Unemployment fix for not-for-profits enacted

Tax Hot Topics newsletter Lawmakers have agreed to a cash flow aid bill that will provide relief for non-profit organizations impacted by the COVID-19 crisis. The Protecting Nonprofits from Catastrophic Cash Flow Strain Act (S. 4209) was signed into law on Aug. 3 and makes a procedural fix to the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Not-for-profit organizations, similar to state and local governments and federally recognized tribes, can either cover unemployment related costs by paying into the state via state unemployment taxes (SUTA) or choose to be “reimbursing employers.” These “reimbursing employers” are self-insuring by not paying into SUTA but instead being billed by the state, periodically, after unemployment claims have been paid out to the not-for-profit’s former employees.

The CARES Act intended to provide relief to these not-for-profits by requiring the federal government to pay 50% of their self-funded unemployment liability for the period beginning March 13 and ending Dec. 31, 2020. The Department of Labor (DOL) however, interpreted this provision to require not-for-profits to pay their unemployment liability bill, as assessed by the state, “in full,” and to obtain a refund of 50% once the state received the funding from the federal government.

This interpretation to pay 100% of the unemployment bill had put a significant strain on NFP finances and cash flows, as they faced unprecedentedly high unemployment due to the COVID-19 pandemic.

Under the new legislation, states would only bill not-for-profits for 50% of the total unemployment costs. This procedural fix will result in the net cost to the not-for-profit and federal government to be the same but will provide relief to the not-for-profit by not requiring them to pay 100% of the cost upfront, thereby mitigating a cash crunch.

Furthering the relief for states that have already begun administering under current law requirements, the legislation includes an explicit safe harbor that would be applicable prior to the date of enactment. For payments that occurred after March 12, 2020, states may issue reimbursements or reduce the amounts required to be paid.

Cash flow forecasting is critical for not-for-profits during COVID-19. The legislation provides some relief, but not-for-profits should continue to monitor their cash expenses and optimize them where and as appropriate. Several cash options, including the Paycheck Protection Program and Main Street Lending programs are available to certain not-for-profits. Not-for-profits should seek guidance on how to avail these programs, as needed, to ensure their cash reserves are sufficient and not depleting.

Michelle Weber
Milwaukee Office
T +1 414 277 1536

Amyn Gillani
Boston Office
T +1 617 973 4727

Jack McDermott
Senior Associate
Manhattan Office
T +1 212 634 5460

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