U.S. GOVERNMENT PUBLISHING OFFICE

33–479 WASHINGTON : 2019

COMPLEXITIES AND CHALLENGES OF SOCIAL SECURITY COVERAGE AND PAYROLL TAX COMPLIANCE FOR STATE AND LOCAL GOVERNMENTS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY 

AND

SUBCOMMITTEE ON OVERSIGHT 

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

JUNE 29, 2017 

Serial No. 115–SS04 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

KEVIN BRADY, Texas, Chairman 

SAM JOHNSON, Texas 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

PETER J. ROSKAM, Illinois 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

DIANE BLACK, Tennessee 

TOM REED, New York 

MIKE KELLY, Pennsylvania 

JIM RENACCI, Ohio 

PAT MEEHAN, Pennsylvania 

KRISTI NOEM, South Dakota 

GEORGE HOLDING, North Carolina 

JASON SMITH, Missouri 

TOM RICE, South Carolina 

DAVID SCHWEIKERT, Arizona 

JACKIE WALORSKI, Indiana 

CARLOS CURBELO, Florida 

MIKE BISHOP, Michigan 

RICHARD E. NEAL, Massachusetts 

SANDER M. LEVIN, Michigan 

JOHN LEWIS, Georgia 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

JOSEPH CROWLEY, New York 

DANNY DAVIS, Illinois 

LINDA SA ́ NCHEZ, California 

BRIAN HIGGINS, New York 

TERRI SEWELL, Alabama 

SUZAN DELBENE, Washington 

JUDY CHU, California 

DAVID STEWART, Staff Director 

BRANDON CASEY, Minority Chief Counsel 

SUBCOMMITTEE ON SOCIAL SECURITY 

SAM JOHNSON, Texas, Chairman 

TOM RICE, South Carolina 

DAVID SCHWEIKERT, Arizona 

VERN BUCHANAN, Florida 

MIKE KELLY, Pennsylvania 

JIM RENACCI, Ohio 

JASON SMITH, Missouri 

JOHN B. LARSON, Connecticut 

BILL PASCRELL, JR., New Jersey 

JOSEPH CROWLEY, New York 

LINDA SA ́ NCHEZ, California 

SUBCOMMITTEE ON OVERSIGHT 

VERN BUCHANAN, Florida, Chairman 

DAVID SCHWEIKERT, Arizona 

JACKIE WALORSKI, Indiana 

CARLOS CURBELO, Florida 

MIKE BISHOP, Michigan 

PAT MEEHAN, Pennsylvania 

GEORGE HOLDING, North Carolina 

JOHN LEWIS, Georgia 

JOSEPH CROWLEY, New York 

SUZAN DELBENE, Washington 

EARL BLUMENAUER, Oregon 

iii 

C O N T E N T S 

Page 

Advisory of June 29, 2017 announcing the hearing .............................................. 2 

WITNESSES 

Marianna LaCanfora, Acting Deputy Commissioner, Office of Retirement and 

Disability Policy, Social Security Administration ............................................. 8 

Sunita Lough, Commissioner, Tax Exempt and Government Entities Division 19 

Maryann Motza, Ph.D., Legislative Committee Chair and Past President, 

National Conference of State Social Security Administrators ......................... 27 

QUESTIONS FOR THE RECORD 

Questions from The Honorable Sam Johnson and Vern Buchanan, to 

Marianna LaCanfora ........................................................................................... 59 

Questions from The Honorable Jim Renacci, to Marianna LaCanfora ............... 60 

Questions from The Honorable Sam Johnson and Vern Buchanan, to Sunita 

B. Lough ................................................................................................................ 70 

Questions from The Honorable Tom Rice, to Sunita B. Lough ............................ 71 

Questions from The Honorable Sam Johnson and Vern Buchanan, to 

Maryann Motza .................................................................................................... 78 

Questions from The Honorable Tom Rice, to Maryann Motza ............................. 80 

Questions from The Honorable Jim Renacci, to Maryann Motza ........................ 83 

PUBLIC SUBMISSIONS FOR THE RECORD 

Rincon Band of Luisenˇ o Indians, statement ......................................................... 105 

(1) 

COMPLEXITIES AND CHALLENGES OF SOCIAL 

SECURITY COVERAGE AND PAYROLL TAX 

COMPLIANCE FOR STATE AND LOCAL GOVERNMENTS 

THURSDAY, JUNE 29, 2017 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON SOCIAL SECURITY, JOINT WITH THE

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC. 

The subcommittees met, pursuant to call, at 10:00 a.m., in Room 

1100, Longworth House Office Building, Hon. Sam Johnson [chairman of the Subcommittee on Social Security] presiding. 

