>> John Darr: Welcome to this IRS presentation on Rehired Annuitants. Hello
everybody. I'm John Darr.
>> Lori Stieber: And I'm Lori Stieber. We're internal revenue agents with the IRS
office of Federal, State and Local Governments.
>> John Darr: I'm sure by the time this presentation is over, you'll have some questions.
At any time you can enter your questions by using the text chat, which appears in the
lower right-hand corner of your screen. We'll save those questions and respond by
e-mail following the presentation. You can also send your questions to
>> Lori Stieber: You should have already received the presentation slides by e-mail. If
not, they are available by clicking on the link in the text chat. This presentation is
geared towards government entity employers. The content will help you to comply with
employment tax obligations concerning recognizing a rehired annuitant and determining
their employment tax classification.
The material in this webinar is a collaborative effort of the IRS Office of Federal, State
and Local Governments, the Social Security Administration and National Conference of
State Social Security Administrators, who assist FSLG to promote Section 218
compliance. All three of these organizations have a different role in determining the
employment tax classification of annuitants and we will discuss their roles a little later.
>> John Darr: We will provide you with information regarding how to seek assistance
from IRS Federal, State and Local Government specialists, the Social Security
Administration, State Public Retirement System representatives and your state Social
Security administrators in these matters. The topic of rehired annuitants is a highly
technical topic, so we hope you will bear with us as we lay the groundwork and
background to help you understand how all these pieces come together. We will
provide you with a brief definition of a rehired annuitant for employment tax purposes.
Next we'll give you an overview of Section 218 Agreements, which are the contract
between the state and the Social Security Administration of covered employees for
Social Security and Medicare.
We will also introduce the organizations you may refer to for assistance and the role
each one plays regarding rehired annuitants. We will explain the three guiding factors
to how employment tax status for rehired annuitants is determined. The three guiding
factors include 218 Agreements, mandatory Social Security, and State Retirement
Systems. Finally, we will bring all this information together in some real-world examples
on how to approach different rehired annuitant scenarios at the end of the presentation.
>> Julie Stieber: A rehired annuitant is a former participant in a Public Retirement
System, who is rehired by the same or different public employer. This person
has retired from service with the state or local government and is either
receiving retirement benefits under the retirement system or has reached the
normal retirement age under the retirement system. Employees often retire
from government entity positions covered by state retirement pensions and
with increased frequency retirees are returning to the workforce. They may fill their old
position, take on a different position at the same entity or fill a position at a different
entity. There are many possibilities. If you advise government entities or oversee either
payroll or human resources, you have important factors to consider when determining
the correct employment tax status of rehired annuitants.
In order to correctly withhold and report employment taxes for rehired
annuitants, management maneuvers statutes and regulations from the Internal Revenue
Code, the Social Security Administration, state statutes and the state retirement system.
While state and federal income taxes are generally due from the rehired annuitant's
wages, the status of their Social Security and Medicare withholding may vary from that
of other public employees.
Most state retirement systems are governed by at least one state statute that observes
how rehired annuitant employment may be limited. For example, it is not uncommon for
a state statute to require that the rehired annuitant had parted from employment with a
valid termination, that is, with a minimum break in service, and having no enforceable
verbal or written agreement or contract as of the employee's termination date for
any future compensable state or public employment.
The guarantee of a future contract is seen as counter to legitimate termination or
retirement. Typically it is the benefits administrator at the new job who will notify the
state retirement system administrators when an annuitant has been hired. If a
rehired annuitant is 65 or older, it is their responsibility to notify the Social Security
Administration if they are working. State retirement systems have a variety of
procedures to adhere to in the case of workers returning to work post-retirement. Their
Social Security benefits may be impacted by continued earnings.
>> John Darr: While Federal tax requirements generally apply on the same basis to
public and private employers, special provisions do apply. Since 1951, states
have been allowed to enter into voluntary agreements with the Federal government
to provide Social Security coverage to public employees as an amendment to
the original Social Security Act of 1935, that extended coverage to private employers.
These arrangements are called Section 218 Agreements because they are authorized
under Section 218 of the Social Security Act. And since 1987, the IRS has been
responsible for collecting these taxes from governmental employers. All 50 states,
Puerto Rico, the Virgin Islands and approximately 60 interstate instrumentalities have
Section 218 agreements with SSA.
