More Choices for Unemployment Tax Systems

Empty Minnesota Capitol chamber with empty seats, the American and Minnesota state flags, and statues of prominent former Minnesota legislators.

State and national unemployment rates are still at historic highs in 2010. A law supported by MCN and passed during the 2010 Legislative Session gave nonprofits more choices and saves them money.

A federal law enacted in 1970 entitles 501(c)(3) organizations to opt out of their state’s tax-rated unemployment system and become a direct reimburser. For most nonprofit employers, this provides substantial savings that can be put into direct programmatic missions or to build assets through a trust or other mechanism. As a reimbursing employer, an organization only pays dollar for dollar for benefits paid out to former employees should there be a claim.

An MCN-initiated provision included in the 2010 omnibus employment and economic development policy bill allows greater choice and flexibility for nonprofits choosing to opt out of contributions to the state unemployment insurance fund. Prior to passage of this provision, the option to opt out existed only once a year in Minnesota, on November 30, forcing a decision at a very busy fundraising and year-end wrap-up time for nonprofits.

The bill, signed by Governor Pawlenty on May 15, 2010, allows organizations to make that decision on a quarterly basis. Once an organization chooses to be a direct reimburser, that status must be in place for no less than 24 calendar months beginning with the date the organization was determined to be an employer with covered employment. A nonprofit organization will continue to be liable for reimbursements until it files a notice terminating its election before the beginning of the calendar quarter the termination is to be effective.

The potential benefit of making this change will grow each of the next three years, as the State of Minnesota increases unemployment compensation rates to repay a $553 million obligation to the federal unemployment trust fund. Virtually every state is coping with these increases, required after the recession.

Options for Direct Reimbursers

One option for nonprofits opting out of the state system is to join an unemployment trust, such as Unemployment Services Trust (UST), one of MCN’s cost-saving partners for members. UST is a grantor trust owned by participating member nonprofits and managed by leaders with vast experience in investment, asset management and in providing oversight of nonprofit organizations. The sole purpose of UST is to provide 501(c)(3) nonprofit organizations with a secure, cost-effective alternative to state unemployment taxes. Nonprofits join UST and pool their resources to pay only the claims incurred by their members and are able to save a substantial amount of money. This program works best for organizations with 10 or more paid staff. Benefits of participation include:

  • having the means to manage the risk of direct reimbursement;
  • minimizing unemployment costs resulting in direct savings;
  • prudent management of financial resources to protect assets; and
  • efficient administration and service support to organizations.

To see if your organization qualifies for UST enrollment, visit and request a savings quote.