[The advisory announcing the hearing follows:] 

2 


Insert 33479A.001

<i) 

WAYS AND MEANS 

CHAIRMAN KEVIN BRADY 

Chairman Johnson and Chairman Buchanan Announce Joint Hearing on the 

Complexities and Challenges of Social Security Coverage and Payroll Tax 

Compliance for State and Local Governments 

House Ways and Means Social Security Subcommittee Chairman Sam Johnson (R-TX) and 

Oversight Subcommittee Chairman Vern Buchanan (R-FL) announced today that the 

Subcommittees will hold a joint hearing, entitled "Complexities and Challenges of Social 

Security Coverage and Payroll Tax Compliance for State and Local Governments." Section 218 

of the Social Security Act allows state and local governments to extend Social Security coverage 

to their employees through a voluntary agreement with the Social Security Administration. The 

hearing will focus on the complexity of Social Security coverage and payroll tax compliance 

under Section 218. Members will also discuss the responsibilities of the Social Security 

Administration, the Internal Revenue Service, and State Social Security Administrators in 

ensuring proper adminjstration. T he bearing will take place on T hursday, June 29, 2017 in 

I 100 Longworth Rouse Office Building, beginning at 10:00 AM. 

[n view of the limited time to hear witnesses, oral testimony at this bearing will be from invited 

witnesses only. However, any individual or organization may submit a written statement for 

consideration by the Committee and for inclusion in the printed record of the hearing. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit wrinen comments for the 

hearing record must follow the appropriate link on the hearing page of the Committee website 

and complete the informational forms. From the Committee bomepage, 

http://waysandmeans.bouse.gov. select " Hearings." Select the hearing for which you would like 

to make a submission, and click on the link entitled, "Click here to provide a submission for the 

record." Once you have followed the online instructions, submit all requested infonnation. 

ATTACH your submission as a Word document, in compliance with the fonnatting requirements 

listed bel.ow, by the close of business on Thursday, J uly 13,2017. For questions, or if you 

encounter technical problems, please call (202) 225-3625. 

FORMATTING REQUI REMENTS: 
3 

f 

Chairman JOHNSON. Good morning, and welcome to today’s 

hearing on the complexities and challenges of ensuring Social Security coverage and payroll tax compliance for State and local government employees. 

Before we begin, I would like to take a moment to say a few 

words about my friend and former Social Security Subcommittee 

Chairman Jim Bunning. You remember him? 

Mr. LARSON. Absolutely. 

Chairman JOHNSON. Sadly, Jim passed away just a few weeks 

ago. Chairman Bunning was a member of the Ways and Means 

Committee for four Congresses, and he chaired this Subcommittee. 

While many will remember Chairman Bunning as a baseball Hall 

of Famer—who pitched two no-hitters, by the way—I will always 

remember him as the guy who showed me the ropes on serving as 

Chairman on Social Security. 

Among many other bills, he introduced the Rehabilitation and 

Return to Work Opportunity Act of 1996, that ultimately became 

the basis of the Ticket to Work Act of 1999. 

More than 20 years later, this Subcommittee continues to look 

for ways to help those beneficiaries who can return to work. And 

I look forward to having another hearing on that topic later this 

year. 


Insert 33479A.002
4 

Jim Bunning was a patriot, a strong supporter of Social Security, 

and a friend. We are thankful for his service and keep his wife, 

Mary, and all his family in our prayers. 

Turning back to today’s hearing, usually when we talk about 

State and local workers and Social Security, we talk about how 

many of them aren’t covered by Social Security. But today we are 

going to focus on the close to three-quarters of State and local 

workers who are covered and figuring out why their Social Security 

coverage and payroll tax compliance is so complicated. 

When Social Secuity was created, State and local government 

employees were excluded due to constitutional concerns. Over time 

the law was changed to allow State and local governments to extend Social Security coverage to their employees. Today, all States 

have at least some employees who are covered by Social Security 

and pay Social Security taxes on their earnings. But who is covered 

can vary by State and even locality. 

With all this complexity, it is up to Social Security, the IRS, and 

the States to work together to get it right. But as we will hear, that 

doesn’t always happen. 

Back in 2010, the Government Accountability Office found that 

both Social Security and the IRS have trouble identifying problems 

with Social Security coverage for State and local government employees and, instead, must rely on public employers to ensure compliance. Not much has changed, has it? 

Social Security still does not have the ability to verify that State 

and local governments are properly reporting wages for covered 

workers, and the IRS still doesn’t know whether the employer has 

reported and paid the correct amount of payroll tax without doing 

an audit. Even though payroll taxes are the biggest tax most people pay, efforts to improve compliance generally focus on other 

taxes. 

These problems, like the one in Missouri that we will hear about 

today, can go undetected for years and have real consequences for 

Americans’ retirement security and for Social Security’s Trust 

Funds. If someone thinks they are covered, but aren’t, according to 

Social Security they may not qualify for the Social Security benefits 

that they have been counting on. And if an individual receives benefits without having paid the correct amount of Social Security tax, 

the Social Security Trust Funds and taxpayers are left to make up 

the difference. 

Let me be clear. The answer here isn’t mandatory coverage, but 

Social Security and the IRS need to get their act together. At the 

end of the day, we need to be sure that State and local employees 

pay the right amount of taxes and receive the Social Security benefits they are counting on, and that the Social Security Trust Funds 

get the taxes that they are owed. The American people deserve 

nothing less. 

