August 3, 2020, President Trump signed the legislation to assist nonprofits and government entities into law.
The purpose of the legislation is noted as: “The Protecting Nonprofits from Catastrophic Cash Flow Strain Act aims to ensure that nonprofits, state and local governments, and federally recognized Tribes that operate as reimbursing employers under state unemployment insurance (UI) systems can receive the UI relief secured through the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) without bearing onerous cash flow burdens that threaten liquidity.” State and local governments and federally recognized tribes have been able to remain financially viable during the COVID-19 pandemic by ensuring they receive federal help for unemployment payments upfront, instead of being reimbursed later. Nonprofits have not had these same benefits.
Nonprofit organizations, state and local governments, and federally recognized American Indian tribes generally have the option of operating as “reimbursing employers” (also known as “reimbursable employers”) under state unemployment insurance systems. This means that they make “payments in lieu of contributions” to finance unemployment benefits attributable to them. Most states periodically bill reimbursing employers for benefits paid out during that period to their former employees. In turn, employers who opt for this payment method are not obligated to pay unemployment insurance payroll taxes.
Section 2103 of the CARES Act was intended to provide emergency relief to reimbursing employers by federally financing 50% of the UI obligations for these employers for the period beginning March 13, 2020, and ending December 31, 2020. However, as interpreted by the Department of Labor (DOL) in guidance issued on April 27, reimbursing employers “must pay their bill in full” before they can receive reimbursement for one-half of their obligation. For many employers, the requirement to pay 100% of the UI bill before securing relief exacerbates the financial impact of historically high claims triggered by the pandemic, increasing the risk of further layoffs, closures, or substantial reductions in services.
This new legislation would enable states to provide the CARES Act’s 50% emergency relief to reimbursing employers without requiring these nonprofits or other entities to pay their full bill first. While the net cost to the employer and the federal government would remain the same, as the employer would still be responsible for paying 50% of its bill and the federal government would still finance the remaining 50%, the procedural fix included in this legislation would significantly mitigate the cash flow concerns for reimbursing employers.
For states that have already begun administering Section 2103 relief under current law requirements, the legislation includes an explicit safe harbor for claim weeks prior to the date of enactment.
The following is an example that outlines how this process works under the current DOL guidance and how it would work under this new legislation.
Former and furloughed employees of a charitable nonprofit file UI claims collectively amounting to $50,000 in a given calendar quarter. The state workforce agency bills the nonprofit for $50,000 at the end of the quarter, at which point the nonprofit must pay the full bill or risk financial penalties. If the employer can pay the full bill, then the state can ultimately reimburse it for $25,000, provided by the federal government for this express purpose.
Under the new legislation, if the nonprofit pays any portion of its bill, the state workforce agency uses a federal transfer to the state unemployment trust fund to effectively reduce the bill to $25,000, which the nonprofit can pay without needing to pay the full $50,000 first.
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By Lee Lumpp, CPA, CGMA
This article originally appeared in BDO USA, LLP's Nonprofit Standard Newsletter - fall 2020. Copywrite 2020 BDO USA, LLP. All rights reserved. www.bdo.com.