The Social Security Administration is responsible for administering the Social Security
Act and interpreting its provisions, as well as interpreting Section 218 Agreements. U.S.
Census Bureau statistics for 2012, under the Census of Governments, reported that
89,000 public employers and as of 2011, just under 20 million public employees. You
can see how the terms of the state agreements with modifications have the potential to
vary. Most state employees participate in Social Security now, except for employees of
Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada and Ohio.
Additionally, each government entity has the right to modify coverage to some degree
over time. Because Social Security coverage can vary widely within a state or even a
local area, it's important to carefully consider compliance with employment tax law for all
coverage groups. Do not make an assumption about Section 218 coverage simply
because circumstances occur within the same state, local area or type of
governmental entity. As we will see, many factors create unique circumstances for
rehired annuitants, even within the same state.
>> Julie Stieber: Let's consider how the Social Security Administration, IRS and the
National Conference of State Social Security Administrators work together. The Internal
Revenue Service is responsible for administering the Internal Revenue Code, advising
employers of their responsibilities, collecting taxes and working with the Social Security
Administration and State Social Security administrators on Social Security coverage and
related tax issues.
The IRS Office of Federal, State and Local Governments, or FSLG, provides a clear
point of contact for most government entities for their tax issues, with the primary focus
on employment tax issues and information return compliance. While FSLG is
responsible for administering tax laws affecting government entities and ensuring
compliance, it also develops and delivers outreach to its customers with presentations
like this one. We support and make easily accessible voluntary compliance programs
for our government customers. Contact your local FSLG office anytime that you have
questions about federal tax issues.
>> John Darr: The State Social Security administrator is the designated official
legally appointed to act for the state in negotiations with the Social Security
Administration. This official acts for the state with respect to the initial 218 Agreement
and modifications. The performance of the State's responsibilities under the agreement
and in all state dealings concerning with the administration of the agreement. Each
state Section 218 Agreement and Social Security Regulation 404.1204 provide a legal
obligation for each state to designate such an official. In many states, however, the
actual day-to-day responsibilities are delegated to the staff of the designated state
For Section 218 Agreement purposes, we rely on state administrators to do
the following, administer and maintain the Federal State Section 218 Agreement
that governs voluntary Social Security and Medicare coverage by state and
local government employers in the state, negotiate modifications to the original
agreement, conduct referendums and identify additional political subdivisions that join a
covered retirement system, secure, maintain the state's master agreements,
modifications, dissolutions and interstate agreements, provide the Social Security
Administration with notice and evidence of the legal dissolution of covered state and
political subdivision entities, resolve coverage and taxation questions related to the
agreement and modifications with the Social Security Administration and the IRS and
provide information to State and local public employers covered under agreements in
accordance with the Act and state legislation.
The state administer serves at the main resource to state and local employers in each
state for information and advice about Social Security coverage, taxation and many
reporting issues. Social Security administrators, IRS, public employers and employees
should contact the designated administrator to help resolve questions as to who is and
is not covered.
When the IRS or Social Security Administration conducts an audit or review of a public
employer, the state administrator for that state may be contacted to clarify the
employer's status. If the employees are covered under a Section 218 Agreement, the
audit or review will verify the specific exclusions that are applicable to that entity.
>> Lori Stieber: For over 60 years, the National Conference of State Social Security
Administrators, or NCSSSA, 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 first exercise the option of providing Social Security coverage for state and local
employees. By the end of 1951, 30 state his executed Section 218 Agreements with
the federal government. The responsibility for administering the Social Security
programs vary from state to state, depending on the particular state's enabling
It became apparent that a forum was needed, where the administrators could address
the many problems and questions posed by the new program. In January of 1952, the
NCSSSA was established to facilitate that needed forum. This unified State perspective
at the federal level provides for an ongoing annual conference committed to problem
solving and the development of new policy. The NCSSSA, has worked closely with the
Social Security Administration and the IRS since its formation to address Social Security
and Medicare issues throughout the United States. NCSSSA works with federal
officials to ensure legislation and regulatory changes address state and local concerns.
NCSSSA provides 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 Social Security Administration 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 Social Security
Administration and IRS committees and workgroups.
>> John Darr: We know that all government entities that employ workers are subject to
federal employment taxes on wages, except where the law provides specific exceptions.
