Unemployment Insurance is Not Really Insurance

March 11, 2015

Unemployment Insurance is Not Really Insurance

But it can act like it is!

In the world of for-profit companies, State Unemployment Insurance is a payroll tax assessed on employers to fund unemployment benefits. It is habitually and imperfectly called “unemployment insurance” or SUI (aka SUTA). Insurance Commissioners in nearly every state differentiate other forms of insurance from this employer tax assessed by their state to collect funds to pay for unemployment “insurance” benefits. In fact, those tax payments are often referred to as “employer contributions” in much of the unemployment literature published by the various state agencies.

However, in the world of 501c3 nonprofits, tribal enterprises and governmental employers, SUI actually provides the option to either elect to pay that tax, or opt out and reimburse, or essentially self-insure the cost of re-paying the state for benefits paid out in the future. Oddly enough, accountants practicing double entry accounting might see reimbursement payments to a state as both a liability and an expense of business operations. In reality, every type of future liability presents an occasion for risk transfer and/or insurance coverage.

As a straightforward financial transaction, making the reimbursing election seems easy enough and it nearly always is immediately cheaper. But how a nonprofit funds future unemployment benefit losses turns out to be anything but simple.

For nonprofit organizations, at the core of the problem is the natural human inclination to pay small financial losses that are sure to occur, in favor of avoiding much larger losses that are less likely to happen. When applied to a recognized insurance product, this means that many people would often rather pay premiums, i.e., small but certain losses (SUI tax, or some other pooled risk), even if it exposes them to potentially disastrous future losses.

Insurance experts often opine that people would make better decisions about their future risk if they understood that a place still afire from a lightning strike is as likely to be struck again as any other. Rather than regarding premiums paid for insurance that doesn’t immediately appear to pay a claim as an uncompensated loss, it is, in fact, financial protection against future ruinous loss.

So, having a thoughtful financial strategy utilizing some level of solid, established coverage of future unknown risk is an excellent business practice. First Nonprofit Group brings nonprofits, tribal enterprises and governmental employers to speed on the benefits of having both a solid financial strategy and coordinated cost control measures that meet a variety of diverse needs now and in the future.

For more information about First Nonprofit Group unemployment services, please contact us.

Source: First Nonprofit Group’s “Financial Mechanics of Funding SUTA” series

Next article: “Savvy Nonprofits Create a Solid Funding Strategy“