This course provides a historical account of events leading up to Section 218, and identifies various critical occurrences and changes that have since affected the Act.
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- What is the Social Security Act of 1935?
- How did the Social Security Act of 1935 affect State and local government employees?
- What is Section 218 of the Act?
- What is a 218 Agreement?
- What happens to State and local government employees who do not participate in Social Security?
- Who is the State Administrator?
- Is there a difference in Social Security taxes for government employees and private employees?
- What additional changes have been made to Section 218 coverage since it began?
- How have government employers been affected by the changes occurring since 1950?
- What is the OIG report and how did it affect the Social Security coverage for public employees?
On August 14, 1935, Congress voted into legislation the Social Security Act of 1935. This legislation established a permanent old-age pension system in the United States through employer and employee contributions. These contributions are collected through the Social Security payroll tax. The original legislation did not cover State and local government employees due to constitutional questions regarding the authority to impose taxes on the States.
The Social Security Act of 1935 did not cover State and local government employees. This caused a problem because many public employees did not participate in public retirement systems equivalent to Social Security. An amendment of the Act was enacted in 1950, Section 218, extending coverage to State and local employees.
In 1950, Congress enacted Section 218 of the Social Security Act. This allowed Social Security coverage to be extended to the State and local government employees who were not covered by an alternative retirement system. The coverage was available at the request of the State, through an agreement signed by the State and SSA. These agreements are referred to as 218 Agreements, Federal-State agreements, modifications, or voluntary agreements (because the coverage is voluntarily requested by the State). Later, in 1954, Amendments were made to the Act allowing State and local workers who were members of a retirement system (except police officers or fire fighters) to also be covered under section 218 Agreements, provided coverage was authorized by the State and approved through a voluntary coverage referendum.
A Section 218 Agreement is a document signed by the State and SSA extending Social Security and Medicare or Medicare-only coverage on a voluntary basis to the State and local employees of that State. Each State has an agreement with SSA and most originated in the early 1950’s. When States want to cover additional State or local government employees they do so by means of a “modification” to the original agreement. Almost all States continue, to this day, to extend coverage through modifications.
The Commonwealths of Puerto Rico and the Virgin Islands also have 218 Agreements with SSA. Additionally, interstate instrumentalities can enter into 218 Agreements.
State and local government employees who do not participate in Social Security, either through voluntary or mandatory coverage, do not have Social Security taxes removed from their paychecks. Therefore, they are not eligible to receive Social Security benefits based on that employment. If such employees later contribute to Social Security via a subsequent coverage agreement or mandatory coverage, their eligibility to benefits, and the amount of those benefits, would reflect only the time that they were properly covered.
In order to effectively implement coverage at the State level, SSA, through regulation 20 C.F.R. §404.1204, requires that each State designate a State Social Security Administrator. The state administrator is responsible for administering all aspects of Section 218 coverage, including interpreting its provisions, and insuring proper application of Social Security coverage to all State and political subdivision employees.
When the Social Security Act was modified by Section 218, there were two separate tax processes for private and government employees. Private employee contributing to the Social Security tax paid “FICA” taxes; whereas government, i.e., State and local government, employees did not pay FICA taxes, but submitted “contributions” to the Social Security program.
When Section 218 was added to the Act in 1951, SSA was designated to administer its tax collection provisions much in the same manner that IRS administered FICA tax provisions. However, SSA considered each State liable for payment of the Social Security contributions on all covered employees, including local governments, because the Section 218 Agreement for Social Security coverage was between the State and SSA, not SSA and the employer. Therefore, while each private employer sent FICA taxes directly to the IRS, government employers with employees covered under a Section 218 Agreement sent Social Security “contributions” directly to the state administrator. The state Administrator then paid the Social Security contributions directly to an SSA account at the Federal Reserve Bank. The separate Social Security tax process for private and public employers existed for almost 40 years.
Then, in 1987, the Act and the Code were changed and taxes due pursuant to Section 218 Agreements were designated as FICA taxes. Public employers became responsible for withholding and remitting FICA taxes in the same manner as private employers and IRS assumed oversight authority.
Significant legislative changes have been made affecting State and local coverage since it began in 1951. Some changes include:
- The 1954 Social Security Amendments expanded the Act to allow States to extend Social Security coverage to State and local government employees who were members of public retirement system (except police officers and firefighters); provided coverage was authorized by the State and approved through a voluntary referendum of all eligible retirement system members.
- In 1956, the Act was amended to authorize certain States to divide retirement systems into two separate groups—those who desired coverage and those who did not. The 1956 Act also authorized certain States to extend Social Security coverage to police officers and firefighters covered by a retirement system.
- Beginning July 1, 1966, employees covered for Social Security under a Section 218 Agreement are automatically covered for Medicare.
- The 1983 Amendments included provisions preventing States from terminating Social Security coverage obtained under an agreement, effective April 20, 1983. Therefore, even though Social Security coverage is voluntarily obtained, it is permanent once in place.
- The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) imposed mandatory Medicare-only coverage on State and Local employees. All employees, with certain exceptions, hired after March 31 1986, are covered for Medicare under section 210(p) of the Act (Medicare Qualified Government Employment). Employees covered for Social Security under a Section 218 Agreement have Medicare coverage as a part of Social Security, therefore they are excluded from mandatory Medicare. However, COBRA 85 also contained a provision allowing States to obtain Medicare-only coverage for employees hired before April 1, 1986 who are not covered under an Agreement. Authority for Medicare-only tax administration was placed in the Code [26 U.S.C. 3121(u)(2)(C)] as the responsibility of IRS.