The Internal Revenue Code defines wages and employment subject to income tax
withholding under Section 3401. Wages for Social Security and Medicare are taxed
under Section 3121. The Social Security and Medicare taxes also refer together as
Federal Insurance Contribution Act or FICA taxes consist of old age survivors and
disability insurance, that's OASDI, or Social Security and Medicare hospital insurance
known as Medicare.
Internal Revenue Code 3101 imposes tax on the employee and Section 3111 imposes
tax on the employer. Employers are generally required under Internal Revenue Code
Section 3402 to withhold income tax from wages.
We are going to look more closely at the treatment of FICA, Social Security, Medicare,
referencing circumstances that are of particular interest to government employers. With
respect to Social Security coverage, all state and local government employees fall into
one of these three categories.
>> Lori Stieber: Employees are covered for Social Security by a voluntary Section 218
Agreement between the state and the Social Security Administration. The entity may or
may not participate in a public retirement system. Employees are also required to be
covered for amounts deemed Social Security wages because they are not members of
a qualifying public retirement system and are not covered by a Section 218 Agreement.
This applies to government employment, not covered by Section 218 or a Public
Retirement System after July 1st, 1991.
Last, but not least, these employees are covered by qualifying Public Retirement
System and are therefore exempt from mandatory Social Security. They are not
covered by a Section 218 agreement.
>> John Darr: State and local government employees can be covered for Social
Security and Medicare through a Section 218 Agreement between the state and the
Social Security Administration. A state and the Social Security Administration may
agree to extend Social Security coverage to services of employees of the state or its
political subdivisions or instrumentalities under a Section 218 Agreement. If a worker
services of covered by a Section 218 Agreement, generally both OASDI and Medicare
taxes apply, unless the services are covered for Medicare only. Medicare taxes
generally apply to wages of all state and local government employees hired after March
31, 1986. This agreement can provide coverage for employee groups regardless
whether or not they are covered by a retirement system. Only the state Social Security
administrator can initiate a request for Section 218 coverage on behalf of an entity in the
state. Each state's original agreement incorporates the basic provisions, definitions and
conditions for coverage. Additional coverage can be provided by modifications. Each
modification, like the original agreement, is binding upon all parties.
In order to establish an agreement, there must be authority under federal and state law,
that is state-enabling legislation. To enter into an agreement and to extend coverage
under an agreement, the types and extent of coverage provided under an agreement
must be consistent with federal and state laws. State and local government employees,
who are covered under an agreement have the same basic benefits and rights and
responsibilities as employees who have mandatory Social Security coverage.
The cost to the employer of providing Social Security protection for state and local
government employees is the same for that of employees mandatorily covered under
Social Security and Medicare. Coverage under an agreement must be provided for
employees by groups. An agreement may be modified to increase, but not decrease
the extent of the coverage.
>> Lori Stieber: Coverage under Section 218 Agreements can be extended only to
groups of employees known as coverage groups. Once an employee's position is
covered under a Section 218 Agreement, any employee filling that position is a member
of the coverage group for Social Security and Medicare. There are two types of
coverage groups, absolute coverage groups, also called non-retirement coverage
groups, employees not in a retirement system, and retirement system coverage groups.
Each state decides which groups to include under its agreement and when coverage
begins for each group, taking into consideration relevant federal and state law. The
state can choose to cover absolute coverage groups, retirement system groups or both.
An absolute coverage group is composed of employees in positions not covered by a
state or local retirement system. Coverage is provided for all current and future
employees in the group, unless one of these exclusions from Section 218 Agreement
applies because federal law excludes them.
A worker's not covered under Section 218 Agreements if the workers hired to be
relieved from unemployment, the work is as a patient or inmate in a hospital, home or
other institution thereof, the work is as a transportation system employee, which is
compulsorily covered for Social Security -- see Section 1013 -- the work is for a private
employer and that work is not defined as employment under Section A of the Social
Security Act and work is performed on a temporary basis in the case of a fire, storm,
snow, earthquake, flood or other similar emergency.
Retirement system members and ineligibles of the retirement system are excluded from
Section 218 Absolute Coverage, unless specifically included. If the retirement system
ineligibles are included, as part of the absolute coverage group explicitly, then the 218
optional exclusions such as part-time positions, would apply to them, as well.
