Nonprofits In California Have A Choice When It Comes To Paying Unemployment Insurance Benefits.

Employers in California are generally subject to unemployment insurance taxes on wages paid to employees.  Typically employers, whether for profit or nonprofit, are assigned a tax rate and make regular contributions to cover the occasional unemployment claim made by former employees.  Most employers do not have options when it comes to making those contributions.  Some nonprofits do. 

 The California Unemployment Insurance Code provides that nonprofit organizations recognized by the Internal Revenue Service as charitable organizations in accordance with Internal Revenue Code section 501(c)(3) have two options for covering claims brought by employees for unemployment.

A 501(c)(3) may:

             (1)  Pay the same unemployment insurance taxes paid by for-profit employers (the tax-rate method); or

             (2)  Reimburse the State of California for the full cost of all Unemployment Insurance Benefits paid to their former employees (the reimbursement method). 

             To elect the reimbursement method, a qualified nonprofit must file EDD Form DE1SNP (Selection of Financing Method by a Nonprofit Organization) and EDD Form DE 1NP (Registration Form for Nonprofit Employers) with the Employment Development Department.  An election of the reimbursement method must remain in effect for not less than five (5) years and the Employment Development Department may terminate the election based on delinquent payments. 

             The reimbursement method may be beneficial if a nonprofit employer has had few unemployment insurance claims and expects few in the future.  The tax-rate method makes sense for employers anticipating heavy layoffs or if it prefers predictability with respect to expenses. 

             Nonprofit organizations are encouraged to seek legal counsel to ensure that all of the appropriate paperwork is submitted before commencing the reimbursement method.  The penalties for failing to properly elect the reimbursement method can be significant.

           Note:  State Disability Insurance contributions by employees are required under either method, as are personal income taxes.