501(c)(3)s Opting Out of Paying MN Unemployment Tax
Posted 2-9-2011
501(c)(3) organizations are allowed to opt-out of paying MN unemployment tax by becoming a direct reimburser of claims. This arrangement presents some GAAP accounting issues of which participating organizations need to be aware.
Opt-out organizations are essentially self-insuring for unemployment claims. Many use a trust account service (UST for one) to manage cash flow and risk. From an accounting standpoint the arrangement is somewhat similar to a tax and insurance escrow on a mortgage. Organizations pay into the trust in amounts adequate to build a reserve to pay claims and expenses.
An organization’s cash balance in the trust is a recordable asset, and the estimated claims payable (including claims incurred but not reported) are a recordable liability. Many organizations report one net amount. In some cases the net amount will be immaterial and need not be recorded. There are additional considerations if any such payments are charged to federal programs. OMB Circular A-122 allows such payments with certain limitations.
The accounting requirements require opt-out organizations to gather adequate information at year-end to make a determination of the amount(s) to record.
For more information, please contact Tom Hodnefield, CPA, at thodnefield@hlbtr.com, or Melanie Accola, CPA, at maccola@hlbtr.com.