Retirement system members, ineligible groups, and optional groups are cover federal
Section 218 coverage was obtained as a result of a majority vote referendum. A state
may extend Section 218 coverage to a retirement group without considering the desires
of the employees. States may also cover ineligible as part of or in addition to the
absolute coverage group, however, the state must decide whether coverage of the
ineligibles will continue or terminate if the ineligible later becomes eligible for
membership in a retirement system.
An absolute coverage group may consist of any of the following, state employees
engaged in performing services in connection with nonproprietary governmental
functions, state employees engaged in performing services in connection with a single
proprietary function, all employees of a political subdivision of a state engaged in
performing services in connection with nonproprietary governmental functions, all
employees of a political subdivision of a state engaged in performing services in
connection with a single proprietary function, certain civilian employees working with the
National Guard of a state and individuals employed under an agreement between a
state and the United States to perform services as inspectors of agricultural products.
>> John Darr: A retirement system coverage group consists of employees working in
positions covered by a public retirement system. Such a group may be provided
coverage under an agreement only if approved by a referendum. The act gives the
state the option for referendum purposes of breaking down a retirement system into its
components. If a retirement system covers employee positions of one or more political
subdivisions in the state, the state has the following choices. This slide provides some
examples of the type of referendums it can hold. The referendum for employment
system employees is conducted either on a majority-vote basis, which is allowed in all
states, or on a divided-system basis, which is allowed in certain states.
With a majority-vote referendum, Social Security and Medicare coverage may be
extended to employees in positions covered by a retirement system only if a majority of
the eligible employees vote in favor of such coverage. A majority of all the eligible
employees under the system, not a majority of the eligible employees voting, must vote
in favor of coverage. Retirement system members, ineligible groups and optional
groups are covered if Section 218 coverage was obtained as a result of a majority vote
All states are authorized by federal law to use the majority-vote referendum procedures.
Although the referendum itself is a state matter, federal law requires that the following
conditions be met to establish coverage. Eligible employees are given at least 90-days
notice of the referendum. An opportunity to vote is given and limited to eligible
employees, the referendum is held by secret ballot, the referendum is supervised by the
Governor or his or her designee and a majority of the retirement system's eligible
employees vote for coverage.
>> Lori Stieber: The act authorizes certain states and all interstate instrumentalities to
divide a retirement system established by the state, a political subdivision thereof, or an
interstate instrumentality, into separate coverage groups based on whether the
employees in positions under that system want Social Security coverage. Coverage of
ineligibles, under a divided-vote referendum, would depend upon whether the retirement
system chose to cover them with the rest of the retirement system. If the retirement
system ineligibles are included as part of the retirement-system coverage group,
optional exclusions, such as part-time positions, would apply to them, as well. Not all
states have authorized ineligibles to be covered for Section 218. Contact your state
administrator to determine your state's status.
If a member has a break in service after coverage is extended to the retirement-system
coverage group, the state determines whether that person is considered a new member
upon return to employment. The state's decision depends upon the provisions of the
particular retirement system involved and on state law.
>> John Darr: Let's say a rehired annuitant performs services in a position under the
same covered, divided retirement system from which the annuitant retired and the
annuitant was part of the system that did not vote for coverage. In this case, the Social
Security coverage status of the rehired annuitant services depends on whether the
annuitant is covered -- considered a new member of the retirement system upon
reemployment and that is a state matter. If the rehired annuitant is considered a new
member of the divided retirement system, services performed by the rehired annuitant
are covered under the state's agreement with that division of the retirement system that
voted for Social Security coverage.
If the rehired annuitant is not considered to be a new member of the divided retirement
system upon reemployment, the rehired annuitant retains their vote, that is Social
Security coverage status under the same divided retirement system before retirement.
If the rehired annuitant was part of the retirement system that did not vote for Social
Security coverage, the IRS rules for mandatory coverage determine the Social Security
coverage status of the rehired annuitant.
>> Lori Stieber: If you're not sure whether a Section 218 Agreement covers a specific
position, contact your state Social Security Administrator for assistance. If a group of
workers is covered you should a Section 218 Agreement, the agreement cannot be
terminated or modified to exclude that coverage group. Most employees who are not
covered under Section 218 Agreement are subject to mandatory Social Security and
Medicare unless they participate in a public retirement system.
