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The hard truth: 50% relief isn’t enough for self-insured nonprofits

By May 11, 2020June 2nd, 2020No Comments

Summary: The CARES Act provided 50% federal relief for nonprofits that self-insure their employees’ unemployment benefits. But with the unprecedented layoffs forced on them by shelter-in-place orders, 50% relief won’t be nearly enough assistance. Unless these nonprofits get at least 90% relief, a few months of shelter-in-place will be more devastating than an entire year of the Great Recession.

If you prefer to “cut to the chase,” please click here to be taken to the bottom of the page to read about how you can show your support.


At 501(c) Services, we’ve been advocating that self-insured nonprofits are going to need more than the 50% assistance provided for them in the CARES Act. One of the questions we get asked sometimes is, “Isn’t 50% assistance generous enough? Why do you need more?” That’s a good question, and it deserves a detailed answer.

Lying underneath this question is often the unspoken observation that self-insured nonprofits have voluntarily signed up for a risk, and therefore it shouldn’t be the job of the government to bail them out if the risk goes poorly. That’s true – up to a point. And we’re far beyond that point. Let me explain:

What is a self-insured nonprofit?

The unemployment tax system often charges nonprofits more, per dollar of payroll, than the average employer in the same state. For this reason, many nonprofits choose to opt out of the tax system and self-insure their unemployment instead. This means that rather than paying taxes, if one of their former employees collects unemployment benefits, the nonprofit will reimburse the state government for the amount paid.

In other words, the nonprofit is trading a predictable expense (taxes) for an unpredictable expense (reimbursement) with the hope that over a period of time, their costs will be lower. But there’s a certain amount of risk inherent in this trade-off. At 501(c) Services, we’ve helped thousands of nonprofits manage that risk for nearly 40 years, so we know a fair amount about what to expect.

What is the normal risk of self-insurance?

The graph below shows the level of risk that self-insured nonprofits are expected to be able to manage on their own. It compares the average experience of nonprofits in our program during a period of exceptionally low unemployment (2015-2018), compared to the worst years of the Great Recession (2009-2011).


As this chart shows, the normal risk that a self-insured nonprofit should be prepared to handle is a bad year with expenses that are about 2.2 times higher than in a good year. The way this often occurs is that because of a drop in charitable donations or loss of a grant, the nonprofit is forced to close a program or two, and therefore lay off several staff people at once. The nonprofit pays for the unemployment benefits of their ex-employees until they find new work, but if the layoff coincides with a recession, the new work may take longer to find, so the nonprofit pays more claims.

Nonprofits who take the self-insurance option are familiar with this risk and prepare for it in a variety of ways. One common strategy is to take some of the tax savings from good years and put it aside in a savings account to pay for the extra costs in bad years.

How does a pandemic compare?

A pandemic creates a completely different type of risk, because unless the nonprofit is considered an essential service or gets some form of government assistance, its only option during a stay-at-home order is to furlough almost all its staff. But as far as unemployment is concerned, there is no difference between a furlough and a layoff, so these employees will become eligible for unemployment benefits, which the self-insured nonprofit will have to pay.

So instead of the typical scenario – paying benefits for the employees of a shuttered program while they look for other jobs – in the pandemic scenario, the nonprofit is paying for benefits for all its employees, and none of them are looking for other jobs.

What does this look like? Let’s add another column to the previous graph. This column represents how much money a self-insured nonprofit will pay for a 3-month furlough, even after receiving 50% help:


Remember that many nonprofits in this situation have also lost their revenue sources as well, so these costs are coming directly out of whatever financial reserves they’ve managed to build up. This will weaken them, and in a worst-case scenario could even drive them out of business. The option to self-insure unemployment benefits was designed to help 501(c)(3) nonprofits financially, but mandatory furloughs have turned it into a dangerous anchor that could sink these organizations.

Fortunately, many nonprofits are considered “essential services” and therefore not affected by furloughs. However, in a survey of our customers that participate the 501(c) Agencies Trust, 24% reported that they have “suspended all or most routine operations.” In other words, nearly one-quarter are at risk of experiencing exactly the scenario above. And another 23% reported that they had been forced to eliminate at least some positions, so they will be experiencing the same problem to a lesser degree.

We’ve heard heartbreaking stories from nonprofits who are now liable for unemployment costs of tens or hundreds of thousands of dollars per week, when they used to pay that much per year. This is exactly the kind of extraordinary, unforeseeable risk that government relief is appropriate for.

How much help is required?

Our modeling has shown that self-insured nonprofits need at least 91% relief just to reduce the cost of a 3-month, full furlough down to the average charges during the Great Recession.

 Therefore, to return to the original question of this article – Why do we feel it appropriate to ask for 100% relief? – the short answer is that anything less than 90% relief will put many nonprofits in a situation that will cost them more than the Great Recession, while also eliminating their revenue. (And if the furloughs extend beyond 3 months, the math gets even worse.)

On the positive side, 90% relief would be a tremendous improvement over the 50% currently being offered. The small incremental step from 90% to 100% can be justified by eliminating a number of administrative challenges that have arisen in the last month as both nonprofits and state governments have struggled to implement the current guidance in the CARES Act.

How you can help

Congress is discussing fixes to the original CARES Act. Together with other service providers in our industry, we’ve asked them to increase their funding for self-insured nonprofits to 100% of their unemployment liability. We’re grateful for the support of prominent national organizations that have added this request to their lobbying efforts, including YMCA of the USA, Boys & Girls Clubs of America, the National Council of Nonprofits, and Independent Sector.

There are two bipartisan letters circulating around Congress right now, asking for support for the nonprofit community. Help for self-insured nonprofits is included as a bullet point in each letter, but the word on the street is that this issue is still not well understood, and support may be lacking.

Please contact your congressperson and ask them to support the following letters and please emphasize that 100% relief for self-insured nonprofits is one of your chief concerns.

  • House of Representatives: Ask your representative to support the requests in the letter coauthored by Reps. Moulton and Fitzpatrick. For more on this letter, click here.
  • Senate: Ask your senator to support the letter being produced by Senators Lankford and King.  Click here to read the letter.

In particular, support is needed from congresspeople who serve on the House Ways & Means Committee or the Senate Finance Committee. Click here for a list of who those congresspeople are; if you are from their area, your support is especially needed.

If you need assistance locating your federally elected congressperson, you can click here to find their contact information.

Thank you

If you are a nonprofit leader: We thank you for your dedication and service to making our communities better. We know that the pandemic has created particularly difficult challenges for those who are serving our country’s most vulnerable populations. Your mission is the reason we do what we do.

If you are a friend to the nonprofit community: Thank you for your interest in this topic, as shown by reading all the way to the bottom of this letter. We appreciate your support for the nonprofit community.

If you are a member of 501(c) Agencies Trust or one of our other programs: We are proud to be part of your mission, and we will continue to serve you to the best of our ability. Please visit our COVID-19 FAQ or contact us for any assistance you may need.


Darren Bowman
President/CEO, 501(c) Services

501(c) Services is the administrator of 501(c) Agencies Trust, 501(c) HR Services, Boy Scout Unemployment Plan and the UInsure unemployment insurance program. We are a 100% employee-owned company.

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