7 minute read
Money Matters
NEW CALPERS FOCUS ON SOCIAL SECURITY COVERAGE FOR PUBLIC AGENCY EMPLOYEES
By Nancy G. Hilu, Edward M. Bernard, Hanson Bridgett LLP
Social Security coverage rules for state and local government employees are complex, leaving special districts the daunting task of sorting out which employees are covered by the federal system and then properly withholding and reporting Social Security taxes for them. Adding to these challenges, CalPERS, the appointed Social Security Administrator for the State of California, has recently begun questioning public agencies about Social Security coverage issues based on information provided in the Annual Information Request (AIR) that public agencies are required to complete each year. If left unresolved, the uncovered noncompliance issues can lead to adverse tax consequences or loss of Social Security benefi ts. What follows are a few best practices that can help employers avoid these negative outcomes.
Public Employee Social Security Coverage Basics
About a quarter of all state and local government employees participate in a public retirement system instead of Social Security. Public agencies that off er a retirement system and provide Social Security coverage to its retirement systemeligible employees in addition to their public retirement system benefi ts must do so through a modifi cation to the State of California’s Section 218 Agreement with the Social Security Administration (SSA).
CalPERS’ Role and the Annual Information Request
As the California State Social Security Administrator, CalPERS performs a number of functions including management of the 218 Agreement modifi cation process. CalPERS is also responsible for collecting information required by SSA from California public agencies. CalPERS uses the AIR to compile data about a public agency’s Social Security or Medicare tax withholding and reporting practices for the SSA. All California public agencies must submit an AIR form to CalPERS annually, regardless of Social Security coverage.
Recently, CalPERS began questioning public agencies about Social Security coverage issues based on information provided in their AIRs. Common errors discovered by CalPERS during their examinations include: • Failure to withhold Social Security tax for rehired annuitants when required to do so under a Section 218
Agreement.
• Withholding Social Security tax based solely on agreement in an MOU to provide Social Security coverage (i.e., Section 218 Agreement modifi cation is not obtained). • Component of a city or county becomes a separate special district and continues the city or county’s Social Security and Medicare tax withholding and reporting practices without obtaining its own Social Security coverage through a Section 218 Agreement modifi cation. • Failure to obtain a Section 218 Agreement modifi cation after the merger of two or more government agencies.
Potential Consequences
Not only is the additional CalPERS scrutiny unnerving, if any Social Security coverage issues discovered by CalPERS during its investigation are not resolved, it can potentially lead to a number of signifi cant adverse consequences for the public agency and its employees, including: • Referral to the IRS for an employment tax audit – If
Social Security tax was withheld without a Section 218
Agreement modifi cation and the district fails to take corrective action, the IRS may refund the Social Security taxes it paid for open tax years. • Loss of Social Security coverage – If a special district fails to obtain a Section 218 Agreement modifi cation after withholding and reporting Social Security taxes without one, the SSA may deny Social Security credits for service with the district. • Windfall Elimination Provision (WEP) – Unless an exception applies, Social Security benefi ts for employees who have also worked in the private sector may be reduced if they earn a pension for public-sector work not covered by Social Security. • Denial of Social Security disability benefi ts – If Social
Security tax was withheld without a 218 Agreement modifi cation and the district fails to obtain one, employees who continue to be employed with the district and become disabled may be denied Social Security
Disability benefi ts. • Potential litigation for improper wage withholding or denied benefi ts – If Social Security tax is improperly withheld from employees’ wages or Social Security benefi ts are reduced or denied as a result of a district’s failure to timely obtain a Section 218 Agreement modifi cation, employees or former employees may sue the district to make them whole.
Best Practices
Given the potential adverse consequences associated with Social Security coverage errors, special districts may wish to consider taking the following best practices: • Determine whether they are withholding Social Security taxes for employees covered by a retirement system. • If withholding Social Security taxes for employees covered by a retirement system, confi rm those employees are covered by a Section 218 Agreement modifi cation. A special district can confi rm this by registering for a MyCalPERS account to obtain a copy of its Section 218 Agreement modifi cation or, alternatively, by requesting a copy from the CalPERS State
Social Security Administrator division. • Review the modifi cation and work with human resources and payroll to ensure the district’s Section 218 Agreement modifi cation is being administered properly. • If the district determines Social Security taxes are being withheld for retirement-system eligible employees without a
Section 218 Agreement modifi cation or with one that doesn’t cover those employees, work with CalPERS to initiate the modifi cation process. The process is extensive, may require the district to successfully conduct an employee referendum, and can easily take between twelve and eighteen months to complete. Depending on the extent of coverage being sought (i.e., retroactive to the date of error, a specifi c number of years or prospective), there are a number of modifi cation options.
In conclusion, the Social Security coverage rules for public agencies are quite complex and can be overwhelming to navigate. Special districts may benefi t from consulting with tax or benefi ts counsel to assist in assessing compliance with the Social Security rules and identifying options to correct any noncompliance issues.
For more information about how to approach Social Security coverage issues, please contact Nancy Hilu at nhilu@hansonbridgett.com or Edward Bernard at ebernard@hansonbridgett.com.
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Officers
JO MACKENZIE, PRESIDENT, Vista Irrigation District VINCE FERRANTE, VICE PRESIDENT, Moss Landing Harbor District ARLENE SCHAFER, SECRETARY, Costa Mesa Sanitary District GLENN LAZOF, TREASURER, Regional Government Services Authority
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GEORGE EMERSON, Goleta Sanitary District PAUL HUGHES, CSDM, South Tahoe Public Utilities District MATTHEW MCCUE, Coachella Valley Cemetery District
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NEIL MCCORMICK, Chief Executive Offi cer CATHRINE LEMAIRE, Coordinator AMBER PHELEN, Executive Assistant RICK WOOD, Finance & Administrative Director
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