National Conference on Public Employee
Retirement Systems (NCPERS) 2014
Annual Conference
What You Don’t Know
About Social Security
April 29, 2014
Speaker: Maryann Motza, PhD
Principal, ATaC, LLC.
Caveats:
Who I am and am not representing and
What I will and will not discuss today
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I am not here speaking on behalf of the State of Colorado or in my
capacity as Colorado’s State Social Security Administrator.
I am not here speaking on behalf of the Public Employees’ Retirement
Association of Colorado nor of its Board of Trustees, even though I am
currently the Vice Chair of that Board.
I will not be addressing the benefit or funding side of Social Security
(or Medicare) coverage of state and local (public) employees.
I will be addressing information about Social Security and Medicare
that is often overlooked by public employers and pension system
administrators related to FICA compliance, including areas that are
now being targeted by the IRS.
What are Section 218
Agreements?
How did state and local
government FICA coverage
develop and why is it different?
Why should NCPERS members and Trustees care?
3
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History of State and Local Social
Security and Medicare Coverage
1935: Social Security first created. State and local government employees
are not eligible to participate due to the Constitutional question regarding
the power of the federal government to tax sovereign entities, i.e., the
states. (10th Amendment)
1950: Many government employers did not have their own retirement systems
so the U.S. Congress amended the Social Security Act by adding Section 218 to
allow states to voluntarily enter into agreements with the Social Security
Administration to extend Social Security coverage to state & local government
employees in their respective states. Thus, voluntary Social Security (and,
later, Medicare) coverage is governed by “Section 218 Agreements.”
1951: Voluntary Social Security coverage available for state and local
government employees for those NOT in a public retirement plan (called
“Absolute Coverage Groups”).
•
Under federal law (Section 218 of the U.S. Social Security Act), each state’s
Governor was charged with implementing the voluntary coverage
agreements on behalf of their state and its political subdivisions.
Continued on next page
4
History – More Key Dates
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State enabling legislation delineated how each state wanted to apply the U.S.
Social Security Act (within federal guidelines).
Both “mandatory” and “optional” exclusions apply to Section 218 coverage
agreements.
1954—Voluntary coverage for those in a public retirement plan via a referendum process.
1965—Medicare created and added to coverage for employees under a Section 218
Agreement.
April 20, 1983—218 Agreements are now irrevocable. State & local governments can no
longer opt out of all or part of their Section 218 Agreements with the SSA.
•
•
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52 (all 50 states plus the Virgin Islands and Puerto Rico) such agreements entered
into with SSA (most in the early 1950’s). Modifications to the State’s “master” 218
Agreement are used to add or change coverage for the sate and its political
subdivisions. Dissolutions are filed by the State Administrator to notify SSA that a
public employer no longer exists.
NOTE: This process cannot be used by a governmental entity as a means to get
out of a Section 218 Agreement.
What was once “voluntary” is now a permanent, binding agreement between the
parties.
April 1, 1986—Mandatory Medicare for new hires.
January 1, 1987 – IRS became the direct collection agent. State Administrators no longer
perform that function.
5
History – More Key Dates (contd)
• July 2, 1991—Mandatory Social Security for
•
those NOT already covered by 218 or in a FICA
equivalent plan.
Amendment to federal laws via the Omnibus
Budget Reconciliation Act of 1990 called
“Mandatory Social Security”
• If not already covered by a Section 218 agreement
• Still excludes government employees who are
members of a FICA equivalent retirement plan
(“Qualifying Plan”)
NOTE: Different from qualified public pension plan.
6
Continuing
Employment
Exception
FICA
Replacement
Plan
Terminology . . . Or,
at least, some of it!
Public
Officer
Mandatory Social
Security
Modification
Independent
Contractor
Mandatory
Exclusions:
WEP & GPO
Common Law
Standard
Medicare
Qualified
Government
Employment
Optional
Exclusions
Non-covered
employment
Dissolution
Retirement
System Ineligibles
7
Semantic Issues
Section 218 Agreements that were entered into prior to those dates
still contain language to the contrary. Thus, you cannot interpret
Section 218’s independently of subsequent changes to federal (and
state) laws. Legal opinions and interpretative documents issued
by the State Attorney General’s Office or Social Security
Administration are vital to proper interpretation of the
agreements.
