Welcome to this IRS video on What’s a Qualified Retirement Plan for Social Security Purposes?

This is video 3 of a 4-video series that helps government entity employers correct or prevent payroll errors related to their unique participation in Social Security and/or Medicare. The information presented isn’t official guidance.

Now let’s begin. Federal Section 218 laws are consistent, but state coverages differ under that law.

Contact your state’s Section 218 Administrator to learn your state’s specific coverage or go to the page shown here.

There are many scenarios for government participation in Social Security.

Under IRC Section 3121(b)(7)(F) and Treas. Reg. Section 31.3121(b)(7)-2, a retirement system generally includes any pension, annuity, retirement or similar fund or system within the meaning of Section 218 of the Social Security Act that’s maintained by a state, political subdivision or instrumentality thereof to provide retirement benefits to its employees.

Under the regulations, in order to work for a state or local government entity – and qualify for exemption from Social Security for wages earned, an employee must be a member of a retirement system that provides certain minimum retirement benefits.

If the government entity doesn’t have a Section 218 Agreement, but has an employee retirement plan, the employer and employee might be exempt from participating in only Social Security. Generally, retirement plans fall into two categories: Defined Contribution Defined Benefit A defined contribution plan provides an individual account for each participant and provides benefits based solely on the amount contributed to the participant’s account. It satisfies the definition of a retirement system that must provide for an allocation to the employee’s account of at least 7.5 percent of the employee’s compensation during any period under consideration.

A defined benefit plan (for purposes of determining whether it qualifies as a public retirement system), is any plan other than defined contribution plan. It determines benefits on a formula based on age, years of service, and salary level.

Revenue Procedure 91-40 provides the formula for calculating benefits based on years of service.

If a government entity doesn’t have a Section 218 Agreement, and the retirement system plan meets the Revenue Procedure 91-40 safe harbor rules, the government entity and the employees don’t participate in Social Security.

(Although anyone hired after March 31,1986 would participate in Medicare).

To be a qualified participant, a member must participate in the system. An employee eligible for an optional system, but decides not to participate, will be subject to mandatory Social Security tax.

You can find more detail on this topic in Chapter 6 of the IRS Publication 963, Federal-State Reference Guide.

Our series on 218 and government entities concludes with video 4: Section 218 and Retirement System Interaction.

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