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Employment Taxes - Reimbursement Payment Option

What is the reimbursement payment option?

Nonprofit organizations that are exempt from federal unemployment taxes under Section 501(c)(3) of the Internal Revenue Code, government entities, Indian tribes, and churches/religious organizations that voluntarily elect to participate in the Unemployment Insurance Program are offered an alternative method of paying for unemployment insurance: the reimbursement payment option, a form of "self-insurance." In lieu of paying taxes on a quarterly basis, you reimburse the Department of Economic Security for your proportionate share of the amount of unemployment benefits it pays to your former workers.

You may choose the reimbursement payment option within 30 days of the date you are notified of your liability for unemployment insurance coverage as an employer by completing and returning the form enclosed with the notification. If you do not return the form, your account will be established on a tax-rated basis. Your choice remains in effect for at least three calendar years and may be changed by filing a written application at least 30 days prior to the beginning of the fourth or any subsequent year.

What factors should be considered before choosing the reimbursement payment option?

  1. This option is generally more advantageous for small employers with stable employment; the tax-rated basis is usually more advantageous for large employers, who tend to have a higher rate of employee turnover, or employers of any size that have unstable employment.
  2. Reimbursement payments will vary depending on the number of former employees who are receiving unemployment benefits. With this method, it is difficult to estimate costs. In contrast, tax-rated employers can more accurately estimate unemployment costs because their tax rates remain constant for a complete calendar year.
  3. Employers who have elected the reimbursement payment option may not be relieved of charges for benefit payments for any reason. This includes cases when former employees are paid benefits after a disqualification for quitting or discharge, in cases where they are paid benefits after subsequent employment, and certain other circumstances. Although tax-rated employers may be relieved of charges for specific individuals, the actual cost of the benefits paid to those individuals is shared by all tax-rated employers.

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