Medicare taxes generally apply to ages of all state and local government employees
hired after March 31, 1986. In addition to determining whether specific employees are
members of a Social Security coverage group, questions may arise as to whether
certain positions constitute employment subject to the rules. It is important to know
whether federal or state law is applied in making a determination on a specific issue.
>> John Darr: An employer that considers hiring a former employee, such as a retiree,
as an independent contractor should carefully consider whether the proposed work
arrangement will meet the common-law standard. Similarly, if you're considering
changing the status of an individual from that of an employee to an independent
contractor or vice versa, your state retirement system will review the reasons that
brought about the change in status. When reviewing independent contractor
arrangements, state retirement systems analyze the status of workers according to
state and Federal guidelines defining worker classification.
It is important to point out that current laws state that a person who is appointed as a
public officer is generally a public employee for common-law purposes and cannot be
excluded as an independent contractor. Public officers include, but are not limited to,
city or township clerks and treasurers, city managers, emergency management
directors and county auditors, treasurers or recorders.
>> Lori Stieber: There can be financial consequences at both a state and federal level if
an employer incorrectly designates an employee to be an independent contractor. As
an additional caution, most retirement systems require that termination of employment
prior to reaching normal retirement age must be considered an actual separation by the
IRS. The IRS prohibits paying benefits to a member who has not reached the plan's
normal retirement age, unless the retiree has truly separated their service. If there's any
kind of agreement or assumed agreement between the employer and employee, that
the employee returns to work either as a retired employee, an independent contractor,
or an employee of an independent contractor, it may not be considered a valid
separation. Separation is typically considered valid if there has been a good faith and
complete termination of the employment relationship.
Most retired workers from public employment must terminate public service through a
voluntary resignation or dismissal by the employer. They must remain out of public
employment or refrain from providing paid services to employers covered by public
retirement systems for a predetermined number of days after termination. And they
must refrain from making any arrangement to work for the same employer until the
waiting period is passed.
While no employee deductions or employer contributions for state retirement plan
coverage may be due on the earnings of a reemployed retiree, the employing unit must
report the gross earnings of a retiree, who holds a nonelected position and who is under
full retirement age. These reemployed retirees are subject to an annual earnings limit
that matches the amount set by Social Security. Therefore, earnings must be monitored
in post-retirement. Earnings and some elected positions are not subject to the annual
earnings limit. When employers hire a person, they must determine if the individual is a
>> John Darr: You may have noted that federal and state statutes guide this process of
determining worker status for Social Security coverage. Federal law determines certain
areas and state laws determine others. This slide lists some area where federal law
makes the determination. Federal law determines whether earnings are wages subject
to Social Security and Medicare. This slide lists the areas where state law makes the
determinations. State laws have bearing on issue of employment, such as whether the
position is that of a public official of the state. Where this is the case, you should
request a state's legal officer's opinion. The state's opinion will be given weight in
making the decision, but it will not determine the issue. Before contacting the IRS or
Social Security Administration, contact the state Social Security administrator for
Because entities have different Social Security and retirement plan situations, it is
important to determine which of two or more entities, organizations or individuals is a
worker's employer. In some cases, certain individuals, referred to as leased workers,
are supplied or paid by one entity, but work under the direction of another. Generally if
there is a provision in a statute or ordinance that creates a position and the individual is
hired or elected under this authority, the individual is an employee of the state or
political subdivision to which the provision applies. If there is no such authority, the
employer is the entity that has the right to control the worker in the performance of the
work. For example, the common-law employer. The employing entity is responsible for
withholding and paying Social Security and Medicare taxes on its employee's wages, as
well as reporting to the Social Security Administration the wages paid. These
withholding, paying and reporting requirements apply to individuals wages subject to
mandatory Social Security ask Medicare, as well as to wages of individuals covered
under a Section 218 Agreement. See publication 15, Circular E, The Employer's Tax
Guide, for more information.
>> Lori Stieber: Regardless of Social Security coverage, most public employees are
covered by some form of retirement plan. The terms of these plans may vary greatly,
but in general, provide for tax deferred income placed in trust for the employee's benefit.
