State Social Security — Publication 963

SSA Regulation 20 CFR Section 404.1204 requires each state to designate at least one state official to act for them in administering that state’s Section 218 Agreement. This official, the State Social Security Administrator, acts for the state with respect to its responsibilities for maintaining and administering the provisions of the agreement as well as the proper application of Social Security and Medicare.

The designated State Social Security Administrator (State Administrator) acts for the state in negotiations with the SSA. This includes acting for the state with respect to the initial Section 218 Agreement and modifications, the performance of the state’s responsibilities under the agreement and in all state dealings concerning the administration of the agreement. Each state’s Section 218 Agreement and Social Security Regulations 404.1204 provide a legal obligation for each state to designate an official. In many states, however, the actual day-to-day responsibilities are delegated to the staff of the designated state official.

The state is responsible for notifying SSA of any changes regarding its designated state official. That official should send a notification to the SSA Regional and Parallel Social Security offices for that state.

The extent of the State Administrators' responsibilities vary from state to state. The location of State Social Security Administrators’ offices and the extent and scope of their responsibilities are determined by each state. Details on each state are contained in the respective state’s enabling legislation, citations for which are listed in the Appendix. Frequently, a State Administrator has other responsibilities, including those related to non-218 entities. A detailed list of basic State Administrator responsibilities is available at Program Operations Manual System (POMS). Also see SSA.gov/SLGE.

For Section 218 Agreement purposes, the State Administrator:

Administers and maintains the federal-state Section 218 Agreement that governs voluntary Social Security and Medicare coverage by state and local government employers in the state;
Negotiates modifications to the original agreement to include additional coverage groups, corrects errors in modifications, conducts referendums and identifies additional political subdivisions that join a covered retirement system;
Maintains in a secured location the state’s master agreements, modifications, dissolutions and intrastate agreements;
Provides SSA with notice and evidence of the legal dissolution of covered state or political subdivision entities;
Resolves coverage and taxation questions related to the agreement and modifications with SSA and IRS;
Negotiates with SSA to resolve Social Security contribution payment and wage reporting questions concerning wages paid before 1987;
- Informs SSA of name, title and address of designated officials involved in Section 218 administration and notifies SSA of any changes;
- Informs SSA of any changes in a government entity’s legal status, such as name changes, dissolutions or consolidations;
- Communicates regularly with SSA, IRS, employers and stakeholders on Section 218-related issues;
- Provides information to state and local public employers covered under agreements in accordance with the Act; and
- Determines necessary funding and staffing for administration of the Section 218 program.

Note: IRC Section 6103 governs the disclosure of tax information by the IRS to other federal and state agencies. Without the consent of the taxpayer, no provision in Section 6103 authorizes the IRS to share specific taxpayer information with State Social Security Administrators. However, in performing a tax investigation, the IRS may request information from the State Social Security Administrator.

The State Administrator is the principal state official responsible for these functions. The Administrator serves as the main resource to state and local employers for information and advice about Social Security coverage, taxation and many

reporting issues. SSA, IRS, public employers and employees should contact the designated Administrator to help resolve coverage questions concerning groups or individual employees. Public employers should advise the State Social Security Administrator of any changes in a government entity’s legal status, such as name changes, dissolutions or consolidations. More detailed information is available at the SSA POMS webpage.

By allowing the State Administrator to inspect your tax information, you can speed up resolving any coverage or federal tax issues with the IRS. A government entity may consent to have a State Administrator or representative review tax information by filing Form 8821, Tax Information Authorization, and filing it with the IRS.

National Conference of State Social Security Administrators (NCSSSA)

The ever-changing and complex Social Security coverage statutes, withholding requirements, reporting obligations and associated employment tax regulations require constant monitoring and interpretation. For more than 50 years the National Conference of State Social Security Administrators (NCSSSA.org) has provided an effective network of communication for federal, state and local governments concerning Social Security coverage and federal employment tax policy.

With the enactment of Section 218 to the Act in 1950, states could exercise the option of providing Social Security coverage for state and local employees. By the end of 1951, 30 states had executed Section 218 Agreements with the federal government. The responsibility for administering the Social Security program varied from state to state, depending on the state’s enabling legislation.

State Administrators began to operate in an area where no precedent existed. It became apparent that a forum was needed where the administrators could address the many problems and questions posed by the new program. The first forum between State Social Security Administrators and federal officials was held in January 1952. As a result, the NCSSSA was established to provide a unified state perspective at the federal level to provide an on-going medium for problem-solving and to maintain an open forum for the development of new policy.