I thank our witnesses for being here today, and I look forward 

to hearing their testimony. 

I now recognize Mr. Larson for his opening statement. 

Mr. LARSON. Thank you, Mr. Chairman. 

And thank you Chairman Buchanan and my distinguished colleague, Mr. Lewis. 

5 

I would like to welcome back Chairman Johnson. As often as I 

get to say this, I will, but to be seated at this dais between two 

iconic American heroes in Sam Johnson and John Lewis is in and 

of itself, I think for every member of this committee and the body 

in general, an honor to serve with perhaps two of the greatest 

Americans in the history of our Nation. 

With that, Mr. Chairman, I am also going to renew my pledge— 

or request, I would say, is better put—to have a hearing down in 

Plano, Texas. Inasmuch as—and I know you have had hearings 

there before—but inasmuch as this is your last term, I only think 

it fitting that we have a hearing down in Plano, Texas, preferably 

during the winter up here, but I am not saying—whenever you call 

for that. 

Chairman JOHNSON. Thank you. 

Mr. LARSON. Listen, also, a sad note on Jim Bunning. I would 

also like to note, not of the stature of Jim Bunning, but equally important to me and many people in the State of Connecticut, Lillian 

Marlow passed last evening as well. Not known to many at this 

dais. 

She was, like so many people who work on this staff, just an extraordinary person who kept government running with her hard 

work and wit and dedication. And I just wanted to recognize her 

here today. 

Social Security is important to all Americans. And as I like to 

say when we are out talking about it, where could you find in the 

private sector guaranteed retirement income that cannot be outlived, protection in the event of a career-ending disability, life insurance for families of a worker who dies, a full cost-of-living adjustment to combat the effects of inflation? Social Security is also 

portable and goes with you everywhere. There simply is nothing on 

the private sector market that can even remotely come close to 

touching Social Security. 

Today, 94 percent of workers in the United States are covered by 

Social Security. They and their employers contribute to the trust 

fund and earn their benefits with every paycheck, with half of the 

contributions coming from the employee and half coming from the 

employer, the employer side being tax deductible. But it is the responsibility of the employer to ensure that they are in compliance 

with payroll taxes. 

The only large group of workers that are outside Social Security 

are some State and local government workers who have their own 

pension plan in place of Social Security. About three-quarters of 

the State and local workers participate in Social Security, but 

about a quarter don’t. In my own State of Connecticut, teachers 

have a separate retirement plan and are not participating in Social 

Security, but they have an alternative plan that they pay for, regardless. 

The fundamental principle is one way or another, every American should have basic retirement coverage at work. Our job today 

is to make sure that that is the case. 

For the 90,000 units of State and local government in the United 

States, it can be complicated sometimes to determine which employees are participating in Social Security and who pays into the 

6 

State plan, as Mr. Johnson has already outlined. But when mistakes are made, workers’ financial security is at stake. 

That is why this hearing today is so vitally important. I thank 

our witnesses for being here. 

It is also why we have introduced the Social Security 2100 Act, 

because we believe so strongly that Social Security needs to be expanded and needs to be made solvent into the next century, and 

so that it is there for every single American and providing the kind 

of benefits with the greatest efficiency. 

And with that, Mr. Chairman, I will yield back my time. And, 

again, it is great to see you. 

Chairman JOHNSON. Thank you. I appreciate that. Thank you 

very much. 

Would you like to make an opening statement? 

Chairman BUCHANAN. Yes. Thank you, Mr. Chairman. 

And I also would like to comment on Jim Bunning. As a young 

kid growing up in Detroit, he was a hero to a lot of us. He was an 

incredible pitcher. And I know he served here in Congress. So I 

share your thoughts with him. 

Good morning. I want to thank the panel for coming today and 

I look forward to the hearing. I also want to thank Chairman Johnson for his important oversight work. 

Today we are looking to better understand the challenge that 

State and local governments face when applying Social Security 

coverage to their workers. While many states and local government 

workers rely on their own retirement plans, others rely on Social 

Security through voluntary arrangements between the State and 

the Social Security Administration. 

Giving states flexibility on coverage decisions is important. However, it often leads to complication, individual coverage situations 

for State and local employees. This creates a unique challenge for 

State and local employees as well as the Social Security Administration, and the IRS, who oversees these programs. 

Nearly 70 percent of the $3.3 trillion collected by the IRS comes 

from employment-related taxes, like those for Social Security and 

Medicare. These contributions must be accurate. 

However, the complexity of the coverage issue for State and local 

governments requires a combined effort in terms of the Social Security Administration, the IRS, and the Social Security administrators to provide State and local employers with appropriate guidance and oversight. 

I look forward to the hearing, and also look forward to our witnesses, so we can assist them to ensure that we better work together. Also, I would like to just add, I want to make sure that the 

information we get today, that we can clearly work with you. 

I yield back. 

Chairman JOHNSON. Thank you, sir. 

I now recognize Mr. Lewis for any opening statement you wish 

to make. 

Mr. LEWIS. Thank you very much, Mr. Chairman. 