These plans may involve employee or employer contributions or both. Under certain
provisions of the Internal Revenue Service Code, contributions may be deferred from
tax until they are withdrawn. Plans covered under Internal Revenue Code Section 401
are considered qualified, meaning they meet specific provisions of the Employee
Retirement Income Security Act, or ERISA, that enable them to offer certain tax
advantages. Many public employees are covered by a nonqualified plan, generally
under Internal Revenue Code Sections 403(b) or 457.
Internal revenue regulations inform us that a retirement system requires retirement type
benefits. A retirement system includes any pension, annuity, retirement or similar fund
or system within the meaning of Section 218 of the Social Security Act that is
maintained by a state, political subdivision or instrumentality thereof to provide
retirement benefits to its employees who are participants.
Facts and circumstances determine whether a plan is maintained to provide retirement
benefits with respect to an employee. For example, a plan providing only retiree health
insurance or other deferred welfare benefits is not considered a retirement system for
this purpose. The legal form of the system is generally not relevant. There are a
number of regulations that describe how a retirement system may include a plan. For
example, you can review Section 401(a), a retirement system may include plans
described in Section 401(a), 403 or 457(d) or (f). Internal Revenue Code section 3121
clearly states that the Social Security system is not considered a retirement system. It
also maintains a requirement that the retirement system provides a minimum level of
In general a pension, annuity, retirement or similar fund or system is not retirement
system with respect to an employee unless it provides retirement benefit to the
employee that is comparable to the benefit provided under the old-age portion of the
old-age survivor and disability insurance program with Social Security. Whether a
retirement system meets this requirement is generally determined on an individual by
individual basis. Thus, for example, a pension plan that is not retirement system with
respect to an employee may nevertheless be retirement system with respect to other
employees covered by the system.
>> John Darr: There are two types of retirement systems that qualify as a FICA
retirement plan, defined benefit and defined contribution. A defined-benefit retirement
system is maintained by state, political subdivision or instrumentality. It projects how
much the employer has to contribute using actuarial calculations to obtain similar
retirement benefit as what Social Security would provide. See section 3121(3)(2). With
a defined-contribution plan there must be 7.5% minimum contribution of the employee's
compensation. Either the employer, employee or both can make the contribution. See
>> Lori Stieber: Under employment arrangement a portion of employee's compensation
is regularly deferred for five years because this arrangement defers the receipt of
compensation for a short period of time rather than until retirement, it is not a plan that
provides retirement benefits. Therefore, this arrange cemetery not a retirement system.
You can review Section 3121(b)(7)(f), for more specifics. Remember, a Section 218
agreement takes precedence unless the employee is a member of a retirement system.
Let's take a look at how this might work.
An individual holds two positions with the same political subdivision. The way it is
earned in one position are covered under the Social Security system through a Section
218 agreement. The other position is not. Section 3121(b)(7)(f), provides an exception
from employment as a member of a retirement system. Because the second position is
not covered under the retirement system, this exception does not apply. You can find
similar examples in Publication 963.
>> John Darr: Since July 2, 1991, Social Security and Medicare coverage has been
mandatory for state and local government employees who are not members of a public
retirement system and who are not covered under a Section 218 Agreement, unless
specifically excluded by law. These mandatory Social Security provisions also apply to
those state and political subdivision employees who have the option to become
members of the retirement system, but have chosen not to do so and those employees
who are personally ineligible for membership in the retirement system. Mandatory
Social Security coverage ceases when a state or local government employee becomes
a member of a public retirement system. If an employee was hired before April 1, 1986,
and was not a member of a public retirement system, the employee is covered for
Social Security and Medicare. If the employee subsequently becomes a member of a
retirement system, the employee ceases to be covered for Social Security and
Medicare. If an employee was hired after April 1, 1986, and is not a member of a public
retirement system, the employee is covered for Social Security and Medicare. If the
employee subsequently becomes a member of a retirement system, the employee
ceases to be covered for Social Security, but not Medicare, because the employee was
hired after April 1, 1986. Employees hired or rehired after
March 31, 1986, remain covered for Medicare regardless of their membership in a
>> Lori Stieber: Section 419(c) of Public Law 108-203, Social Security Protection Act of
2004, requires state and local government employers to disclose the effect of the win
fall elimination provision and the government pension offset to employees hired on or
after January 1, 2005, in jobs that are not covered by Social Security. The law requires
newly hired public employees to sign a statement that they are aware of a possible
reduction in their future Social Security benefit entitlement. For more detailed
information about this law and to view a copy of the statement concerning employment
and a job not covered by Social Security, see Form SSA-1945. Although these
employees are not covered by Social Security, they are covered by a qualifying public
retirement system. Because a FICA replacement system is in place to meet the
equivalent of a Social Security coverage, these employees are therefore exempt from
mandatory Social Security. They are not covered by a Section 218 Agreement.