•
Some things that were “optional” exclusions under a Section 218
Agreement now must be “mandatorily” covered under Social
Security, unless employees are covered by a qualifying FICA
replacement retirement system.
But, “mandatory” doesn’t mean Social Security and/or Medicare is
mandated for everyone in state and local government.
•
•
What used to be “voluntary” is now required, yet “mandatory”
doesn’t mean it’s required for everyone.
State and local government employers have a minimum of 500
possible compliance scenarios for their employees.
8
Federal or State Law?
Federal law governs determinations involving coverage of State and local
government employees. The interpretation or application of state laws are
resolved by the authorized legal officers of the State (e.g., State Attorney
General) in accordance with applicable State and local laws, regulations and the
State court decisions.
Federal law applies to the
following:
 Does an employeremployee relationship
exist?
 What is the identity of the
employer?
 Are earnings wages?
 What are emergency
services?
 What are student services?
State law applies to the following:
 Who is an officer of a state or political
subdivision?
 Is an entity a political subdivision?
 What is the legal status of a new entity?
 Is a function governmental or
proprietary?
 Is a position under a retirement system?
 Which employees are eligible for
membership in a retirement system?
 Who is an employee for purposes of
retirement system participation?
9
All Levels of Government Have Roles
STATE & LOCAL
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State Administrator
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Act as bridge between state, local, and
federal agencies.
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Maintain files of changes to coverage
agreement and all relevant documents.
Representative of the Governor as a
party to the voluntary coverage
agreement.
Request coverage for employees.
Social Security Administration
(SSA)
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Prepare changes to coverage
agreement.
Public Employer (e.g., both state and local
governments)
•
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FEDERAL
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Maintain employees’ record
of earnings.
Approve changes to
coverage agreements.
Internal Revenue Service (IRS)
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Comply with coverage provisions in any
changes to the coverage agreement.
Withhold Social Security and Medicare
taxes as appropriate and/or provide a
public pension plan for employees.
Maintain and interpret
coverage agreements.
•
Assure proper reporting and
collection of Social Security
and Medicare taxes and
compliance with public
pension plan requirements.
Provide public tax guidance.
10
10
Mandatory Medicare
•
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Some employees of governmental entities are not covered by Section
218 Agreements, but are still required to pay into Medicare (but NOT
OASDI) while others are not required to pay into either OASDI or
Medicare. Why?
ANSWER: They are “mandatorily” covered by Medicare under what is
called Medicare Qualified Government Employment (MQGE). MQGE
applies to services of state and local government employees subject to
Medicare (HI only) tax but not to Social Security tax. Effective since
April 1, 1986.
Those excluded from Medicare can only obtain such coverage via a
Modification to the State’s Section 218 Agreement granting
Medicare-only coverage to eligible employees. A referendum election
must be conducted by the State Social Security Administrator. SSA
must approve the Modification to the State’s Section 218 Agreement
11
Exclusions from §218 Coverage
Mandatory Exclusions
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•
•
•
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Services of employees who are hired to relieve them from
unemployment.
Services performed in a hospital, home, or other institution by a patient
or inmate.
Covered transportation services.
Emergency services (after January 1, 1968. Before this date these
services could be excluded as an optional exclusion.
Service other than agricultural labor and student services which would
be excluded from coverage if performed for a private employer. This
generally applies to certain categories of visa holders, such as (f)(1),
(j)(1), (m)(1), and (q) (1).
Caution: Mandatory exclusions apply to voluntary Social Security coverage
situations (through a Section 218 Agreement) and should not be confused
with the different set of exclusions that applies to mandatory Social Security
coverage situations
12
Section 218 Optional Exclusions
• Elective positions
• Part-time positions
• Positions Compensated on a Fee Basis
• Agricultural Labor
• Student Services
• Services Performed by Election Officials and
Workers
CAUTION: Some “optional exclusions” under
Section 218 Agreements are now subject to
“mandatory Social Security” because of OBRA
1990 (effective July 2, 1991).