Since its formation in 1952, the NCSSSA has worked closely with SSA and IRS to address Social Security (and later Medicare) coverage and employment tax issues raised by state and local employers and State Social Security Administrators throughout the United States. The NCSSSA works with federal officials to ensure that legislative and regulatory changes address state and local concerns. They provide leadership to state and local governments through accurate interpretation of federal laws and regulations, communication of federal tax policy and resolution of problems arising at the state and local level. The NCSSSA hosts national workshops and annual meetings where SSA and IRS officials address the concerns of state and local government representatives in a face-to-face format. NCSSSA officials represent public sector employers on various SSA and IRS committees and work groups.

Audits and Reviews of Public Employers

When the IRS or SSA conducts an audit or review of a public employer, the State Administrator for that state may be contacted to clarify the employer’s status, including:

Whether the employees are covered under a Section 218 Agreement; and, if so,
The specific exclusions (required and optional) that apply to that entity that must be considered during the audit or review, including any that are unique to individual employees (for example, whether any employees are subject to the Medicare continuing employment exemption).

For further information about the NCSSSA, contact your State Social Security Administrator, or go to NCSSSA.org.

n Glossary

Absolute Coverage Group (also called a non-retirement coverage group) - for Section 218 coverage purposes, a group of employees whose positions are not covered under a public retirement system; also referred to as a “non-retirement system coverage group” or a “Section 218(b)(5) coverage group.”

Additional Medicare Tax - This tax on employees is imposed on the wages of certain employees under IRC Section 3101(b)(2) and is in addition to the Medicare tax under IRC Section 3101(b)(1). Employers must begin withholding the Additional Medicare Tax when an employee’s Medicare wages exceed $200,000 during a calendar year.

Alternative Lookback Rule - An optional method for determining whether an employee can be treated as a qualified participant in a retirement plan for purposes of determining whether mandatory Social Security applies. Under this rule, an employer may treat an employee as a qualified participant in the first year of employment if it is reasonable to believe the employee will be a qualified participant on the last day of the plan year. An employer may treat an employee as a qualified participant in a calendar year if the employee was a qualified participant at the end of the previous plan year. Treas. Reg. 31.3121(b)(7)-2(d)(3).

Continuing Employment Exception - Provision for exclusion of an employee from Medicare tax and coverage for services of a state or local government employee who is not covered by a Section 218 Agreement, is a participant in a public retirement system and meets all of the following requirements:

The employee was performing regular and substantial services for remuneration for the employer before April 1, 1986;
The employee was a bona fide employee on March 31, 1986;
The employment relationship was not entered into for purposes of avoiding the Medicare tax; and
The employment relationship with the employer has not been terminated after March 31, 1986.

Coverage Groups - Categories of state and local government employees with respect to a Section 218 Agreement. There are two types of coverage groups:

1. Absolute coverage groups: employees in positions not covered under a retirement system

2. Retirement system coverage groups: employees in positions covered by a retirement system

The Social Security 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.

Defined Benefit Plan - An employer plan that uses an actuary to determine retirement benefits under a formula, generally based on age, years of service and salary level.

Defined Contribution Plan - An employer plan that provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains, losses and forfeitures of accounts of other participants that may be allocated to the participant’s account.

Earnings Record - The information maintained by the SSA for an individual indicating Social Security and Medicare covered wages and self-employment income. Each individual’s record is accessed by SSN.

Employee - Generally any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, is subject to the employment tax requirements of IRC Sections 3121 and 3401. The term is defined for Social Security and Medicare purposes in Sections 210(j) and 218(b)(3) of the Social Security Act and IRC Section 3121(d).

Employer Identification Number (EIN) - A unique nine-digit identification number assigned by IRS to state and local governments, businesses and other entities for tax-filing and reporting purposes, including withholding and paying FICA taxes. An entity can obtain an EIN by filing Form SS-4, Application for Employer Identification Number, with the IRS.

Entity - A separate legal “person,” that is not an individual; includes a corporation, partnership, LLC or a political unit, including a state, a political subdivision, a wholly-owned instrumentality, a municipality and so on.

Federal Insurance Contributions Act (FICA) - (IRC Sections 3101-3128) Federal statute providing for payroll tax deductions of Social Security and Medicare taxes from employees’ wages (employee portion), for employer’s obligation to deduct from wages and pay over the employee portion and for employer liability for the employer portion of Social Security and Medicare taxes on wages to fund Social Security and Medicare coverage.

