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Retired Military Finances 201: Can You Use Unemployment Benefits to Start a Business? Thumbnail

Retired Military Finances 201: Can You Use Unemployment Benefits to Start a Business?

Managing Your Finances

Millions of Americans have found themselves without a job as unemployment rates rose to 14.7 percent in April.1 Even as states begin loosening stay-at-home orders and allowing businesses to resume operation, not all who were laid off weeks ago have a job to return to. Industries like hospitality, travel and entertainment have taken some of the hardest hits, with events canceled or postponed through the end of 2020.

If you’ve recently lost your job amidst the pandemic, you may be receiving unemployment benefits (although, depending on the state, your military retirement may make you ineligible). And through the CARES Act, eligible individuals may be receiving an additional $600 in benefits per week for up to four months.2 With time away from work, maybe you’ve reflected and reevaluated your current career. If you’re thinking of moving toward self-employment and starting your own business, it could be tempting to put your unemployment benefits toward this exciting endeavor.

What does the law allow in regards to unemployment benefits, and is this an option you should consider? The answer is, it depends.

A Brief Introduction to Self-Employed Assistance (SEA)

Introduced in 2012 as part of the Middle Class Tax Relief and Job Creation Act, the self-employment assistance program was established to “provide unemployed individuals with an allowance in lieu of [extended unemployment compensation] to establish a business and become self-employed.”3 While SEA was introduced at a federal level, the decision to establish a SEA program and utilize the funding has always been up to individual states.

According to the Department of Labor, funds available to eligible individuals would be considered a SEA allowance - offered in lieu of regular unemployment benefits. Last reported in November 2019, the only states offering the program were Delaware, Mississippi, New Hampshire, New York and Oregon.4 However, if you are filing for unemployment and interested in the option, you’ll want to ask if your state offers this program as well.

SEA programs are designed specifically for those looking to start their own business, meaning they change the eligibility requirements typically needed to secure unemployment benefits - such as actively seeking out outside sources of income and applying to jobs.3 Those who are interested in a SEA allowance instead are encouraged to spend their time engaged in activities including entrepreneurial training, business classes and other similar endeavors. 

Using Unemployment Benefits to Start a Business

Since SEA programs are seemingly few and far between, there’s a greater likelihood that you live in an area with no designated funding in place. But if you’re planning on using your unemployment benefits plus the additional benefits provided through the CARES Act to fund your new business venture, there are a few considerations to make first.

Consideration #1: Eligibility Requirements

Every state has its own set of requirements one must follow in order to qualify for and continue receiving unemployment benefits.

According to the DOL, you typically qualify if you:

  • Are unemployed through no fault of your own (typically because there was a lack of available work)
  • Meet work and wage requirements during a “base period”5

This means that, during the COVID-19 pandemic or under normal circumstances, you can’t quit your job and collect unemployment. Through the CARES Act, however, unemployment benefits have been extended to those who are typically ineligible. These include contract workers, self-employed individuals and gig workers.

Consideration #2: Keeping Up With Your Job Search

Some states may require that you make a good faith effort to find new employment. Refusing to do so could result in a decrease or suspension of benefits. This means that if your plan is to focus all of your energy on starting a new business - meaning you turn down job offers or stop applying altogether - your eligibility status may change.

It’s important to note, however, that some states have relaxed the requirement to seek out work opportunities during the COVID-19 pandemic.

Consideration #3: Income Earned Through Your New Business

Just as you would if you accepted a job offer, you’ll be required to report any income to your state’s unemployment office. Depending on how much you’re earning from this new business venture, your unemployment benefits will decrease or stop altogether.

Taking this time away from the office may give some go-getters the push they need to become their own boss. And while it can be a rewarding endeavor as you seek to make lemonade out of life’s recent lemons, there are several considerations to keep in mind. If you’re ever unsure or worried about losing your benefits, check with your state’s unemployment office first. And if you still have questions about your financial situation and your ability to start a business, reach out to your financial advisor.

  1. https://www.bls.gov/news.release/pdf/empsit.pdf
  3. https://www.congress.gov/bill/116th-congress/house-bill/748/text
  5. https://www.congress.gov/bill/112th-congress/house-bill/3630
  7. https://oui.doleta.gov/unemploy/self.asp
  9. https://www.dol.gov/general/topic/unemployment-insurance

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