Chairman Johnson, Chairman Buchanan, Ranking Member Larson, and fellow members, good morning. And good morning to our 

witnesses. Thank you for being here. 

7 

Chairman Johnson, thank you for remembering Jim Bunning. 

We came in the same class. 

Chairman JOHNSON. Did you? 

Mr. LEWIS. In the same class. Wonderful, wonderful man. He 

played well, baseball well, but he played well as a Member of the 

House and the Senate. And our prayers go out to his family. 

Every working American should have basic retirement coverage. 

This can be provided through Social Security or through a State’s 

retirement system for public sector employees. These benefits help 

ensure that Americans maintain a basic standard of living during 

their retirement. 

Ninety-four percent of American workers receive their basic retirement coverage through Social Security. However, about six million State and local government employees do not. These workers 

participate in their State’s retirement system and generally include 

teachers, firefighters, and police officers. In my home State of Georgia, more than 180,000 State and local employees are not covered 

by Social Security. 

State and local governments often have their own retirement system. However, these governments have the option to enter into voluntary agreements with the Social Security Administration to have 

their employees covered by Social Security. If a local government 

decides to provide coverage through Social Security, its employees 

must pay Federal payroll taxes just like every other American 

worker. 

Today’s hearing will look at how Federal and State agencies 

work together to provide Social Security coverage to State and local 

government employees and ensure compliance with payroll tax requirements. We will learn from the witnesses more about how the 

Internal Revenue Service, the Social Security Administration, and 

State Administrators work together to ensure governments comply 

with payroll tax requirements. 

I look forward to receiving recommendations from all of our witnesses on how to improve compliance. And, again, I want to thank 

you for being here this morning. 

I yield back, Mr. Chairman. 

Chairman JOHNSON. Thank you. 

As is customary, any Member is welcome to submit a statement 

for the hearing record. 

Before we move on to our testimony today, I want to remind our 

witnesses to please limit your oral statements to 5 minutes. However, without objection, all of the written testimony will be made 

a part of the hearing record. 

We have three witnesses today. Seated at the table are Marianna 

LaCanfora, Acting Deputy Commissioner, Office of Retirement and 

Disability Policy, Social Security Administration. 

Sunita Lough, Commissioner, Tax Exempt and Government Entities Divison, Internal Revenue Service. 

Maryann Motza, Legislative Committee chair and past president, 

National Conference of State Social Security Administrators. 

Please proceed, Ms. LaCanfora. 

8 

STATEMENT OF MARIANNA LACANFORA, ACTING DEPUTY 

COMMISSIONER, OFFICE OF RETIREMENT AND DISABILITY 

POLICY, SOCIAL SECURITY ADMINISTRATION 

Ms. LACANFORA. Chairman Johnson, Chairman Buchanan, 

Ranking Member Larson, Ranking Member Lewis, and members of 

the subcommittees, thank you for inviting me to discuss Social Security coverage for State and local employees. I am Marianna 

LaCanfora, Social Security’s Acting Deputy Commissioner for Retirement and Disability Policy. 

About 94 percent of employees in the United States are covered 

by Social Security. That is, they pay Federal Insurance Contributions Act, or FICA, taxes on their earnings up to a certain limit. 

Those earnings can qualify them and their families for benefits 

under our retirement, disability, and survivors insurance programs. 

There are approximately 23 million State and local employees, 

and about one-fourth of them are not covered by Social Security. 

My written testimony provides the long history of coverage-related 

laws for this group. But in short, when Social Security was enacted 

in 1935, no State or local employees were covered. 

Over time, Congress amended the Social Security Act to allow 

States to decide whether to cover employees who fall under a State 

retirement system, and to require coverage for those who do not. 

The method used by the States to establish coverage is called a 218 

Agreement, after the authorizing section of the act. These Agreements specify which positions are covered. 

Every State, Puerto Rico, the Virgin Islands, and 60 interstate 

instrumentalities have a 218 Agreement with us. Over the years, 

each Agreement has been modified numerous times as political 

subdivisions, positions, and retirement systems have been created 

and as groups of employees have petitioned their States to obtain 

Social Security coverage. 

Under current law, there is tremendous variability in which positions are covered between and even within the same State. For example, if two teachers are working in the same position in the 

same school district, one might be covered while the other is not. 

Each State and local employer is responsible for applying the 

terms of their State’s 218 Agreement, accurately reporting earnings 

to SSA, and appropriately withholding FICA taxes for covered employees. 

Each State has a designated State Social Security Administrator. 

This State official is critical in ensuring that the State get its employees’ coverage status right. The Administrator performs many 

functions, such as being the point of contact with the SSA and the 

IRS, interpreting the 218 Agreement, and educating State employers and employees. They also hold referendums and notify us of the 

creation or dissolution of State entities. 

The IRS also plays a critical role in this process by performing 

compliance checks to ensure that States have appropriately withheld and remitted FICA taxes for covered employees. 

Given the complexity involving State and local employee coverage, it is no surprise that employers sometimes make mistakes. 

