Reimbursing Nonprofits: Cash Flow Relief Approved by Congress

  • Regulations
  • 7/18/2020
Businessman Having Discussion With Colleagues

If signed into law, the Protecting Nonprofits from Catastrophic Cash Flow Strain Act will bring cash flow relief to governments, nonprofits, and tribal nations acting as “reimbursing employers.”

Key insights

  • The House and Senate recently passed the Protecting Nonprofits from Catastrophic Cash Flow Strain Act.
  • If signed into law, this Act will provide great relief to the nonprofits, governments, and tribal nations that function as a “reimbursing employer” and may face significant unemployment benefit costs.
  • Under this Act, states would only bill “reimbursing employers” for half of the relevant costs, and the federal government would pay states for the other half.

Knowing that unemployment claims would skyrocket as a result of COVID-19, Congress included provisions in the CARES Act to cover 50% of unemployment benefit costs for “reimbursing employers” (entities that directly pay for unemployment costs).

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While this elicited a sigh of relief from the many nonprofits that have had to minimize or cease operations due to COVID-19, the CARES Act didn’t dictate how the funds would make their way from the federal government to the impacted organizations. This may have left you uncertain about if, when, and how a large unemployment bill may need to be paid.

April guidance from the Department of Labor (DOL) indicating that states should charge “reimbursing employers” for 100% of unemployment costs up-front and later reimburse the 50% covered by CARES Act federal relief funds didn’t provide a welcome answer. To the contrary, it raised a cash flow panic for organizations that were already money-strapped and facing concerns about reduced contributions and other revenue sources.

Good news arrived in early July. Both the House and Senate passed the Protecting Nonprofits from Catastrophic Cash Flow Strain Act, which is intended to allow states to access the 50% federal subsidy prior to charging the nonprofit. Under this Act, rather than charge 100% up-front and reimburse 50% after federal relief funds are received, states would only need to bill nonprofits for 50% of the total unemployment benefit costs.

While seemingly a minor procedural change, this Act will provide great relief to the nonprofits, governments and tribal nations, if it is signed into law. You’ll be able to breathe a little easier as you plan cash flow for the summer and fall.

At the time of publication, the Protecting Nonprofits from Catastrophic Cash Flow Strain Act was still awaiting the President’s signature.

Who does this impact?

Unlike for-profit companies, nonprofits, state and local governments, and federally recognized tribes have two options for how they cover unemployment-related costs:

  1. Pay into state unemployment pools via state unemployment taxes (SUTA)
  2. Choose to be a “reimbursing employer” that doesn’t pay into SUTA, and rather is billed by the state after unemployment claims have been filed and paid out

Nonprofit employers choosing the first option would typically see longer-term impacts on their SUTA rates, since those rates are based on historical claims. However, through the Families First Coronavirus Response Act (FFCRA), the federal government provided additional funding to states if the states agreed to certain changes to their unemployment system, including not increasing an employer’s unemployment tax rate for claims related to COVID-19. Because of these financial incentives, many states have passed legislation to minimize or eliminate SUTA rate increases based on COVID-19-related unemployment claims.

However, no such equalizing provision existed for nonprofit “reimbursing employers” until the CARES Act became law. These employers were still responsible for 100% of the claims made by their former employees. Today, even with the CARES Act provision to cover 50% of unemployment benefit costs for “reimbursing employers,” the April DOL guidance could create financial strain for organizations choosing option two.

Unemployment cost scenario planning

Nonprofit costs are often heavily concentrated in payroll. It’s fairly common to see 60-80% of total expenses spent on salaries and benefits. Because COVID-19 has forced numerous nonprofits to cease operations or scale back programming, many resorted to layoffs to keep their organization open, even though their physical doors may have been closed.

Say a nonprofit had an annual budget of $1M and spent 75% or $750,000 per year on payroll. Imagine COVID-19 caused it to cease operating its earned-revenue programs, and it had to lay off half of its staff of 12. Assuming all six were unable to find work and filed for unemployment, the nonprofit could be on the hook for $40k in up-front unemployment benefit costs (benefit amounts and eligible weeks vary by state).

Let’s assume this organization only had $100k cash on hand going into the spring, a reserve level not uncommon in nonprofits of this size. Paying $40k up front to the state while waiting for $20k in federal reimbursement could render the organization unable to make payroll for employed staff, pay rent, or even operate. Under the Protecting Nonprofits from Catastrophic Cash Flow Strain Act, the organization would only pay $20k. While still a challenge, that amount would be more manageable.

How CLA can help

Flexible cash flow planning has never been more important for nonprofits. CLA helps nonprofits with financial modeling and planning, evaluating the impact of workforce changes, and budgeting. We can also help you navigate PPP forgiveness questions and applications.

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