Alabama Blanket Unemployment Compensation Tax Bond
What Is the Purpose of the Unemployment Compensation Tax Bond?
In the State of Alabama, non-profit organizations may elect to assume direct liability for their unemployment compensation payments, rather than make unemployment tax contributions. In order to take advantage of this opportunity to reduce their taxes, non-profit organizations must post a surety bond with the Secretary of the Alabama Department of Labor (ALDOL), as a financial guarantee that the organization’s unemployment obligations will be paid to former employees, no matter the state of the non-profit organization’s financial health.
Which Businesses Need the Unemployment Compensation Tax Bond?
The Unemployment Compensation Tax Bond is required under the Code of Alabama Section 25-4-51 for any non-profit organization that elects to become liable for the unemployment compensation payments, instead of contributing through the State’s unemployment tax. After electing this option, the non-profit must file the surety bond with the Secretary of the ALDOL within 30 days.
How Is the Bond Amount Determined for the Unemployment Compensation Tax Bond?
The Secretary of the ALDOL will determine the approved bond amount, which will be a percentage of the non-profit organization’s covered payroll for the four calendar quarters preceding their election to cease tax contributions.
What Do Surety Underwriters Need to Know About the Unemployment Compensation Tax Bond?
The Unemployment Compensation Tax Bond extends an attractive opportunity to non-profit organizations to reduce their total tax expense, and take control of the payment of unemployment claims. For obvious reasons, this is favorable to non-profit organizations. To surety carriers, however, this assumption of liability represents a non-trivial risk. As an example, take a non-profit organization that encounters financial difficulty and is forced to lay off employees. Layoffs in this case would trigger direct unemployment compensation payouts, potentially exacerbating the financial difficulty for the organization. (Under usual taxation, the non-profit pays unemployment also, but earlier in the form of a tax contribution to the state.) If the organization goes out of business altogether, the entire non-exempt staff would now be eligible for unemployment compensation, and that liability belongs squarely to the non-profit. This is where bond claims are likely to materialize, and the losses could be significant in the case of non-profits who become insolvent.
Although the severity of the risk is significant, the likelihood of loss appears low based on knowledgeable sources in the industry who report loss ratios less than 5% in Alabama. This is likely affected in part by the Secretary’s vetting of applicants for the direct payment option.
Given the considerable unemployment compensation expenses that could be incurred by a failing non-profit organization, surety underwriters should conduct a thorough underwriting to gain an understanding of the organization’s business model, financial health, and experience in their respective industry.
What Do Surety Claims Handlers Need to Know About the Unemployment Compensation Tax Bond?
Claims against the Unemployment Compensation Tax Bond originate from the Secretary of the ALDOL, who would tap the bond for the outstanding unemployment compensation amount.
Can a Non-Profit Organization Avoid the Bond Requirement?
Yes, non-profit organizations are able to avoid the bond requirement if they simply pay their unemployment tax bills through typical recurring contributions, thereby avoiding the requirement altogether. If they elect to pay their unemployment expenses directly, they are required to either post a surety bond or deposit an equivalent cash amount, imposing a significant capital requirement on the non-profit.
How Much Does the Unemployment Compensation Tax Bond Cost?
The price of the Unemployment Compensation Tax Bond will be a percentage of the total bond amount, as assessed by the Secretary of the ALDOL. Surety carriers typically price the bond at 3% to 15% of the total bond amount.
How Is the Unemployment Compensation Tax Bond Filed?
The original bond with seal must be delivered to the Alabama Department of Labor within 30 days of the organization’s notice to the Secretary electing to assume payment responsibility.
All documentation must be sent to the following location:
Alabama Department of Labor
649 Monroe St.
Montgomery, AL 36131
Can the Unemployment Compensation Tax Bond Be Cancelled and Do They Need to Be Renewed?
Pursuant to the Code of Alabama Section 25-14-51, the Unemployment Compensation Tax Bond for a non-profit organization must be kept in force for at least two years, and cannot be cancelled during that time. As long as the non-profit elects to continue paying claims directly instead of contributing taxes, they must renew their bond at least once every two years. This periodicity allows the Secretary the opportunity to evaluate the potential unemployment liabilities of the non-profit and potentially increase the required bond amount.