SSA is committed to working closely with our State partners and 

the IRS to provide the tools and training that States need to get 

9 

these decisions right from the start and to address issues when 

they arise. 

I would like to highlight some of the actions SSA has taken to 

improve this process since GAO’s last review. 

We worked with the IRS to develop a tool that States can use 

to ensure compliance with Federal tax requirements. We designated an employee in each of our regional offices to serve as an 

expert and point of contact. We scanned nearly all of our agreements and modifications, including tens of thousands of pages, into 

a central database to allow for ease of access and search. 

We modernized the system our employees use to resolve differences between the earnings reports sent to SSA and the IRS. We 

updated and clarified our policy guidance based on our experience 

and feedback from State Administrators. We developed comprehensive training materials and resources for the Administrators and 

provided training sessions to State and local employees. 

We established standing meetings with representatives from the 

IRS and the National Conference of State Social Security Administrators to share information and best practices and identify challenges and solutions to issues that arise. 

In addition, we recently started a project to compile and maintain lists of covered positions based on the 218 Agreements, which 

will be a valuable tool and quick reference for the Administrators 

to identify coverage issues. We are also reviewing our regulations 

to identify areas that we might streamline or clarify. 

We remain open to ideas regarding how to further enhance our 

valuable relationship with the States and the IRS as we work together on these issues. 

Thank you for the opportunity to describe the history and complexity of Social Security coverage for State and local employees. I 

would be happy to answer any questions. 

[The prepared statement of Marianna LaCanfora follows:] 

10 


Insert 33479A.003

HEARING BEFORE 

COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEES ON 

SOCIAL SECURITY AND O VERSIGHT 

UNITED STATES HOUSE OF REPRESENTATIVES 

J UNE 29, 2017 

STATEMENT 

OF 

M ARIANNA L ACANFORA 

ACTING DEPUTY COMMISSIONER FOR R ETIREMENT AND DISABILITY POLICY 

SOCIAL SECURITY ADMlNl STRA TION 
11 


Insert 33479A.004

Chainnan Johnson, Cha innan Buchanan, Ranking Member Larson, Ranking Member Lewis, and 

Members of the Subcommittees: 

Thank you for the opponunity to discuss Social Security coverage and the Social Security 

Administration's partnership with the Internal Revenue Service and State Social Security 

Administrators to provide for Social Security coverage of certain State employees while 

collecting commensurate Social Security taxes. My name is Marianna LaCanfora and I am 

SSA's Acting Deputy Commissioner for Retirement and Disability Policy. 

Importance of Social Security 

Social Security is a social insurance program, under which workers earn coverage for retirement, 

disability, and survivors' benefits by earning wages through employment or income through selfemployment. Those same wages are subject to Federal Insurance Contributions Act (FICA) or 

Self-Employment Contributions Act (SECA) taxes. 

Social Security pays monthly benefits to more than 60 million individuals, consisting of41 

million retired workers and 3 million of their spouses and children; nearly 9 million disabled 

workers and almost 2 million dependents; and 6 million surviving widows, children, and other 

dependents of deceased workers. Last year, these benefits totaled around $905 billion. 

Administrati ve costs were less than 1 percent of benefit payments. 

Coverage of Earnings for Soda I Security 

Individuals obtain coverage for Social Security retirement, disability, and survivors' insurance 

benefits by establishing a history of earnings based on their wages. Wages are defined in section 

209 of the Social Security Act as money paid for work or a service in an employer-employee 

relationship. Wages do not include payments made outside of an employment relationship, such 

as life insurance proceeds, tax refunds, child support payments, scholarships, proceeds from the 

sale of a home, court awards, royalties, unemployment benefits, public assistance, or canceled 

debts. 

ln 2017, employees and employers each pay 6.20 percent (or for self-employed individuals, the 

individual pays 12.40 percent) on the first $ 127,200 of an employee's wages or self-employed 

income in Social Security taxes. If an individual's employment and earnings are covered for 

Social Security, he or she should pay these taxes on his or her wages. 

Ninety-four percent of employees working in the United States are covered by Social Security. 

There are, however, exceptions to coverage for certain employees of private employers, and 

more commonly, for certain State and local government employees. Coverage (and coverage 

exceptions) are dictated by section210 or section218 of the Social Security Act. 

Section 2 10 explains coverage for work performed for, among other entities, private U.S. 

employers and the District of Columbia. While most private work is covered, section 2 10 

explains the exceptions to coverage for private workers (including work perfonn ed in cenain 
12 


Insert 33479A.005

religious roles, as a Native American tribal council member, by certain students, by foreign 

workers, or by temporary, emergency workers). 

Section 218 involves work perfonued for State and local government employers and explains the 

process by which States may request coverage for their government workers, under a Section 

2 I 8 Agreement. These agreements are created at a State's discretion and, as long as they comply 

with relevant Federal and State laws, the Social Security Act requires the extension of Social 

Security coverage to the State and local govenunent employees specified under the agreement. 

All 50 States, Puerto Rico, the Virgin Islands, and approximately 60 interstate instnunemalities 

have entered into a Section 218 Agreement with SSA. 