13
Mandatory Social Security and
Mandatory Medicare Exclusions
Under Section 210(a) of the Social Security Act, the following categories of
employees are not subject to mandatory Social Security coverage, even if
they are not covered by a public retirement system. The same exclusions apply
to the mandatory Medicare tax even though the services are performed by an
employee hired after March 31, 1986.
•
•
•
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Services performed by individuals hired to be relieved from
unemployment.
Services performed in a hospital, home or other institution by a patient or
inmate thereof as an employee of a state or local government.
Services performed by an employee hired on a temporary basis in case of
fire, storm, snow, earthquake, flood or similar emergency.
Services performed by election officials or election workers paid less than
the calendar year threshold amount mandated by law, unless a Section
218 Agreement covers election workers.
Continued on next slide
14
Mandatory Social Security and Mandatory
Medicare Exclusions – contd.
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•
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Services in positions compensated solely by fees that are subject to selfemployment tax (SECA), unless a Section 218 Agreement covers these
services.
Services performed by a nonresident alien temporarily residing in the
U.S. holding an F-1, J-1, M-1 or Q-1 visa, when the services are performed
to carry out the purpose for which the individual was admitted to the U.S.
Services performed by students enrolled and regularly attending classes
at the school, college or university where they are working, unless a
Section 218 Agreement covers student services.
Services that would be excluded if performed for a private employer
because the work is defined as employment under Section 210(a) of the
Social Security Act, unless a Section 218 Agreement covers certain
agricultural services.
15
Impact of Mandatory Social Security on
Section 218 Optional Exclusions
Optional exclusions that must now be covered by either full
FICA (under mandatory Social Security provisions, i.e., under
a public retirement system or by paying full FICA without a
Section 218 Agreement). Optional exclusions can also be
covered by full FICA by modifying the original Section 218
Agreement to, instead, include the coverage groups under
Social Security/ Medicare. The coverage groups that are
affected are:
1.
Elective positions.
2. Part-time positions.
3. Fee-based positions.
16
Impact of Mandatory Social Security on Section 218
Optional Exclusions – contd.
Optional exclusions that may continue to be excluded from coverage even
if they are not under a public retirement system are:
1.
Agricultural labor (if their services would be excluded if
performed for a private sector employer).
2.
Student services (if their services would be excluded if performed
for a private sector employer).
3.
Services performed by election officials or election workers if
they are paid less than $1,600 in the calendar year that began
January 1, 2014.
Notes: The dollar threshold was different for prior years and is updated annually
by the Social Security Administration. If the threshold amount is exceeded, FICA is
owed from the first dollar paid that calendar year.
If the Section 218 Agreement does not exclude election workers from coverage, or
does not provide a threshold for coverage, social security and Medicare taxes
apply from the first dollar paid. If the entity is not covered under a Section 218
Agreement, the rules for mandatory social security and Medicare under Section
210(a)(7)(F) of the Social Security Act apply.
17
Determining the Correct Coverage
In general, to determine the correct coverage for a group of employees, a
government employer must review the following:
•
If a Section 218 Agreement applies:
1. When did the state voluntarily enter into a Section 218
Agreement to elect social security coverage for a particular
political subdivision?
2.What optional exclusions and what coverage groups were listed
in that Agreement or later modification?
3. Does the political subdivision have more than one modification?
4.Did the state or political subdivision terminate voluntary social
security coverage, in its entirety or with respect to any coverage
group(s), before April 20, 1983?
5. Has the state elected to provide Medicare-only for a particular
entity?
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Determining the Correct Coverage – cont.
•
If not covered by Section 218:
1.Does the state or political subdivision have any employees who
were hired prior to April 1, 1986, and are exempt from
mandatory Medicare?
2.Does the state or political subdivision have a public retirement
system?*
If so, employees who are qualified participants in the public
retirement system are not subject to mandatory Social Security
coverage that began July 2, 1991.
* The term “public retirement system” (or “FICA replacement plan”) refers
to a retirement system administered by a state, political subdivision, or
instrumentality thereof that meets the requirements of section
3121(b)(7)(F) of the IRC. See Revenue Procedure 91-40 in the Appendix to
IRS Pub. 963. For section 218 purposes, it is irrelevant whether the
retirement system meets the minimum benefit standards for a qualified
plan under the Employee Retirement Income Security Act (ERISA). See IRS
Pub., Chapter 6.
