As layoffs continue to increase across the country, so does the financial impact of unemployment insurance (UI) claims on nonprofit organizations. According to the U.S. Department of Labor, the average cost per UI claim has risen by 23.7% over the last six quarters. The duration of claims has also grown, with the average claim lasting 15.22 weeks as of Q2 2024, up from 13.7 weeks in early 2023. Moreover, more individuals are exhausting their benefits, with the exhaustion rate rising from 32.7% to 37.9% during the same period.
While the national unemployment rate showed a slight decline to 4.1% as of September 30, 2024, other key indicators remain concerning. Nonprofits in particular are feeling the strain, as the average duration of unemployment claims for their employees has risen to 15.3 weeks, and the exhaustion rate has surpassed 38%—indicating that many employees are remaining out of work for longer periods. This upward trend in claims costs is putting a financial burden on nonprofits that are already managing tight budgets.
The Importance of Auditing Unemployment Claims for Nonprofits
For nonprofit organizations, unemployment claims can represent a significant financial strain. It’s crucial to recognize that many states have high rates of improper claims payouts, which can result in nonprofit employers overpaying for unemployment insurance benefits. Errors in claims processing are not uncommon, and nonprofit leaders must take an active role in auditing claims to ensure they are only paying for legitimate benefits.
Examples of Improper Payments by State
- California: According to a report by the U.S. Department of Labor, California has experienced a roughly 15% rate of improper unemployment insurance payments. This means that approximately 15% of all claims processed by the state are either paid incorrectly to ineligible individuals or overpaid due to miscalculations.
- Florida: Florida has struggled with even higher rates of improper payments, with an estimated 20% of unemployment claims being paid improperly. This includes instances where individuals who voluntarily left their jobs or were fired for misconduct still received benefits.
- Texas: Texas has seen a 12% improper payment rate, which, while lower than states like California and Florida, still represents a substantial amount of overpaid benefits. In many cases, this is due to delays or errors in reviewing claimants’ work histories, leading to eligible employees receiving higher payments than warranted.
- New York: New York reported a 13% rate of improper payments in its unemployment insurance program. Common errors include issues with benefit calculation and misclassification of worker status, which result in overpayments that employers are ultimately responsible for covering.
Without regular audits, nonprofits could end up paying for claims they should not be responsible for, which can add up quickly. If claims are not carefully reviewed, nonprofits may be paying for benefits to ineligible individuals, or they may be overpaying on claims due to state processing errors. Regularly auditing claims and disputing any inappropriate payouts is an effective way to avoid unnecessary financial losses and ensure that claims are processed accurately. For nonprofits, especially those that are reimbursing employers, this is a critical step in managing costs effectively.
- Review Claim Details: Carefully examine each claim to verify that the individual is eligible and that the circumstances of their separation from the organization are accurately reflected.
- Challenge Inaccurate Claims: If any claim is found to be in error, nonprofits should challenge the decision by providing supporting documentation to the state’s unemployment office.
- Partner with Claims Auditors: Consider working with a professional claims auditor who specializes in nonprofit unemployment claims. These experts can help identify discrepancies and ensure claims are processed accurately.
How Nonprofits Can Mitigate Rising UI Claim Costs: The Reimbursing Employer Option
One of the best strategies for nonprofits to manage the rising costs of unemployment claims is to become a reimbursing employer. Unlike traditional employers who pay regular unemployment insurance taxes, reimbursing employers are only required to reimburse the state for the actual unemployment benefits paid to former employees. This can significantly reduce the financial impact of rising claim costs.
Why Reimbursing Employer Status Works for Nonprofits
- Control Over Costs: As a reimbursing employer, nonprofits only pay for the unemployment claims they incur, which allows them to directly manage and control these costs. This model can help nonprofit organizations avoid the rising costs of unemployment taxes and benefit payouts.
- Avoid Rising UI Tax Rates: With the taxable wage base increasing and the average cost of claims continuing to rise, reimbursing employers are shielded from these escalating tax rates. This provides nonprofits with an effective way to bypass the impact of higher tax rates and benefit increases.
- Flexibility for Low-Claims Organizations: Nonprofits with few unemployment claims can benefit the most from this model. If a nonprofit has a low rate of unemployment claims, paying only for the actual claims rather than a fixed tax rate can lead to significant savings.
- Budgeting Stability: Reimbursing employers have more predictable and manageable expenses since they are only paying for actual claims, which helps with long-term financial planning and budgeting.
The decision to switch to reimbursing employer status depends on a nonprofit’s unemployment claims history and financial position. For nonprofits with relatively low claims or those that are confident in their ability to reduce claim duration through reemployment programs, this option can be highly beneficial.
Becoming a reimbursing employer also offers the advantage of greater flexibility in managing unemployment costs, making it an attractive choice for nonprofits that want more control over their unemployment insurance expenses.
The Case for Proactive Claim Management
Given the rising costs of unemployment claims, nonprofit organizations must adopt a proactive approach to managing these expenses. One effective way to do so is by implementing reemployment programs. Reemployment programs can help shorten the duration of unemployment claims by 30% or more, potentially saving nonprofits $2,064 per claim.
In states with high claim costs, such as Massachusetts, New Jersey, and Washington, the savings can be even more significant. In these regions, unemployment claims often exceed $10,000, and reducing the length of claims by even a few weeks can lead to savings of $3,000 or more per claim.
Key Benefits of Reemployment Programs for Nonprofits
- Reduced Claim Duration: Reemployment programs can help individuals return to work faster, reducing the total cost of each claim.
- Cost Savings: By shortening the duration of claims, nonprofits can save significantly on unemployment payouts, especially in states with higher-than-average claim costs.
- Improved Workforce Development: Reemployment programs also help foster a skilled workforce, improving retention and overall organizational stability.
Reduce Unemployment Costs by Being Proactive
For nonprofit organizations, managing the cost of unemployment claims is more important than ever. Regular claims audits, transitioning to reimbursing employer status, and leveraging reemployment programs are three key strategies that can help nonprofits mitigate the rising costs of unemployment claims. By staying proactive, nonprofit leaders can protect their budgets, save on claims expenses, and ensure that their resources are used effectively to support their mission.
For more information on becoming a reimbursing employer or to learn how to effectively audit and manage your unemployment claims, contact us today. We can guide your nonprofit through these processes to ensure that you’re making the best financial decisions.
About Us
For more than 40 years, 501(c) Services has been a leader in offering solutions for unemployment costs, claims management, and HR support to nonprofit organizations. Two of our most popular programs are the 501(c) Agencies Trust and 501(c) HR Services. We understand the importance of compliance and accuracy and are committed to providing our clients with customized plans that fit their needs.
Contact us today to see if your organization could benefit from our services.
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Portions of this post have been provided by our friends at NextJob.
