On April 27, 2020, the US Department of Labor (DOL) issued Unemployment Insurance Program Letter No. 18-20 (the Guidance) to provide states with instructions on implementing the emergency unemployment relief provisions in Section 2103 of the CARES Act applicable to state and local governmental entities, certain nonprofit organizations, and Federally-recognized Indian Tribes.
The Guidance applies to a category of tax-exempt entities known as “Reimbursing Employers,” which are permitted by Congress to self-insure claims for unemployment benefits. Rather than contributing to state unemployment trust funds, Reimbursing Employers pay back the state fund for unemployment benefits paid out to their former employees.
The CARES Act provides that the federal government will cover 50 percent of the cost of COVID-19-related claims charged to Reimbursing Employers. This amount will be transferred from the Federal Unemployment Account (FUA) to a state’s account. Congress instructed that any interpretive guidance by the DOL must give states “maximum flexibility” to interpret their own unemployment compensation laws regarding Reimbursing Employers as it relates to timely payment and the assessment of penalties and interest.
According to the Guidance, “upon payment from the Reimbursing Employer of the amount owed in lieu of contributions, the state may remit to the employer up to one-half of the amount of compensation paid by the state attributable to service with the employer.” This means that self-insured nonprofits must pay for their claims and then seek partial refunds. The DOL appears to have developed this approach because Section 2103 of the CARES Act requires funds to be used to “reimburse” self-insured nonprofits.
In addition, according to the Guidance, states may be penalized if they are too generous in extending payment relief toward self-insured nonprofits. Where a state opts to provide partial relief to Reimbursing Employers from payments due in lieu of contributions, upon the employer’s payment into the state’s trust fund, the state may repay the employer for those payments up to the amount of funds transferred from the FUA for each claim. Where such relief is 50% or less of the amount owed by the Reimbursing Employer, all funds transferred from the FUA for each claim may be used by the state to repay the Reimbursing Employer. However, where such relief is more than 50% of the amount owed by the Reimbursing Employer, the state may see unintended consequences. Because the amount transferred to the state from the FUA may only be used to repay employers, relief above 50% of the amount owed will result in the state not being able to use a portion of the transferred funds. Any unused portions of the amount transferred from the FUA must be returned.
According to the North Carolina Center for Non-Profits, there are two problems with repaying nonprofit employers after they have paid state funds for the cost of unemployment benefits remitted to their former employees. First, it “essentially requires nonprofits to make an interest-free loan to state unemployment trust funds. Under normal circumstances, nonprofits might use their operating reserves to provide the capital for this payment. However, this process will be particularly problematic during and after the COVID-19 crisis, since many nonprofits have already exhausted any operating reserves they may have had to mitigate immediate financial losses.”
Second, the process “adds unnecessary red tape – and inevitably further delays – both for self-insured nonprofits and overburdened state unemployment agencies.”
The North Carolina Center for Non-Profits indicates that the process laid out in the Guidance for handling reimbursements may persuade financially challenged nonprofits to delay rehiring staff until they have received their partial reimbursement, make further cuts to programs and services or, worse yet, gone out of business.
Many nonprofit organizations are mobilizing to see if they can clarify that the relevant language in the CARES Act permits states to simply reduce Reimbursing Employers’ unemployment benefit costs, rather than requiring states to proceed with the two-step reimbursement process outlined in the Guidance.