If your organization were counseled to stop using the alternative postal rate offered to nonprofits, it would seem like strange advice wouldn’t it? Since Congress and the U.S. Postal Service specifically provide a special rate for nonprofits to send their mail for 24 cents per piece instead of 44 cents, why wouldn’t you opt to pay less?

The choice seems obvious, but there is another alternative provided under federal law that many nonprofits are not currently using to their advantage—even though it could save them thousands of dollars.

Section 3303(e) of the Internal Revenue Code allows nonprofit organizations and local government entities to use an alternative method to pay for state unemployment compensation. They are allowed to opt out of the state unemployment insurance (UI) tax system and instead reimburse the state only for the unemployment benefits paid out to their own former employees. 

Given the choice, most for-profits would jump at this opportunity, because employers that pay into the state UI system typically pay about $2.00 in taxes for every $1.00 paid out in benefits to laid-off workers. But only 501(c)(3)s and local units of government can opt out and become a “reimbursing” employer, simply paying the state for their own agency’s unemployment claims—dollar for dollar—and saving valuable unrestricted funds.

In addition, because of the recent recession, many state unemployment funds have dried up and have begun borrowing from the federal government—with loans now totaling $37 billion. For employers, this will mean higher unemployment taxes in the coming years, regardless of their own employment practices.Nonprofits owe it to themselves to evaluate whether they should opt out of the state UI system. 

 “Nonprofits are getting smarter and savvier from the financial crisis . . . This is one cost they’re learning they can save on,” says Donna Groh, Executive Director of the Unemployment Services Trust (UST), a group of more than 2,000 nonprofits that have decided to opt out of the state UI system. Groh explains that this alternative is best for nonprofit employers with 10 or more full-time-equivalent employees.

When organizations look to UST to find out if they should opt out of the state unemployment system, UST evaluates the organization’s size as well as its unemployment-claim history. Nonprofits that have recurring seasonal unemployment aren’t typically a good fit, since they tend to have higher overall unemployment claims. But those that do not can really benefit from getting out of the state system, since that system is built to cover all employee claims, which drives up costs for everyone—even those employers who haven’t experienced any unemployment claims. Says Groh, “Last year UST members that opted out of the state unemployment tax system immediately saved an average $99.74 per employee, and they can expect to continue to save long-term.”

In addition to the nationally available services of UST, groups formed to offer unemployment services for nonprofits include First Nonprofit Companies of Chicago, 501(c) Services of Cupertino, CA, and the 501 Alliance, in Michigan.

Most states only allow nonprofits to exercise this alternative once annually, typically by November 30. You can find out if it is a smart alternative for your agency by visiting www.chooseust.org/savings-evaluation or websites of the other providers.

Philip Bond, CPA isVice President and CFO for Metro United Way, Louisville, KY, and a volunteer trustee for UST.