HistoryofSection 218 

When the Social Security Act was enacted in 1935, Social Security coverage was not extended to 

State and local government employees due to legal questions over the Federal Govenunent's 

ability to tax the States. However, because many government employers did not have their own 

retirement system, the Social Security Act Amendments of 1950 authorized States to enter into 

voluntary agreements with SSA to extend coverage to their public employees. These Section 218 

Agreements originally only allowed for voluntary Social Security coverage to State and local 

government employees who were not covered by a retirement system. The Social Security 

Amendments of 1954 expanded the Act to authorize the States to extend Social Security 

coverage to all State and local government employees who are members of public retirement 

systems, if coverage group members vote in a referendum for such coverage. 

The coverage provided under Section 218 Agreements varies substantially between, and within, 

States. When a State enters into a Section 218 Agreement, employees are brought under the 

agreement in coverage groups. There are two types of employee groupings for coverage 

purposes: absolute coverage groups, composed of positions that are not under a retirement 

system; and retirement system coverage groups, composed of positions that are under a 

retirement system. The State decides which coverage groups it would like covered and the 

effective date of coverage, subject to Federal and State laws, and works with SSA to formalize 

that coverage in the State's agreement. 

Each State may have only one Sectioo218 Agreemeot, but the State may request modificatioos 

to its agreement as political subdivisions, public employment positions, and retirement systems 

are created, or if groups decide t11ey would like to obtain Social Security coverage. Such 

modifications must meet the requirements of the Social Security Act and State laws. 

Additionally, if the coverage group is covered by a retirement plan, the group must first vote in a 

referendum for Social Security coverage. 

Tbe Social Security Amendments of 1956 authorized 23 States to divide a retirement system 

established by the State or instrumentality based on whether iod.ividual employees under that 

system desire Social Security coverage. Under the divided-vote procedures, a referendum is held 

for a coverage group, and the Section 218 Agreement modification provides coverage for only 

those members who voted for coverage, as well as all members who are newly hired after the 

modification goes into effect. Thus, under such a divided system, if two employees are 

2 
13 


Insert 33479A.006

perfonning the same work in the same position for the same employer under the same retirement 

system, one's employment could be covered, while the other's is not. 

Before 1983, a State could terminate Social Security coverage for employees covered under its 

Section 218 Agreement. The 1983 Social Security Ametldments resciJJded this provision oftbe 

Act, prohibiting States from terminating coverage. Consequently, groups of State and local 

government employees generally cannot have their coverage rescinded. 

The Consolidated Omnibus Budget Reconciliation Act of 1985 made Social Security coverage 

mandatory for State and local govermnent employees who were neither covered under a Section 

218 Agreement nor members of a public retirement system (that offers, at a minimum, retirement 

benefits comparable to those provided by Social Security), beginning July 2, 1991. 

The change of laws and the flexibility that the laws have provided to the States have led to great 

variability regarding coverage for Social Security. One State may, for example, cover all of its 

teachers under a retirement system, and choose not to extend Social Security coverage to those 

positions. Another State may cover its teachers under a retirement system, but also provides its 

teachers an option to obtain additional, voluntary Social Security coverage through a referendum 

and subsequent modification to the State's Section 218 Agreement. A third State may provide 

retirement system and Social Security coverage to its teachers, but because of the divided-vote 

option, some individual teachers may fall outside of that coverage. Another State may provide 

neither voluntary Social Security nor retirement system coverage to its teachers, resulting in 

mandatory Social Security coverage even though the State's Section 218 Agreement does not 

establish that coverage. Likewise, these examples could all be present within a single State, 

depending on how the State defined its coverage groups. 

Roles of Government Agencies a nd Non-Governmenflll Groups 

Due 10 the complex nanare of both Section 2 18 Agreements and the exceptions to coverage under 

section 210 of the Social Security Act, many groups are involved in detennining employees' 

coverage Status and, subsequently, in monitoring that FICA taxes are being paid correctly. 

Employers are the first and most important group, as they are ultimately responsible for 

appropriately withholding their employees' taxes, including FICA taxes. Employers are also 

generally in the best position to differentiate between individual employees' coverage statuses 

because they deal with their employees at an individual, unaggregated level. Under section 2 10, 

most private employees are covered. For State and local employees, however, coverage can vary 

substantially between States, positions, retirement systems, and even individual employees. To 

detennine whether FICA is applicable under section 218, the State or local employer must 

detennine if an employee's position is covered under the State's Section 218 Agreement. If not, 

the employer must then detennine whether the employee is mandatorily covered under section 

210 by establishing whether the employee is a member of a public retirement system. Using this 

information, employers are responsible for determining whether an individual is covered for 

Social Security and if FICA taxes should be withheld. 