>> John Darr: So let's review. We discussed the background on 218 Agreements, we
talked about how agencies work together to advise government entities on 218 related
matters, hour retirement system works, who is an employee and what is covered
employment. With this information, we can determine how we hire annuitant are treated
for Social Security and/or Medicare coverage. An individual in a position covered by a
Section 218 Agreement providing for full coverage is subject to Social Security under
the agreement's terms. The 218 Agreement takes precedence over the state retirement
system rules that would exclude the position from Social Security. Let's take a look at
some more examples.
A teacher who was covered under state retirement system retired and was rehired as a
bus driver, a position covered by a 218 Agreement. The individual is subject to Social
Security tax under the terms of the 218 Agreement. For our second example, let's look
at a teacher who is not of retirement age and retires from service due to a permanent
disability. She was a member of the state teacher's retirement system and begins
receiving annuity payments from the system. In 2007, she returns to work for the same
school district as a part-time tutor. The school district has no 218 Agreement and new
position is not covered by a state retirement plan. The teacher is a rehired annuitant
and is not subject to Social Security tax because she was rehired after March 31, 1986,
her wages are subject to Medicare tax.
>> Lori Stieber: Here are a few things to keep in mind. Under Section 218 rules, if
rehired annuitant are currently working in positions covered by retirement system, but
cannot join that retirement system, then for Section 218 purposes, they are considered
retirement system ineligible. If the entities Section 218 Agreement covers these
ineligibles, then rehired annuitants are covered by Section 218 Social Security
Medicare. If the entities Section 218 Agreement does not cover ineligibles of that
retirement system, then apply the mandatory Social Security and mandatory Medicare
rules. The regulations provide that a rehired annuitant in a particular retirement system
is deemed to be qualified participant in the retirement system. This is regardless of
whether he or she continues to accrue a benefit or whether benefits continue during the
employment period. Contributions are not required to be made to the state retirement
system on the retired annuitant's behalf.
>> John Darr: Here are some key mandatory Social Security and Medicare rules. A
retiree of a public retirement system is exempt from Social Security coverage if he or
she is employed by the same employer or another employer who maintains the same
retirement system that the retiree formerly participated in. All employees hired after
March 31, 1986, are mandatorily covered for Medicare, unless specifically excluded
under Section 210(p), of the Social Security Act. The key for determining mandatory
coverage requirements is the retirement system, not the position. Per Internal Revenue
regulations, a rehired annuitant is a former participant in retirement system is deemed to
be qualified participant without regard to whether they continue to accrue a benefit or
whether the distribution of benefits under the retirement system has been suspended
pending cessation of services. Internal Revenue regulations also state that a former
participant in retirement system may continue to be a qualified participant after
becoming reemployed if they meet the minimum required benefit. This includes the
requirement that the system provides retirement benefit to the employee that is
comparable to the benefit provided under the old age portion of the old age survivor and
disability insurance program with Social Security. In other words, the retirement system
of the current employer meets the qualifying FICA replacement plan requirements.
>> Lori Stieber: What if a rehired annuitant works for an entity that maintains the same
retirement system as the one they retired from? Then mandatory Social Security does
This is because the annuitant is considered a member of a retirement system, even if
the position is excluded from coverage. Medicare coverage, however, is mandatory for
employees rehired after March 31, 1986.
Let's take this example. Jane is a teacher who retires from county A, as a member of
the statewide teacher's retirement system. County B hires her as a bus driver in March,
2000. The bus driver position is not covered by Section 218 Agreement. Counties A
and B are part of the same retirement system. Although Jane is qualified to receive a
pension from County A, her position as a bus driver is not covered under the retirement
system. So what is the coverage status of the bus driver position?
