COVID-19: What Nonprofits Need to Know About Unemployment Under the CARES Act

One of the essential components of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27, 2020, is enhanced unemployment benefits for individuals who are out of work during, and because of, the COVID-19 pandemic. These benefits are provided through state unemployment agencies, which administer and pay claims and are reimbursed for enhanced CARES Act benefits from the federal unemployment fund.

Nonprofits, defined in Section 501(c)(3) of the Internal Revenue Code, generally fall into one of three unemployment insurance categories: self-insured, state-participating, and exempt. The CARES Act affects nonprofits and their displaced employees in each of these categories differently.

Self-Insured: Nonprofits can elect to self-insure rather than pay unemployment taxes to the state. Self-insured nonprofits are charged by and reimburse the state on a dollar-for-dollar basis for approved claims. These employers expect that, through sound management practices, their expenses for reimbursing unemployment claims will be less than the state taxes they would be required to pay for coverage through the state unemployment fund. Claimants apply for state unemployment benefits in the usual manner and the state determines eligibility. If approved, they receive weekly benefits calculated under the state formula.

In passing the CARES Act, Congress recognized that self-insured employers will likely be unduly burdened by an unexpected increase in the volume of unemployment claims caused by the pandemic. Accordingly, under Section 2103 of the CARES Act, self-insured nonprofits are entitled to reimbursement from the federal government for 50 percent of the amounts they pay to reimburse the state for approved unemployment claims made against them. These federal reimbursement payments are made to the state, not directly to the self-insured nonprofit. Rather than the state only billing the employer for 50 percent of the amount of paid claims, the US Department of Labor has recently clarified that the self-insured nonprofits must pay the state in full for claims and then await the 50 percent reimbursement from the state.

Under Section 2104 of the CARES Act, approved claimants receive an extra $600 per week through July 31, 2020, in addition to the regular state unemployment amount to which they are entitled. This extra $600 per week, known as Pandemic Unemployment Compensation (PUC), is 100 percent funded by the federal government, and the self-insured employer is not responsible for any additional payment because of it.

State-Participating: Nonprofits can elect to pay state unemployment taxes, and those that do are treated like other covered businesses. Taxes are assessed quarterly based on the employer’s claims history, and claimants approved for unemployment benefits are paid from the state unemployment fund. In addition to regular unemployment benefits, claimants receive the extra $600 weekly PUC benefit under Section 2104 through July 31, 2020. The state-participating employer is not responsible for any part of this extra $600 payment or any additional taxes because of it.

Exempt: Some nonprofits, such as qualifying religious organizations, are exempt from unemployment laws, and their employees are not eligible for unemployment compensation.

Under Section 2102 of the CARES Act, individuals who are not eligible for regular state unemployment benefits may be eligible for federally funded Pandemic Unemployment Assistance (PUA) benefits. In order to qualify, the otherwise ineligible individual must certify that he or she is available to work and is not working because of one of 11 COVID-19-related reasons that are defined in the act. These reasons include being diagnosed with COVID-19, caring for a household member with COVID-19 or a child whose school is closed as a direct result of the pandemic, and being unable to go to work because the individual’s employer is shut down as a direct result of the COVID-19 public health emergency. Employees of exempt nonprofits may qualify for PUA benefits if they have a COVID-19 qualifying reason. They apply to the state, which determines eligibility.

Claimants eligible for PUA benefits receive the amount they would have received if they had been eligible for state unemployment benefits, but not less than the federal minimum weekly unemployment amount. In addition, through July 31, 2020, qualified recipients also receive the additional $600 per week PUC benefit. The entire amount of PUA benefits, i.e., the amount calculated using the state formula and the additional $600 per week, is federally funded. The exempt employer is not subject to any tax and is not responsible for paying any part of PUA benefits.