19
Referenda Overview
There are two major categories of Section 218
Modifications that require referendum elections:
1. Full FICA -- both Social Security (Old Age-SurvivorDisability Insurance, “OASDI”) and Medicare
2. Medicare-only (for government employees hired
before April 1, 1986, who are exempt from Medicare
and are covered by a FICA replacement public pension
plan).
NOTE: Referendum elections can only be conducted by
the designated State Social Security Administrator in
each state. For the list of State Administrators, see:
http://www.ncsssa.org/statessadminmenu.html.
20
Referenda Overview – contd.
There are two types of coverage groups for state and local
government employees who are brought under full FICA via
a Section 218 Agreement:
1. Absolute Coverage Groups composed of employees in
positions not covered under a retirement system, and
2. Retirement System Coverage groups composed of
employees in positions covered by a retirement system.
The Act gives each State the right, within the limits of
State and federal laws, to decide which coverage groups
are to be included under its Agreement and any
modifications to the Agreement.
All states, the Virgin Islands, Puerto Rico, and interstate
instrumentalities can conduct majority vote referenda.
21
Majority Vote Referendum
A referendum in which if a majority of the eligible
members of the retirement system* (NOT a majority of
those voting, unless all those voting are actually all of the
eligible members of the retirement system) vote in favor of
coverage, the State may then submit a modification to its
Agreement to extend coverage to that group.
All States are authorized under Section 218(d)(3) of the Act
to conduct majority vote referenda for coverage.
* Or a majority of the Medicare-exempt employees, if a
Medicare-only referendum is being conducted.
22
Divided System Retirement Referendum
• The U.S. Social Security Act authorizes 23 named states
and all interstate instrumentalities to divide a
retirement system established by the state, a political
subdivision thereof, or an interstate instrumentality into
separate coverage groups based on whether the
employees in positions under that system want Social
Security coverage.
NOTE: An interstate instrumentality is an independent
legal entity organized by two or more States to carry out
one or more governmental functions. For purposes of a
Section 218 Agreement, an interstate instrumentality has
the status of a State.
• These “divided vote” states may choose between a divided
system vote and a majority vote referendum.
23
What happened in Missouri
concerning their Section 218
Agreements and their public
pension systems?
What has occurred since then and
why it matters to NCPERS members
and pension trustees.
24
The “Missouri Problem”
• A Federal Section 218 Task Force
for Missouri School Districts
report, issued in 2009, identified
a number of major Social
Security coverage and taxation
issues that had developed in the
Missouri schools, including:
• Some employees paying
Social Security who should
not have been.
• Other employees should have
been paying Social Security,
but were not.
25
Congress Orders a Study
•
•
In 2009, the U.S. House Ways and Means Committee asked the
Government Accountability Office (GAO) to examine how Social
Security coverage for state and local government (“public”)
employees is being administered by the federal government.
The GAO report arose from concerns about how the voluntary
Social Security and Medicare (Section 218) coverage agreements
were being administered throughout the country.
• Congress was concerned problems identified
in the State of Missouri might be widespread
nationwide.
26
The GAO Report
• Nationwide 71 percent of state and local
•
•
government earnings were covered for Social
Security (both via 218 Agreements and
mandatory Social Security).
Social Security covered earnings total $527.5
billion.
Social Security-covered earnings range from a
low of one (1) percent in Ohio to 99 percent (in
both New York and Vermont).
NOTE: No state has 100% of its public
employees covered under Social Security.
27
GAO Report – contd.
• The GAO report identified a number of concerns
and areas for improvement to facilitate tax
compliance by state and local governments.
• Proper Social Security and Medicare or public
pension system coverage of public employees is
vital to providing for their retirement (and
disability or survivors’) security.
• Accurate assessment of FICA taxes by the IRS is
critical to that process.
• The GAO will do a follow-up study five years after
issuance of its 2010 report – or during 2015.
