As many private non-profit hospitals know, the higher the number of claims for unemployment benefits, the higher the reimbursement payment to the Employment Security Commission at the end of the year.  A recent change to the unemployment insurance laws, however, gives some private non-profit organizations the chance to eliminate that reimbursement payment altogether for 2009.  This Law Note summarizes those changes and explains how an employer can take advantage of the new laws to help its bottom line.

The Two Methods of Paying Unemployment Contributions

A private non-profit employer has historically had the option to choose between two methods of paying unemployment contributions to the ESC:  the "experience-rated method" and the "reimbursable method."  Because the changes only benefit those employers who use the reimbursable method, a brief explanation of the two methods may be helpful.

The Experience-Rated Method

Under the experience-rated method, an employer pays a quarterly tax to fund its unemployment insurance account with the ESC.  When former employees apply for unemployment benefits, a "benefits charge" is recorded against the employer by the ESC.  At the end of the year, if the employer's unemployment tax rate appears too small (or large) in light of the benefits charges, then the employer's tax rate is adjusted upward (or downward) to compensate.

The Reimbursable Method

Private, non-profit organizations, on the other hand, have the option of selecting the reimbursable method of contributing to the unemployment insurance fund.  Under the old law, a non-profit using the reimbursable method could elect not to pay an unemployment insurance tax at all, instead maintaining an account from which benefits claims were paid, dollar for dollar.  The account was required by law to maintain funds in the amount of 1% of an employer's total taxable payroll.  At the end of each year, the ESC would tally benefits claims made against the account, and set the amount that each non-profit employer must pay back in to the account as a reimbursement to ensure that the account would contain funds equal to 1% of the employer's total payroll for the upcoming year.

The Key Change: Moving from a 1% Account to a 1% Bond

North Carolina Senate Bill 741, passed in 2008, made an important change to the reimbursable method as described in section 96-9(d) of the North Carolina General Statutes.  Effective January 1, 2010, a private non-profit employer electing to use the reimbursable method need not maintain an account equaling 1% of its taxable payroll.  Instead, such an employer need only post a surety bond (or an irrevocable letter of credit) in the same amount.  From 2010 onward, those employers may simply reimburse the ESC, dollar for dollar, for benefits claims made by former employees, without having to keep a 1% reserve on hand with the ESC.

How the Change to the Law Can Save Private Non-Profit Organizations Money

There are two key ways that Senate Bill 741 can save private non-profit organizations money.  First, because the cost of obtaining a surety bond is less than the face value of the bond, employers electing the reimbursable method will have less money tied up in the unemployment insurance fund.

Second, any money presently remaining in the employer's 1% account will be used to offset benefits charges for 2009.  If there is any money left over after the benefits charges are reimbursed, those funds will be carried over into future years to help offset future benefits charges, until the account balance reaches zero.

How to Take Advantage of the Changes

The ESC has just recently finalized its regulations implementing the changes in Senate Bill 741 (called "Regulation 7B").  Because the regulations are so new, the ESC has extended the usual December 1 deadline to December 31 for this year only.  By that date, any reimburseable method private non-profit that wishes to take advantage of the changes to the law must pay any reimbursements owed, if any (above and beyond the 1% of payroll that is already on account with the ESC) and post a surety bond as described above.

If you have any questions about whether these changes apply to your organization, or questions about how to take advantage of the changes, please contact Jerry Oliver at (919) 755-8710, or the Employment Security Commission Tax Status Manager at (919) 707-1188.