- The Omnibus Budget Reconciliation Act of 1986 (OBRA 86) made dramatic changes to Section 218 of the Act. All responsibilities related to tax administration and oversight were removed from the section and from SSA’s authority for the years after 1986. SSA retained tax responsibility for all years prior to 1987. OBRA 86, at the same time, amended the Code to designate Social Security taxes due pursuant to section 218 agreements as FICA taxes, thereby transferring tax authority to IRS. Public employers became responsible for withholding and remitting these taxes in the same manner as private employers.
- The Omnibus Budget Reconciliation Act of 1989 (OBRA 89) amended the Act to allow SSA to correct an individual’s earnings record at any time when the employer has reported less than the correct amount.
- The Omnibus Budget Reconciliation Act of 1990 (OBRA 90) imposed mandatory Social Security coverage on State and local government employees beginning July 2, 1991 who are not (1) already covered for Social Security under an agreement, or (2) members of a retirement system which meets certain Treasury regulations or requirements. This provision is intended to ensure that all public employees have some type of retirement protection, either obtained as part of Social Security or through a plan offered by the employer. OBRA 90 also amended the Code to apply FICA taxes to mandatorily covered employment. An important difference between mandatory Social Security coverage and voluntary Social Security coverage obtained through a Section 218 agreement is that mandatory Social Security coverage for employees terminates when they become members of a retirement system meeting Treasury regulation requirements. Social Security coverage obtained under a Section 218 agreement cannot be terminated, regardless of retirement system membership status.
- The Social Security Independence and Program Improvements Act of 1994 established the SSA as an independent agency, effective March 31, 1995. This Act also increased the FICA exclusion amount for election workers from $100 to any amount less than the threshold amount mandated by law in a calendar year. (To verify the current year amount, see the SSA website.) States were authorized to amend their Section 218 Agreements to increase the FICA exclusion amount for election workers to a statutorily mandated threshold. The Act also amended Section 218 of the Act to allow all States the option to extend Social Security and Medicare coverage to police officers and firefighters who participate in a public retirement system. (Under previous law, only 23 States were specifically authorized to do so.)
- Public Law 105-277 provided a 3-month period for States to modify their Section 218 Agreements to exclude from coverage services performed by students. This provision was effective July 1, 2000, for States that exercised the option to take this exclusion.
Due to the changes in coverage, some public employers may be unaware of their employees’ coverage status. The following factors have contributed to this dilemma:
- For over 30 years, from 1951 to 1982, it was possible for States to terminate coverage previously obtained under an agreement; terminating coverage was not allowed after 1982. This led to a belief, still existing among some government employers, that Social Security coverage for government employees is optional. However, Social Security coverage is required, absent a qualified retirement system.
- There is a unique relationship between Social Security coverage and retirement system coverage. Through Section 218 Agreements, retirement system groups can be covered for Social Security (e.g., all positions in a State Teachers’ Retirement System or all positions under a county pension plan). In situations were coverage is obtained for retirement system coverage groups, employers may not always be aware of their employees eligibility in that system, which could lead to reporting errors.
- Unlike Social Security coverage for private industry employees, there are circumstances under which coverage for government employees discontinues. These circumstances depend on how the coverage was originally obtained. Coverage obtained pursuant to a Section 218 Agreement (regardless of retirement system membership) cannot be terminated as of 1983. However, mandatory Social Security coverage stops when the employee becomes a member of a qualifying retirement system meeting. Conversely, mandatory Medicare-only coverage cannot be terminated.
- Many small government employers do not have personnel or payroll staffs. In this situation, wage reporting functions may be performed by individuals with little or no knowledge of SSA or IRS requirements. Even experienced personnel or payroll staffs make mistakes due to the complexity of the coverage issue. When government employers began to pay FICA taxes directly to IRS in 1987, many States reduced the role of the State Administrator. In some States, despite SSA regulations, State Administrator functions were completely abolished. During the years that SSA had oversight authority for correct reporting of Social Security contributions; both SSA and State Administrators audited the correctness of employer reports. IRS did not place special emphasis on auditing government employers until recently.
In December 1996, the Office of the Inspector General (OIG) issued audit report #A-04-95-06013, “Social Security Coverage of State and Local Government Employees.” SSA requested the audit to determine if serious reporting problems existed, and, if so, the extent—as earnings that are not properly reported by employers can lead to inaccurate employee earnings records, which can affect Social Security benefit entitlement and payment.
The report concluded that there is a significant risk of noncompliance by government employers with the State and local coverage provisions. OIG noted the following problems: No systematic compliance reviews by either IRS or SSA; Insufficient data collection and exchange between IRS and SSA, and widespread confusion as to the responsibilities of SSA, IRS and the States. In response to the problems, OIG made the following recommendations: That SSA fund an ongoing compliance program for public employers; pursue a memorandum of understanding (MOU) with IRS outlining the respective roles and responsibilities of each agency, and, as a possible long-term solution, study the feasibility of universal coverage of all public employees.
Note: The MOU was completed and signed by both the Social Security and IRS Commissioners in the spring 2002.