3 
14 


Insert 33479A.007

State and local employers often receive additional help in making coverage determinations, due 

to the complexity inherent to Section 218 Agreements. SSA, through regulation, requires each 

State to have a State Social Security Administrator (State Administrator). The State 

Admi.oistrator is a State employee who is responsible for maintaining and administering 

provisions oftbe State's Section 218 Agreement. The admi nistrator is responsible for 

detennining which State and political subdivision employees are covered by approved Section 

218 Agreements and modifications, facil itating the expansion of coverage through additional 

modifications to the State's agreement, and providing SSA updates when there are changes in 

covered State or political subdivision entities. They also work with State and local employers to 

guarantee proper Social Security withholding and reporting, provide education to State and local 

employers and employees, and resolve coverage and taxation questions in coordination with SSA 

and LRS. The State Administrator also plays a central role in communicating information 

between SSA and State and local entities. Because Section 218 Agreements are voluntary 

agreements between SSA and the States, SSA 's communications to State and local entities must 

flow through the State Administrator. State Administrators are an essential part of this process 

and we appreciate the service they provide and the hard work that they do. 

SSA primarily provides support by confinning coverage status under a State's Section 2 18 

Agreement. At the State Administrator's request, we explain entities' coverage options, review 

proposed modifications to the State's Section 2 18 Agreement for legal sufficiency, and evaluate 

the coverage status of entities and positions when questions arise. We interpret, execute, and 

maintai11 Section 218 Agreements, as specified under section 218 of the Social Security Act and 

i11 coordination with State laws. We work closely with the State Administrators and their 

umbrella organization, the National Conference of State Social Security Administrators 

(NCSSSA), to identify coverage compliance risk factors, answer questions, and resolve any 

issues that arise. We also assist in educating the administrators on complex or error-prone 

aspects of coverage and provide them with the infonnation necessary to understand and 

administer complex coverage situations under section 218. We also support State Administrators 

with outreach to State and local entities and by participating in educational sessions for 

referendum voters. Finally, we are also responsible for establishing and maintaining our earnings 

records based on the amount of wages paid to employees. 

Prior to 1987, SSA was responsible for collecting Social Security and Medicare contributions 

from the States and ensuring that each State paid the correct amount of FICA taxes for all 

employees covered under its Section 218 Agreement. The State Administrators were responsible 

for ensuring that State and local government employers fi led timely and accurate returns and that 

they collected and paid the proper amount of Social Security and Medicare contributions to the 

Federal goveromeot. 

Effective January I, 1987, the Omnibus Budget Reconciliation Act of 1986 transferred 

responsibility for collecting employment taxes for wages paid under Section 2 18 Agreements 

from SSA and the States to the IRS. State and local employers are now required to file Fom1 94 1, 

the Employer's Quarterly Federal Tax Rerum, with the IRS directly, and the IRS is responsible 

for collectiog Social Security aod Medicare taxes. lo additioo to collecting taxes, the IRS verifies 

the amount of taxes owed and determines the amount that bas been paid. It is also responsible for 

4 
15 


Insert 33479A.008

interpreting FICA-related provisions of law and ensuring proper reporting and collection of 

taxes. 

Finally, in addition to the important roles that employers, State Administrators, SSA, and the IRS 

play, employees are offered the oppommity to regularly review the taxes that are being withheld 

via their pay stubs and tax documentation. To assist with this and to allow individuals to review 

the benefits their covered earnings should provide them, individuals may access their earnings 

records through the Social Security Statement, which is available to them at any time through 

a my Social Security account. 

Ea rnings Corrections 

The Social Security Act directs us to presume that our earnings records are correct as posted. 

Employers are responsible for classifying wages as covered or non-covered and reporting 

earnings appropriately. That said, there are instances in which we need to correct an individual's 

posted earnings. 

We frequently learn of small-scale errors through what is known as the " reconciliation" process. 

Every year, the TRS and SSA compare the wage information that employers report to the TRS on 

form 941 with the earnings report infonnation that SSA obtains from processing forms W-2 and 

W-3. If the employer's aggregate Social Security and Medicare wage amounts do not correspond 

to the W-2 and W-3 totals, then either IRS or SSA investigates and resolves the discrepancy, 

depending on the nature of the discrepancy. However, the reconciliation process will not catch 

situations where employers have misidentified their employees' earnings as covered or not 

covered. 

We may find errors when individuals apply for Social Security benefits. In the course of 

reviewing an individual's application, we investigate inconsistencies, such as gaps, which may 

indicate an error in employer-reponed earnings information. If an applicant infom1s us that his or 

her earnings record is incorrect, we request primary evidence of his or her earnings (e.g., a Forrn 

W-2 or W-2c, an employer-prepared wage statement, a statement of an employer, or a pay stub) 

or rwo pieces of secondary evidence to corroborate his or her claim. lf our review of the evidence 

leads us to determine that our posted earnings are incorrect, we correct the Social Security wages 

in our system. The earnings correction determination is then sent to the [RS to alert it to the 

possibility of uncollected taxes. 

