CARES Act: Non-Profit Employers’ Obligation for Unemployment Benefits Reimbursement

Under the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), the federal government will pay 50% of the reimbursable unemployment benefits from March 13, 2020 through December 31, 2020 for those non-profit employers that use the “reimbursement method” for paying unemployment benefits (these non-profit employers opted to pay the cost of any unemployment compensation in exchange for not paying unemployment insurance premiums).  The CARES Act allows states flexibility in collecting the remaining 50%.

The CARES Act also provides additional unemployment benefits for employees, but these expanded benefits (including a $600 extra weekly benefit and an extra 13 weeks of unemployment compensation) will be paid by the federal government and will not require reimbursement by the non-profit employer.  We analyze these additional unemployment benefits and CARES Act changes to unemployment eligibility rules in a separate client alert.

Background

Unemployment insurance is governed by both federal and state statutes.  It is administered at the state level, and each state program is slightly different.  Unemployment tax is universally required for for-profit enterprises (with some limited exceptions), but unemployment tax may work somewhat differently for non-profits.

Certain non-profits are not subject to unemployment tax or insurance provisions at all.  These include: 

• Non-profits with fewer than four employees
• Churches, church auxiliaries, and religious schools

For other non-profits, the non-profit must pay unemployment insurance tax unless it elects the “reimbursement” method for unemployment benefits.  Under the reimbursement method, the non-profit does not pay unemployment insurance tax, but must reimburse the state for any unemployment benefits paid to former employees.  

States have adopted laws that provide for this general reimbursement structure, with certain state-specific variations.  Many non-profit employers elect the reimbursement method for unemployment benefits, as these non-profit employers would ordinarily save money by not making regular unemployment insurance tax payments to the state.  

A non-profit employer that opted for the reimbursement method and that furloughs or lays-off numerous employees could face a significant burden in reimbursing the state for unemployment benefits paid to former employees.  

A non-profit employer generally cannot avoid this issue by cutting an employee’s hours or by furloughing the employee.  While the eligibility criteria for unemployment benefits varies by state, the basic principle underlying the state laws is that unemployment benefits are available for those employees who are “able” and “available” to work, but are unable to find work.  As discussed in our companion client alert, the CARES Act has impacted state eligibility requirements for unemployment benefits.  

CARES Act Provisions

The CARES Act includes the following provisions relating to unemployment benefits paid under the reimbursement method:

• The federal government will cover 50% of the benefits paid to the non-profit’s former employees (the non-profit must reimburse the other 50%) for the period March 13, 2020 through December 31, 2020
• States are allowed flexibility in collecting the remaining 50% of the benefits

The CARES Act also expanded unemployment benefits coverage from 26 weeks (typical for most states) to 39 weeks in most states through the end of 2020.  Additionally, the CARES Act increased weekly unemployment insurance benefits by $600 through July 31, 2020.  Non-profits that opted for reimbursement funding will not have to reimburse the state for these additional benefits (as they are fully funded by the federal government).

In summary, a non-profit should carefully weigh its options and consult with counsel in connection with planned layoffs or furloughs of its employees.  There are various benefits available to employers under the CARES Act and Families First Coronavirus Response Act that could impact this decision.  Moreover, the non-profit should factor employee benefits considerations and the potential unemployment benefits reimbursement burden into its decision.

Respective state unemployment websites can be found here. For more information, please contact your Foley relationship partner or the Foley colleagues listed below.  For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the websites of the CDC and the World Health Organization. 

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