28
IRS Section 218 Assessment Project
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•
•
•
Soon after Congress ordered the GAO study, the IRS’s Federal-State-Local
Government (FSLG) section initiated a process to find similar problems in
other states, referred to as the Section 218 Assessment Project.
The IRS is using the information obtained from that survey, and subsequent
follow-up they have been doing in the states and territory that appear to have
“Missouri-like” characteristics, to build a separate repository for each state of
the Social Security, Medicare, and pension system coverage.
The assessment project is continually being refined as the IRS gains new
information from their compliance efforts with all state and local governments
which will be increasing in the upcoming years.
The IRS is currently updating the list of compliance risks and expects the new
list to be available in approximately 5 months or so.
• If you’d like to know what is on the revised list when the IRS releases it,
contact me (see last slide for contact information).
NOTE: It is not widely published and is not posted on the IRS website.
29
Charter Schools
•
The IRS is working closely with State Social Security
Administrators and the U.S. Social Security Administration
(SSA) in a few states on this highly complex issue.
1.
2.
•
The primary issue the IRS has encountered in this area is whether
or not the charter school is a governmental entity.
A secondary issue is whether the charter school is covered by the
local school district’s Section 218 Agreement/Modification to
the State’s Master Agreement, or if the charter school requires
its own Modification/Agreement.
This is a highly complex area of the law and the IRS has only
scratching the surface so far. They are working to ensure
accurate and consistent application of the law.
30
Employer Pick-up Issues
Section 414(h)(2)
•
•
Generally, employee contributions to retirement plans must be
included in both federal income taxable wages and in FICA taxable
wages in the year of contribution. However, IRC § 414(h)(2)
provides an exception for § 401(a) qualified plans established by
certain State and local government entities. If an employer meets
the requirements of § 414(h)(2), the contributions will be treated as
employer contributions for both federal income tax purposes, and
for FICA tax purposes unless the contributions are deducted from
the employee’s wages subject to a salary reduction agreement.
Internal Revenue Code Section 3121(v)(1)(B) includes in wages any
amounts treated as employer contributions under § 414(h)(2) where
the employer picks up the contributions pursuant to a salary
reduction agreement (whether evidenced by a written instrument
or otherwise).
Continued on next slide
31
Employer Pick-up Issues –
Section 414(h)(2) – contd.
•
•
•
Entities making 414(h)(2) contributions to their retirement plans via
salary reduction, and who are covered by Social Security via a Section 218
Agreement, would be liable for both Social Security and Medicare taxes
on those contributions.
Entities making these types of retirement plan contributions for
employees who were hired after March 31, 1986, and who do not have
Section 218 modifications, would be liable only for Medicare taxes on
those contributions if the retirement plan was Social Security equivalent.
If the retirement plan was not Social Security equivalent, the contribution
amount would be subject to both Social Security and Medicare taxes per the
mandatory rules.
The question of “What constitutes a Salary Reduction Agreement?” is
critical. The IRS has encountered situations where taxpayers do not include
the employee contribution to the retirement plan in FICA wages because
they maintain the contributions are mandatory, thus no salary reduction
agreement exists. This position has been litigated and defeated by the 10th
Circuit Court of Appeals in the Shalala case.
32
Government Entity Restructuring
•
•
•
Given the current budgetary limitations we are working under, there
is increasing pressure for government entities to find more cost
effective means to deliver the required services.
For example, a variety of factors ranging from declining student
enrollment to budgetary considerations have led to an overall drop in
the number of school districts across the country. In many instances
a Section 218 referendum may be necessary when a new entity is
formed for Social Security and/or Medicare tax to be legally withheld
from employees’ compensation. If a state has not had a Section 218
modification in several years, this may be indicative of a potential
compliance problem.
FSLG is currently following up with the State Administrators to
determine if the required referendums have been held.
33
Mandatory Medicare Coverage
• The IRS has found problems in this area
more commonly in relation to police and
firefighter positions where Medicare tax is
not being withheld on payments made to
anyone hired on or after April 1, 1986.
34
Part-time Positions
•
•
•
Incorrect Social Security and Medicare tax withholding may occur
when an entity improperly interprets the Section 218 Agreement in
regard to part-time exclusions. To make a proper determination, the
IRS will research the applicable state law to determine what the
definition of part-time includes and to which position(s) the exclusion
may apply.
