public-policy newsletter

Protecting Nonprofits from Catastrophic Cash Flow Strain

June 29, 2020

By Zachary Tashman

As nonprofit organizations, particularly in the human service sector, continue to operate on the front lines to combat the dire health and economic effects of COVID-19, they are coming under increasing financial strain. One of the main areas of budgetary pressure for nonprofits is the way Unemployment Insurance (UI) is administered.

Unlike private employers, nonprofits are generally given the option to self-insure rather than pay into their state’s unemployment trust fund. Under this system, a participating nonprofit would not pay an unemployment insurance tax but must reimburse the state for any unemployment benefits paid to former employees. Historically this is a fair arrangement since nonprofits are more likely to avoid laying off their employees even during recessions. However, the major economic shock caused by COVID-19 has overwhelmed the resources of many smaller nonprofits. Legislation is urgently needed to allow nonprofits to maintain their operations at lower capacity without being subject to major financial penalties.

UI Relief in CARES Act

Under Sec. 2103 of the CARES Act, the federal government covers 50 percent of the unemployment benefit costs that self-insured nonprofits are required to pay to their state workforce agency. This cost-sharing provision lasts from March 13, 2020 through the end of the calendar year. Additionally, the CARES Act allows states increased flexibility in collecting the remaining 50 percent of the benefits from self-insured nonprofits. The intent of this provision is for federal reimbursements to state workforce agencies to be paid immediately upon request. However, the Department of Labor (DOL) issued guidelines in April that interpreted Sec. 2103 to mean that self-insured nonprofits must first pay the state the full amount owed, only after which can they get reimbursed by the federal government for half.

This interpretation of the CARES Act seriously endangers the financial stability of many smaller nonprofits. For community-based organizations, finding sufficient resources to make these quarterly payments is not a mere accounting exercise; it could mean the difference between continued operations and insolvency. If self-insured nonprofits are unable to pay the full amount, many states will subject them to stiff financial penalties, which would offset the benefit from federal reimbursements they receive down the road.

Reimbursement Technical Corrections Bill

Senator Tim Scott (R-SC) and Senator Sherrod Brown (D-OH) recently introduced the Protecting Nonprofits from Catastrophic Cash Flow Strain Act (S.4001). This legislation would clarify that before a nonprofit pays its unemployment insurance reimbursement, a federal transfer to their state unemployment trust fund would cover 50 percent of the cost. This legislative fix would ensure that nonprofits are not unnecessarily saddled with upfront costs that the federal government is already obligated to cover.

As of this writing, S.4001 has 12 Senate sponsors, including the Chairman and Ranking Member of the Senate Finance Committee. The language of this bill has also been incorporated in the House Democrats’ latest COVID relief package (H.R. 6800, Sec. 50005), which passed that chamber last month, but is unlikely to see Senate action.

Next Steps

S.4001 shares broad bipartisan support and Congress should immediately pass this bill. Human service nonprofits across our country are providing essential assistance to families in order to rebuild a foundation of well-being in their communities. These organizations, which were supposed to be provided with immediate relief months ago, should not be forced to wait any longer for financial certainty.

The National Assembly urges our members to reach out to Senators and Representatives in support of this technical corrections bill. Contacting your Senators is easy. Simply email or tweet this message to each: “[SenatorTwitterHandle] #nonprofits in our state must have immediate relief from catastrophic cash flow strains caused by flawed Labor Department guidance.” For further questions about this bill, we encourage members to reach out to Conor Sheehey from the Scott office or Nora Todd from the Brown office.