State and local government employees may be covered for social security and Medicare either by mandatory coverage, or under a Section 218 Agreement between the state and the Social Security Administration. Under some circumstances, an employee may be excluded from social security or Medicare, or both.
Sometimes employers fail to properly apply the terms of coverage to their employees. This leads to incorrect reporting, including non-reporting or erroneous coverage. Once incorrect reporting occurs it will often continue until the Social Security Administration or the IRS becomes involved; typically, during claims processing or examinations and audits.
Social security coverage can vary widely within a state or even a local area. Do not make an assumption about Section 218 coverage for an entity and whether it is in compliance with all applicable laws merely because of the status of a similar entity, either in the same or a different state. For Section 218 coverage questions, contact your state Social Security Administrator (see www.ncsssa.org). For mandatory coverage questions, contact an IRS FSLET Specialist (see /govts for a directory).You can also visit the SSA State and Local Government Employers website at www.ssa.gov/slge.
This fact sheet provides a brief summary of the coverage rules for social security and Medicare. For more information, follow the links in the text.
Social Security Coverage
In addressing coverage for a specific employee, the first question that should be asked is:
Is the employee covered by a Section 218 Agreement or a modification amending the Agreement?
Your State Social Security Administrator is responsible for determining whether a position occupied by a particular government employee is covered by a Section 218 Agreement. Contact that office if you are uncertain whether you have a Section 218 Agreement, or have questions about coverage for particular positions. You can identify your State Social Security Administrator from the National Association of State Administrators (NCSSSA) website.
If a Section 218 Agreement is in effect, the following points should be considered:
Is the position optionally excluded from coverage under a provision of federal or state law?
The optional exclusions include:
- Agricultural labor, but only those services that would be excluded if performed for a private employer;
- Elective positions;
- Election workers and election officials whose pay in a calendar year is less than the amount mandated by law, unless Section 218 agreement covers election workers;
- Positions compensated solely by fees that are subject to SECA (Self-Employment Contributions Act), unless Section 218 Agreement covers these services;
- Part-time positions;
- Students enrolled and regularly attending classes at the school, college or university where they are working.
Is the effective date of the modification within the scope of what Section 218 of the Act allows? The effective date of coverage is the date specified by the state for coverage to begin.
Did SSA fully execute the modification within two years of the referendum?
If a Section 218 Agreement does not exist, then coverage may be mandated by law. All governmental employees are subject to OASDI (social security tax) for wages paid after July 1, 1991, unless one of the following applies:
a. The employee is covered by a public retirement system.
A public retirement system must meet the standards of coverage as provided in section 31.3121(b)(7). A public retirement system must meet standards for a minimum benefit or minimum contribution as well as meeting other vesting requirements. Regulation 31.3121(b)(7)-2(e) and Revenue Procedure 91-40 explain the requirements for a public retirement system.
Note: A public retirement system is not required to be a “qualified plan” under the terms of the Employees’ Retirement Income Security Act (ERISA) of 1974. The only consideration is whether the minimum benefit requirements are met as defined in the Regulations.
b. A specific statutory exemption applies.
IRC sections 3121(a) and (b) indicate exclusions from wages and employment for social security purposes. For a list of specific exclusions, see Publication 963, section 5, “Social Security and Medicare Coverage.”
Erroneous coverage: If the employee has been identified as not being covered for social security either by law or through a Section 218 Agreement, what happens if an employer made reports and payments for social security coverage to the IRS in the mistaken belief that such action provided coverage? (This can occur when (a) a state or local government employer without a Section 218 agreement is reporting social security for employees who are members of the public retirement system, or (b) a government employer without a Section 218 Agreement or a retirement system for its employees has been withholding and reporting social security since before 1990.)
When erroneous reporting is discovered, contact the State Administrator immediately. The state can correct erroneous reporting by providing coverage under the State’s Section 218 Agreement, through an error modification, or a regular Section 218 modification. If the error involves a retirement system, the state must comply with the referendum procedures before executing an error modification or a Section 218 modification. If the retirement system was not in existence at the time the error was made, the coverage group would be covered as an absolute coverage group under Section 218 of the Act and a referendum would not be necessary.
Medicare (HI) tax
Coverage for hospital insurance (Medicare) tax is governed by rules that went into effect in 1986, and has been further clarified by subsequent revenue rulings.
State or local government employee hired or rehired after March 31, 1986: The employee is covered for Medicare unless a specific exclusion applies
State or local government employee hired before April 1, 1986: The employee is exempt from mandatory Medicare under the following conditions if:
a. The employee has been working continuously for the same state or local government employer since March 31, 1986; and
b. The employee a member of a public retirement system, and
c. The employment relationship was not entered into for purposes of avoiding the Medicare tax.
For more information on the continuing employment exception, see Revenue Ruling 86-88, Revenue Ruling 88-36, or section 5 in Publication 963.
Employees hired before April 1, 1986 may be covered for Medicare through a Section 218 agreement.
Contacting a State Social Security Administrator
State Administrators can provide information and answer questions about social security and Medicare coverage in your State. A directory of state administrators can be found by visiting the NCSSSA website.