Federal Unemployment Tax Act (FUTA) - Federal statute imposing tax on employers to provide for payments of unemployment compensation to workers who have lost their jobs. States and political subdivisions of a state are exempt from paying FUTA, but under state unemployment law, most state and local government employees must be covered for state unemployment insurance.

Fee-Based Public Official - A public official who receives and retains remuneration directly from members of the public, for example, a justice of the peace. An official who receives payment for services from government funds in the form of a wage or salary is not a fee-based public official, even if the compensation is called a fee.

FICA Replacement Plan - Alternate name for a public retirement system, as described in the regulations for Section 3121(b)(7)(F) (See Treas. Reg. 31.3121(b)(7)-2). Refers to a pension, annuity, retirement or similar fund or system established by a state or political subdivision for the purpose of providing retirement benefits to employees. See Public Retirement System.

Full Retirement Age (FRA) - The age at which unreduced Social Security benefits are payable. Depending on the date of birth, an individual’s FRA ranges from 65 to 67.

Governmental Function - Activity normally associated with the authority of government, legislative, executive, judicial, such as the control and prevention of crime, promoting the general welfare and providing for public safety. Income derived from any essential governmental function is exempt from federal income tax under IRC Section 115.

Government Pension Offset (GPO) - A reduction in the Social Security benefits that applies to individuals who (1) receive a government pension from work not covered for Social Security and (2) are eligible for Social Security as a spouse or widow(er). Two-thirds of the government pension offsets any spouse’s or widow(er)’s Social Security benefit.

HI - Hospital Insurance (Medicare Part A).

Indian Tribal Government - The governing body of any federally recognized tribe, band, community, village or group of Indians or Alaska Natives that is determined by the Secretary of the Treasury, with the Secretary of the Interior, to exercise governmental functions under IRC Section 7701(a)(40). Under IRC Section 7871, an Indian tribal government is treated as a state for certain purposes. Likewise, a subdivision of an Indian tribal government is treated as a political subdivision of a state if the subdivision has been delegated the right to exercise one or more of the substantial governmental functions of the Indian tribal government. However, a tribal government is not a “state” for purposes of Section 218 and is not eligible for a Section 218 Agreement.

Interstate Instrumentality - 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.

IRC - Internal Revenue Code.

IRS - Internal Revenue Service.

Mandatory Exclusions - See Required Exclusions.

Mandatory Medicare Health Insurance - Medicare tax and coverage not included as part of a Section 218 Agreement; imposed on all state and local government employees hired or rehired after March 31, 1986.

Mandatory Social Security - Required Social Security coverage for state and local government employees who are not members of a public retirement system and who are not covered by a Section 218 Agreement; effective July 2, 1991.

Medicare - Federally established health insurance program for people age 65 and older and certain people with disabilities. Part A (Hospital Insurance) is financed through employer and employee taxes on covered wages/self-employment or by individual payment of monthly premiums. Part B (Supplemental Medical Insurance) is financed by individuals paying monthly premiums.

Medicare Qualified Government Employment (MQGE) - Services of state and local government employees subject to Medicare tax but not to Social Security tax.

Modification - An amendment to an original Section 218 Agreement to extend coverage to additional groups of employees or to implement changes in federal and state laws. Each modification, like the original agreement, is a legally binding document.

National Conference of State Social Security Administrators (NCSSSA) - Professional association of State Social Security Administrators. These state officials are authorized by state law to administer Section 218 Agreements with the SSA and are responsible for all other activities associated with federal and state laws addressing Social Security and Medicare coverage of state and local public employers. Additional duties of individual State Administrators vary from state to state.

Non-Covered Employment - Employment not covered by Social Security under the Social Security Act and the IRC.

Nonproprietary Function - Governmental activity integral to the operation of a state or political subdivision, for example, maintaining order or levying tax (distinguished from activity of a private or commercial venture).

Old-Age, Survivors and Disability Insurance Program (OASDI) - Program administered by the SSA, providing monthly benefits to retired and disabled workers, their spouses and children and to survivors of insured workers.

OASDI Taxes - Taxes imposed under IRC Section 3101(a) on employees and IRC Section 3111(a) on employers to help fund the OASDI program. These taxes are called “Social Security taxes” on IRS forms such as Form W-2 and the amount of wages subject to these taxes are “Social Security wages.”

Optional Exclusions - Categories of services that, under the Social Security Act, may be included or excluded from coverage under a Section 218 Agreement at the option of the state.

Pension Plan - A plan that provides systematically for the payment of definitely determinable benefits to employees over a period of years, usually for life, after retirement. Retirement benefits are generally determined by factors such as an employee’s years of service, age and compensation.