The IRS has found that 24 of 52 states have a part-time exclusion
included as part of their Section 218 Agreement. Of those 24, only 12
provided a definition of part-time while 15 stated the exclusion was
made on an entity by entity basis and 7 stated it was for specific
positions.
This is an example of a risk where one size does not fit all. The IRS
needs to accurately document the provisions of the Section 218
Agreement and state law as it existed on the applicable date to
ensure accurate and consistent application of the law.
35
Police and Firefighter Positions
• According to the IRS, the primary Section 218 risks
involving police officer and firefighter positions are
similar to the risks discussed in regard to the public
schools positions (discussed on the next slide).
•
This is the same problem identified in the State of
Missouri.
The risk arises when governmental entities
expand retirement system coverage to include
absolute coverage positions. The IRS is working
with the State Administrators to ensure that
entities do not erroneously discontinue Social
Security coverage in these situations.
36
Public School “Teacher” Positions
• The greatest compliance risk discovered during the
Section 218 assessment project concerns states
improperly discontinuing Social Security withholding on
absolute coverage positions due to expansion of pension
plan coverage.
This is the same problem identified in the State of
Missouri.
•
The potential for this particular issue exists in states that have
pension plans that are not covered by a system-wide Section 218
modification. So far, the IRS has identified 25 states and one
territory that have these specific attributes. That does not
necessarily mean that a problem exists. The IRS is following up with
the State Administrators to evaluate the Section 218 attributes in
these states.
37
Qualifying FICA Replacement Plans
• In today’s economic climate many states are modifying
their pension plans to such an extent they may,
inadvertently, no longer qualify as a FICA replacement
retirement system. In this situation, with no Section 218
Agreement, employee compensation would then become
subject to the mandatory Social Security provisions.
•
In 1990, Congress amended the Internal Revenue Code and the Social
Security Act, making Social Security and Medicare coverage mandatory
for most state and local government employees who were not covered
by a qualifying FICA replacement public retirement system or a Section
218 Agreement. This law became known as mandatory Social Security,
which is different from mandatory Medicare. Medicare is mandatory
regardless of the existence of a retirement system, but Social Security is
mandatory only in the absence of a retirement system or Section 218
Agreement. However, a qualifying FICA replacement retirement
system must provide a retirement benefit to the employee that is
comparable to the benefit provided under the Old-Age portion of the
Old-Age, Survivor, and Disability Insurance (OASDI) program of Social
Security.
38
Retirement Plan Types
• Many state and local governments are considering, or
•
•
have enacted, retirement plans other than, or in addition
to, the traditional defined benefit and/or defined
contribution plans.
FSLG specialists have become more aware of “401-k like”
plans being implemented or considered in several states.
The IRS expects to see many of these hybrid plans in
future years.
FSLG has also found numerous instances concerning
ineligible employers (for example, housing authorities)
participating in 403(b) plans.
39
Student Services
• IRS research has found 33 states opted to exclude
student services from FICA coverage under the
State’s Section 218 Agreement.
• 16 states elected to provide Social Security and
Medicare coverage for services performed by
students in certain schools.
• 3 states have virtually no Section 218 coverage of
students.
40
Common Mistakes by Public
Employers Found by the IRS
•
•
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•
•
•
•
•
•
•
•
Totals shown on Forms 941 or Form 944 do not reconcile with totals on Forms
W-2 and W-3, or between these forms and the accounting records.
Forms W-9 and W-4 are not being used or are not being updated when
necessary.
Failure to backup withhold on payments to vendors when required.
Failure to correctly complete or file Forms 1099.
Failure to apply accountable plan rules to reimbursements and allowances.
Incorrect or missing employment tax deposits.
Failure to follow electronic filing requirements.
Treatment of certain groups of workers as independent contractors, rather
than as employees.
Failure to pay and withhold Medicare-only tax on rehired annuitants.
Failure to include taxable noncash benefits in employee wages.
Failure to correctly apply withholding rules to election workers and public
officials.
41
How might your pension fund
be impacted by “the Missouri
problem”?
42
Why should NCPERS member systems be
concerned?
