In reply refer
to MUL

Manpower Administration
Washington., D.C. 20910

November 14,1972

SUBJECT:  Maximum Amount of Bond, Deposit or Other Safeguard that May Be Required of Nonprofit Organizations Electing to Make Payments in Lieu of Contributions
PURPOSE: To inform State agencies of an nterpretation of sections 3304(a)(6)(B) and 3309(a)(2), FUTA as such section's relate to bond, deposit and other safeguards required by State law of nonprofit organizations electing reimbursement.

Sections 3304(a)(6)(B) and 3309(a)(2) require, as a condition for a State's employers to receive tax credit, that a State law provide that those nonprofit organizations which are required to be covered (by reason of section 3304(a)(6)(A)) must be permitted to elect to make payments in lieu of contributions. Section 3309(a)(2) also provides, "the State law may provide safeguards to ensure that organizations so electing will make the payments required under such elections."

It is clear that in requiring States, as a condition for tax credits to provide nonprofit organization's with the right of electing either reimbursement or contributions, Congress did not intend to place on an organization that elected the reimbursement option a greater potential obligation than the organization would have if it paid contribution's. (The obligation may, of course, be greater if the amount of reimbursement exceeds the amount of contributions which would be payable if the organization elected contributions, but this is the risk inherent in any such election.)

If conditions, e.g., safeguards, imposed on the right to elect the reimbursement option are such as clearly to discourage nonprofit organizations from electing that option; i.e., if they reduce substantially the advantages that may otherwise accrue from reimbursement--such conditions, in effect, remove the availability of that option. A State law containing such conditions does not meet the requirements of sections 3304(a)(6)(B) and 3309(a)(2) of the Federal Unemployment Tax Act.

Thus, the conditions imposed should not be so high as, in effect, to remove the advantages that might otherwise accrue from electing the reimbursement option. If the required amount of the bond, deposits or other safeguard, or the combined amount of all such safeguards constitutes a greater obligation for the employer than his potential liability as a contributor, it would be disadvantageous for him to elect reimbursement and, in effect, the availability of that option would be removed.

Limiting the maximum amount of a required safeguard to the amount, derived from applying (to his annual taxable payroll) the rate each individual employer would have to pay if he were a contributor, would assure that the reimbursement option would not represent a greater obligation than paying contributions. However, it is not administratively feasible to establish a limit on the safeguards a State may require of each reimbursing employer based on what the tax liability would be each year for that employer if he were a contributor.

Accordingly, the Assistant Secretary for Manpower has concluded that bonds, deposits, or other safeguards, or the combination of all such safeguards may be considered consistent with sections 3304(a)(6)(B) and 3309(a)(2), Federal Unemployment Tax Act, if the amount of such required safeguard does not exceed a percentage of his annual taxable payroll equal to the maximum rate that any employer who is liable for contributions during the year in question would have to pay under the State law.

The reason for establishing the maximum rate payable by any employer liable for contributions as the point, beyond which a safeguard requirement may be considered unreasonable is that is clearly, no nonprofit organization would if it elected contributions instead of reimbursements be liable for more than that amount. A safeguard requirement of an amount in excess of the maximum rate (applied to annual taxable payroll) for which any contributing employer would be liable would clearly negate any advantage which might accrue to an organization by electing the reimbursement option.

Where a deposit or securities are required as a safeguard, the limitation described above relates to the amount of such deposit and the value of such securities. Where a bond is required as a safeguard, the limitation described above relates to the face value of the bond, rather than the cost of the bond. If, instead of a bond, deposit, or securities, a State requires reimbursing nonprofit organizations to prepay specified sums, the amount of such prepayment may not exceed the limitation described above. If the State requires a combination of the above safeguards, the amount of such safeguards combined may not exceed the limitation described above.

Those States whose laws do not now provide a maximum limit on the amount of the bond, deposit, or other safeguards that may be required of nonprofit organizations electing to make payments in lieu of contributions should establish an appropriate limit either by law or by regulation if a regulation is authorized by the State law. Those States whose laws require bonds, deposits, or other safeguards in amounts in excess of those described above and determined to be consistent with sections 3304(a)(6)(B) and 3309(a)(2), Federal Unemployment Tax Act should seek appropriate changes in the applicable law or regulation at the earliest opportunity, to make the State law consistent with Federal requirements.


Deputy Assistant Secretary
for Manpower and
Manpower Administrator