Political Subdivision - A separate legal entity of a state that has governmental powers and functions. Examples of political subdivisions include a county, city, town, village, school district and other similar governmental entities.

Proprietary Function - Function of a governmental entity, such as a business venture for profit or in competition with private industry, or other discretionary act on behalf of citizens, that by its nature is not an integral governmental activity.

Public Retirement System - (Also called a “FICA replacement plan”) A plan, fund or system established by a state or political subdivision for the purpose of providing retirement benefits to employees that meets the tests under IRC Section 3121(b)(7)(F) and Treas. Reg. 31.3121(b)(7)-2(e). A public retirement system may be a pension, annuity, retirement or similar system. For this purpose, it is irrelevant whether a public retirement system is a “qualified plan” within the meaning of ERISA.

Qualified Participant - An individual who is (or has been) a participant in a public retirement system and who has a total accrued benefit under the retirement system that meets the minimum retirement benefit requirements of IRC Section 3121(b)(7) and regulations thereunder. Treas. Reg. 31.3121(b)(7)-2(d) establishes standards for defined contribution retirement systems. See Revenue Procedure 91-40 for safe-harbor formulas for defined benefit retirement systems.

Required (previously referred to as Mandatory) Exclusions - Categories of services that are not covered for Social Security under Sections 210 and 218 of the Social Security Act. These exclusions should not be confused with the different set of exclusions that apply to those services not covered under the Section 210 mandatory Social Security provisions.

Retirement System - See Public Retirement System.

Retirement System Coverage Group - A group of employees whose positions are covered under a retirement system by referendum under the provisions of Section 218(d). The retirement system does not need to meet the tests under IRC Section 3121(b)(7)(F) and Treas. Reg. 31.3121(b)(7)-2(e) to secure coverage under a Section 218 Agreement.

Section 218 Agreement - Voluntary agreement between a state and the Commissioner of Social Security (prior to March 31, 1995, the Secretary of Health and Human Services); allows states to voluntarily provide Social Security and Medicare or Medicare-only coverage for the services of state and local government employees. The Section 218 Agreements cover positions, not individuals; if the position is covered under the agreement, then any employee filling that position is subject to FICA taxes.

Self-Employment Contributions Act (SECA) - (IRC Sections 1401-1403) Federal statute imposing tax on the net earnings of self-employed individuals to fund Social Security and Medicare.

Social Security Act (Act) - Federal statute providing OASDI and Hospital Insurance (Medicare), as well as other benefits.

Social Security Administration (SSA) - An independent agency in the executive branch of the federal government responsible for administering the OASDI insurance program and for determining eligibility for Medicare benefits.

Social Security Statement - Annual statement issued by SSA to workers, with information about their individual Social Security and Medicare earnings as reported by employers, with estimates of the different types of benefits for which they and their family may qualify.

Social Security Number (SSN) - The identification number assigned by the SSA to individuals. It must always be used in reporting an individual’s earnings and in correspondence regarding specific employees. Each individual’s earnings record is maintained under this number.

State - For purposes of a Section 218 Agreement, one of the 50 states, Puerto Rico, the Virgin Islands and interstate instrumentalities. The term, for this purpose, does not include the District of Columbia, Guam or American Samoa.

State Social Security Administrator (SSSA) - The principal state official authorized by state law to administer the Section 218 Agreement with the SSA, responsible for all other activities associated with applicable federal and state laws addressing Social Security and Medicare by state and local public employers in the state.

Taxpayer Identification Number (TIN) - The number used to identify an employee (SSN) or employer (EIN) for tax reporting purposes.

Wage Base - The maximum amount of wages of each worker that is subject to OASDI tax in any calendar year. This is also referred to as the Social Security wage base and is adjusted annually. There has been no wage base limit for Medicare since 1994.

Wholly-Owned Instrumentality - An entity created by or pursuant to state statute to carry on a governmental function of a state or political subdivision. It is an independent legal entity with the power to hire, supervise and discharge its employees and, generally, it may sue and be sued, may enter into contracts and may hold or transfer property in its own name. Normally a whollyowned instrumentality of a state or political subdivision does not exercise governmental powers, for example, the police power, the taxing power and the power of eminent domain. An instrumentality can also be created by a state and a political subdivision, by more than one political subdivision, or by more than one state. See “Interstate Instrumentality.”