• States (and local pension plans) continue to change laws
to address their pension funding liability issues, but . . .
• State law changes to retirement systems in your state
can put your retirement systems and public employers
at risk if they are not compliant with federal law.
• Employers who are paying into non-qualifying FICA
retirement plans are still required to pay into Social
Security/Medicare and can be required to pay back-FICA,
penalties, & interest, if audited by the IRS.
• And, as we know, the IRS is increasing it’s compliance
activities . . .
43
Why should NCPERS member systems be
concerned? -- contd
• Employers with similar situations are given different
•
advice about who should pay FICA taxes and who is
entitled to benefits. The erroneous advice comes from a
variety of sources, including the IRS, SSA, State Social
Security Administrators, and private tax advisors and
attorneys, thus resulting in inequitable and unfair
treatment. Employees can be adversely affected if they
receive a public pension; they may believe they will
receive full Social Security benefits at retirement, but will
discover that they are subject to Windfall Elimination
Provision (WEP) & Government Pension Offset (GPO).
Employers who do not pay Medicare-only taxes for
employees hired on or after April 1, 1986, can be
required to pay back-taxes, penalties, & interest, if
audited by the IRS.
44
Why Public Pension Plans and Trustees
Should Care
Possible Consequences of Noncompliance
•
•
•
•
Affiliated employers who should be paying into Social Security under a Section
218 Agreement and discontinued doing so to join your pension plan may be
forced to disaffiliate from your plan.
Employers who are paying into non-qualifying retirement plans are still
required to pay into Social Security/Medicare and can be required to pay backFICA, penalties, & interest, if audited by the IRS.
Employers with similar situations are given different advice about who should
pay FICA taxes and who is entitled to benefits. The erroneous advice comes
from a variety of sources, including the IRS, SSA, SSSAs, and private tax
advisors and attorneys, thus resulting in inequitable and unfair treatment.
Employees can be adversely affected if they receive a public pension; they may
believe they will receive full Social Security benefits at retirement, but will
discover that they are subject to WEP & GPO.
Employers who do not pay Medicare-only taxes for employees hired on or after
April 1, 1986, can be required to pay back-taxes, penalties, & interest, if audited
by the IRS.
45
WARNINGS!
•
•
•
•
•
Neither the Government Accounting Standards Board (GASB)
standards nor the Government Accountability Office’s (GAO)
“Yellow Book” test for FICA compliance.
Do NOT ASSUME anything about this area, especially that everything
is o.k. even after a “clean” audit finding.
Key phrases need to be considered, such as: “covered” employees’
definition (under Social Security 218 Agreements AND/OR public
pension systems).
Collective bargaining agreements can promise things that violate
FICA laws.
Definitions vary, depending on which law (Social Security Act or
Internal Revenue Code) control in some cases, such as part-time
employees, fee-based employees, and students.
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Summary
• State & local governments’ FICA & pension requirements
•
•
•
vary by employer & employee.
In the 1990’s Colorado documented there are AT LEAST 500
possible compliance scenarios. That was before many of the
additional federal requirements went into effect.
Information cannot be addressed by using solely federal
laws (U.S. Social Security Act and Internal Revenue Code) –
state enabling legislation and public pension laws as well as
legal opinions and interpretative documents also apply!
BEWARE!! Due to differences in how states enacted Section
218, neighboring states may be polar opposites in terms of
Social Security coverage, such as Michigan and Ohio.
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In this area, ignorance is NOT bliss . . .
Don’t assume you know the correct solution . . .
until you identify the true problem!
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Contact Information
ATaC, LLC. -- Avoid Tax Consequences
Private, independent consulting company that provides
advise and assistance to state and local governments
and public pension systems nationwide regarding
federal employment tax and pension laws’ compliance.
www.avoidtaxconsequences.com
•
•
Dr. Maryann Motza, Partner: 719-651-3291;
email: [email protected]
Mr. Dean J. Conder, Partner: 720-266-7209;
email: [email protected]
For further information about this topic, see: Maryann Motza and
Dean J. Conder. “Common Errors in State and Local Government FICA
and Public Retirement System Compliance.” Government Finance
Review, August 2009.
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