In reply refer
Manpower Administration
Washington. D.C. 20210

October 12, 1973

SUBJECT: Nonprofit Organizations Not Required By Federal Law To Be Covered
PURPOSE: To inform State agencies of an interpretation of Federal law   providing that the requirement, that States offer nonprofit    organizations the option to choose between contributions and reimbursement, does not apply to those nonprofit organizations not required by Federal law to be covered.
A number of States cover nonprofit organizations which Federal law does not require them to cover (those having less than four employees in at least 20 weeks) only by election.  Section 3303(e) of the Federal Unemployment Tax Act (FUTA) provides that States may permit nonprofit organizations to finance benefit costs by making payments in lieu of contributions (i.e., reimbursement), without violating the experience-rating standard.  The Assistant Secretary for Manpower has construed that section as permitting, but not requiring, States to offer nonprofit organizations, which they are not required by Federal law to cover but permit to elect coverage, the contributions-reimbursement option.

Accordingly, for nonprofit organizations covered on an elective basis only, States may (a) permit them a choice of contributions or reimbursement; or (b) require them to pay contributions and deny them the reimbursement option; or (c) require them to be reimbursers.  Nonprofit organizations which a State is required to cover by reason of Federal law must continue to be permitted to choose between contributions and reimbursement, consistent with sections 3304(a)(6)(B) and 3309(a)(2), FUTA.

All but two States now permit all subject nonprofit organizations, whether covered on a mandatory or an elective basis, the choice between contributions and reimbursement.  All States are urged to take this approach, since it will encourage nonprofit organizations, not otherwise covered because of a State's size-of-firm requirement, to extend unemployment insurance protection to their workers by electing coverage.  The workers excluded because their employers do not elect coverage are no less in need of the protection of the program than other workers who are covered.  Moreover, the closer the program comes to achieving the broadest feasible coverage, the closer to attainment will be other goals.  So long as gaps in coverage exist, qualifying requirements and benefit provisions will not be fully effective or equitable: some workers who now fail to qualify for benefits on the basis of only that part of their employment which is covered would qualify if all their employment were covered; similarly, some workers who do qualify would be eligible for benefits representing a more accurate replacement of their actual wage loss if wages from all their employment were considered.  If small nonprofit organizations not required by Federal law to be covered are denied the opportunity to choose between contributions and reimbursement, clearly the effect would be to discourage at least some such organizations from electing coverage.

The requirement in the FUTA that larger nonprofit organizations, which must be covered as a condition for tax credit, be provided an opportunity to choose between contributions and reimbursement stems from congressional concern for such organizations, because they are so often dependent upon charitable contributions.  Nonprofit organizations which are not required by Federal law to be covered are dependent upon charitable contributions to the same extent as those required by State law to be covered.

The same policy considerations that dictated that larger nonprofit organizations should be afforded the choice between reimbursement and contributions apply equally to small nonprofit organizations covered on an elective basis.  The determination of whether a particular employing unit should be entitled to the contributions-reimbursement option should most reasonably depend, as it does in most States, upon whether it is a nonprofit organization of the type described in section 501(c)(3) of the Internal Revenue Code (and exempt from income tax under section 501(a) of the Code), not on the number of individuals it has in its employ.

Acting Associate Manpower Administrator
    for Field Direction and Management