Remember, the bus driver position is not covered by Section 218 Agreement. Jane, the
annuitant, is a retired teacher under the same retirement system, therefore, mandatory
Social Security does not apply, even though her new position as a bus driver is not
covered under the retirement system or the Section 218 Agreement. Her earnings as a
bus driver will not have Social Security taxes withheld. You should request a copy of
the Section 218 Agreement and any modification associated with it. The state Social
Security administrator will provide this information. Be careful to understand dates for
applicable coverage of specific positions.
Is the annuitant working for an entity that maintains the same retirement system as the
one from which she is qualified to receive a pension? The answer is yes. The state
retirement system can confirm that an entity is covered under its plan. The annuitant is
covered under the retirement system so mandatory Social Security does not come into
play even though the bus driver position is not covered by the Section 218 Agreement.
Additional earnings will not have Social Security taxes withheld.
Is the annuitant rehired after March 31, 1986? The answer is yes. Jane retired after
March 31, 1986, therefore, mandatory Medicare applies. Even though she was
originally hired before March 31, 1986, her retirement constitutes a break in service,
thus causing her to be covered under mandatory Medicare.
>> John Darr: Here is another example. What if a worker is a rehired annuitant into a
position with the same retirement system, but the 218 Agreement coverage referendum
was based on a divided vote referendum? Would the new job be covered by the
agreement? The retirement system rules of the state determine if the individual is not a
new member of the retirement system. The status size a new member or an existing
member determines whether the individual holds onto their original divided referendum
vote. If determined to be a new member, the workers covered by the 218 Agreement
with the "yes" group of the divided referendum. If not a new member, the worker retains
their vote. "Yes" voters carries their yes vote and they are covered by Social Security
and Medicare under the agreement, not under mandatory section 210 provisions. It is
not, if not a new member, and a "no" voter, the worker is not covered under the
agreement. Here mandatory provisions could apply if the retirement system is deemed
a different system from for the participant. Coverage here depends on whether the
rehired annuitant is considered new member of the retirement system upon
reemployment. This is determined by the state's retirement system rules.
>> Lori Stieber: To determine how rehired annuitant may be treated for employment tax
purposes and in particular Social Security and Medicare, consider these questions. Is
the rehired annuitant working for the same or a different employer? If a different
employer, does that employer maintain the same retirement system as the original
employer? And what is the title of the position the rehired annuitant now occupies?
How does Section 218 apply to the position? If it does apply to the position, know the
modification number and the date the modification became applicable, make sure it
applies to the position in question. What services are specifically covered by the
Section 218 Agreement? Were retirement system ineligibles covered by that
modification or subsequent modification? What exclusions were there? If part time,
what was the definition on the applicable date? If part time, what is the definition of part
time? Do the mandatory Social Security and Medicare rules apply to the employee?
What retirement systems did the entity participate in on the absolute coverage
applicable date? Is the retirement system the rehire annuitant is part of covered by a
systemwide Section 218 modification? Are retirement system ineligibles covered by
that modification or a subsequent modification? Is Section 218 coverage extended
retirement systemwide or has coverage been extended on an entity-by-entity basis? Is
the retirement system in question a qualifying FICA replacement plan during the period
of time being reviewed? Does the employer have an absolute coverage modification?
If the retirement system is a qualifying FICA replacement plan and the employer does
not have absolute coverage modification, mandatory Social Security would not apply,
but Medicare would apply for employees hired on or after April 1, 1986. If it is, and the
employer does have an absolute coverage modification, what positions were covered by
the retirement system and what were the requirements of the position? Has the
retirement system expanded coverage since the applicable date of the current
employer's absolute coverage modification? And what was the expanded position part
of the absolute coverage group prior to participation in retirement system?
>> John Darr: Rehired annuitants are common in the workplace and determining the
correct tax status for the withholding tax due on related earnings can be complex. You
can rely on your state Social Security administrator and your state retirement system
representative for much of the required information to assist you in compliance with
employment taxes. The Social Security Administration can clarify coverage for Section
218 purposes. The Internal Revenue Service FSLG specialists are here to assist you
with answering certain questions such as: What is a retirement system? Who is a
qualified participant? Who is a new hire for mandatory Medicare? We can also help
you with FICA tax withholding for mandatory non-section 218 covered employment
>> Lori Stieber: This slide lists some resources to assist you. You will have the
opportunity to download this slide presentation. And don't forget, if you have any
questions, you can e-mail us and visit the FSLG website. Thank you for joining us.