Windfall Elimination Provision (WEP) - A Social Security benefit formula that may be applied to workers who receive both a Social Security retirement or disability benefit and a pension based on work not covered under Social Security. The WEP benefit formula produces a lower Social Security retirement or disability insurance benefit.

n Appendix

The following pages contain important documents referred to in the text. Many other related documents may be found at www.IRS.gov and www.SSA.gov.

Amended Section 530 of the Revenue Act of 1978

(a) Termination of Certain Employment Tax Liability.

(1) In general.

If (A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period,

and (B) in the case of periods after December 31, 1978, all federal tax returns (including information returns)

required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee, then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.

(2) Statutory standards providing one method of satisfying the requirements of paragraph (1).

For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not

treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was in reasonable reliance on any of the following: (A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the

taxpayer; (B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to

the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or (C) long-standing recognized practice of a significant segment of the industry in which such individual was

engaged.

(3) Consistency required in the case of prior tax treatment.

Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 1978, if the taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977.

(4) Refund or credit of overpayment.

If refund or credit of any overpayment of an employment tax resulting from the application of paragraph (1) is

not barred on the date of the enactment of this Act (Nov. 6, 1978) by any law or rule of law, the period for filing a claim for refund or credit of such overpayment (to the extent attributable to the application of paragraph (1)) shall not expire before the date 1 year after the date of the enactment of this Act (Nov. 6, 1978).

(b) Prohibition Against Regulations and Rulings on Employment Status.

No regulation or Revenue Ruling shall be published on or after the date of the enactment of this Act (Nov. 6,

and before the effective date of any law hereafter enacted clarifying the employment status of individuals for purposes of the employment taxes by the Department of the Treasury (including the Internal Revenue Service) with respect to the employment status of any individual for purposes of the employment taxes.

For purposes of this section (1) Employment tax. - The term ‘employment tax’ means any tax imposed by subtitle C of the Internal Revenue

Code of 1986 (formerly I.R.C. 1954, section 3101 et seq. of this title).

(2) Employment status. - The term ‘employment status’ means the status of an individual, under the usual

common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).

(d) Exception.

This section shall not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work.

(e) Special Rules For Application of Section.

(1) NOTICE OF AVAILABILITY OF SECTION

An officer or employee of the Internal Revenue Service shall, before or at the commencement of any audit

inquiry relating to the employment status of one or more individuals who perform services for the taxpayer, provide the taxpayer with a written notice of the provisions of this section.

(2) RULES RELATING TO STATUTORY STANDARDS

For purposes of subsection (a)(2)

(A) a taxpayer may not rely on an audit commenced after December 31, 1996, for purposes of subparagraph

(B) thereof unless such audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer, (B) in no event shall the significant segment requirement of subparagraph (C) thereof be construed to require

a reasonable showing of the practice of more than 25 percent of the industry (determined by not taking into account the taxpayer), and (C) in applying the long-standing recognized practice requirement of subparagraph (C) thereof (i) such requirement shall not be construed as requiring the practice to have continued for more than

10 years, and (ii) a practice shall not fail to be treated as long-standing merely because such practice began after

(3) AVAILABILITY OF SAFE HARBORS

Nothing in this section shall be construed to provide that subsection (a) only applies where the individual

involved is otherwise an employee of the taxpayer.

(4) BURDEN OF PROOF (A) IN GENERAL

(i) a taxpayer establishes a prima facie case that it was reasonable not to treat an individual as an

employee for purposes of this section, and (ii) the taxpayer has fully cooperated with reasonable requests from the Secretary of the Treasury or

his delegate, then the burden of proof with respect to such treatment shall be on the Secretary.

(B) EXCEPTION FOR OTHER REASONABLE BASIS

In the case of any issue involving whether the taxpayer had a reasonable basis not to treat an individual

as an employee for purposes of this section, subparagraph (A) shall only apply for purposes of determining whether the taxpayer meets the requirements of subparagraph (A), (B), or (C) of subsection (a) (2).

(5) PRESERVATION OF PRIOR PERIOD SAFE HARBOR

If (A) an individual would (but for the treatment referred to in subparagraph (B)) be deemed not to be an

employee of the taxpayer under subsection (a) for any prior period, and (B) such individual is treated by the taxpayer as an employee for employment tax purposes for any

subsequent period, then, for purposes of applying such taxes for such prior period with respect to the taxpayer, the individual shall be deemed not to be an employee.

(6) SUBSTANTIALLY SIMILAR POSITION

For purposes of this section, the determination as to whether an individual holds a position substantially similar to a position held by another individual shall include consideration of the relationship between the taxpayer and such individuals.

Revenue Procedure 85-18