the calendar year in which it is to apply, or within 30 days after the calendar quarter in which the non profit organization or governmental entity becomes liable under the Unemployment Insurance Law.

The request could be mailed or faxed to the address and fax number below. Remember to include your federal tax ID, unemployment registration number and a copy of the organizations notice of 501(c)(3) status from the IRS and include your federal tax ID and unemployment insurance registration number;

New York State Department of Labor, Unemployment Insurance Division, State Office Building Campus, Albany, New York 12240-0322. Fax: 518-485-6172.

Copyright 2010 – PayMatic Payroll Service

PayMatic Payroll Service is a full service payroll bureau based in Rockland County, NY and has been helping nonprofit organizations work through the maze of payroll and unemployment laws for over 10 years. Because unemployment insurance law in New York is so complex and many organization administrators are busy enough as is, we found that many non profits do not take advantage of these laws and are either confused or are doing thing wrong.

To answer this need, PayMatic Payroll thoroughly researched New York’s Unemployment Insurance Law, analyzed scores of different organizations of various sizes and prepared this report to help organizations make informed decisions.