We note that Social Security insured status and benefit payment depend upon the amount of an 

individual's covered earnings and not on the FICA taxes that be or she bas paid. The Act bases 

covered earnings on an individual's wages, and not on the amount of FICA paid for that 

individual. If we detect an error in the earnings record, locate evidence justifying that a 

correction is warranted, and then correct the error, we will immediately extend insured status or 

will base the amount of an individual's benefit on the corrected amount. 1 

1 The Tnost Funds arc also credited based on the amount of earnings, rather than on the taxes paid. Prior to 1950, the 

IRS accounted for all Social Security tax receipts (including penalties, imerest and additional taxes), and upon 

receipt inunediately credited such money to the Social Security Tmst Fund. This method presented two difficulties 

5 
16 


Insert 33479A.009

Additionally, if a State or local employer realizes that it should have been withholding FICA for 

its employees and had not been, we will credit the earnings based on sufficient evidence of the 

wages paid to the employees. IRS is responsible for collecting all taxes (including FICA) to the 

extent permitted by law. Because under the Social Security Act an individual's Social Security 

insured status and benefit amount depend on wages paid to the individual, we credit the 

individual's earnings record regardless of whether FICA has been paid. 

While instances do arise where FICA taxes were not paid, earnings mistakes and corrections go 

both ways. Many errors we see involve situations where an entity pays FICA in the mistaken 

belief that its employees are covered. When a State or local entity has paid Social Security taxes 

without an appropriate modification to the State's Section 218 Agreement, we work with the 

State to allow affected individuals to legitimize coverage based on the erroneous FICA 

contributions. However, the State has the option to either amend its Section 218 Agreement 

through an error modification, or to forego coverage and receive a refund of erroneous FICA 

payments. When the State decides to legitimize the coverage, no eamings correction is 

necessary, and no employee is harmed by an inability to recover FICA payments under IRS' 

three-year statute of limitation on refunds. 

Recent Improvements to the Administratioo of Sectioo 218 and Our Part11erships 

To strengthen our effons in this area, we took several actions in response tO the Government 

Accountability Office's 20 I 0 audit, "Social Security Administration: Management Oversight 

Needed to Ensure Accurate Treatment of State and Local Government Employees." 

Increased Communicatiou with NCSSSA and IRS 

Since then, we have strengthened our relationship with the NCSSSA and the IRS through the 

creation of the Section 2 18 Council, which is a collaboration established to increase 

communication between the Federal agencies and the State Administrators. We regularly meet 

and have informal conversations to discuss coverage risk factors, work collaboratively when 

issues arise, and offer ongoing training in areas that SSA and IRS have determined may require 

extra attention. We also participate in quarterly Section 218 Council meetings, meet annually 

with NCSSSA leadership, and provide substantive training for State Administrators at 

NCSSSA's annual conference. During the 2016 NCSSSA conference, which was open to all 

State Admioistrators, we presented at length on a variety of topics, such as completing Section 

218 Agreement error modifications after mandatory coverage; mandatory and voluntary 

for SSA: fi~t. while cash now out of the Tn1st Fund occurred at periodic intervals on a predicwblc basis. cash now 

into the Fund nuctuated considerably and irregularly; and second, SSA received no money for employers who had 

forwarded individual wage data, but then did not pay ~•c r taxes. 

Congress changed the law to alleviate these problems in the Social Security Act Amendments of 1950. This law 

provided ~tat Social Security taxes to be transferred to tltc Tn1st Funds would be computed by applying the 

appropriate tax r.ue to ~·e wage and self-employment records established and maintained by the Secretary of Health 

and Human Services (formerly Health Education and Welf.'lrc). as ccnified to ~te Secretary of the Treasury. This. in 

effect, meant that SSA 's Tmst Funds wonld be credited upon the basis of employer tax liability, not necessarily 

payment. 

6 
17 


Insert 33479A.010

coverage and their exclusions; how to fix Section 2 18 Agreement errors; coverage considerations 

for rehired annuitants; and how State and local entities can evolve. In recent years, SSA has also 

provided training on critical and developing issues, including the treatment of charter schools 

and coverage for police and fi refighters who are under retirement systems. 

Developed Comprehensive Training Materials, Guidance, and Resources 

We created comprehensive material for our website, the State and Local Coverage Handbook, 

and a dedicated training website designed for use by the State Administrators. In the past several 

years, we have diligently updated and expanded our online training materials to better equip 

State Administrators with the information, tools, contacts, and resources that they require to 

perfonn their jobs optimally. We provide the State and Local Coverage Handbook for the State 

Administrators' use, which is SSA's unredacted policy on the subject matter. The section 2 18 

training website entails basic and advanced training courses that provide more detailed I,'U idance 

on how to administer section 218. In addition, we developed an internal tool where we 

consolidate policy, procedures, and resources by topic so SSA employees have easy access to 

information relating to section 2 18 and how it is administered in one spot. 

Es!ablished Regional Exper/s 

In addition to creating these valuable training resources, we have stepped up our efforts to assist 

State Administrators with their frequent requests for guidance and evaluations on whether 

specific groups of employers are covered by their State's a1,rreement. Each SSA region has a 

specialist wbo is the point-of-comact for all questions from State Administrators in that region. 

The regional specialist works to quickly resolve any questions that State Administrators may 

have. At a State Administrator's request, we will also assist with communicating infom1ation to 

State and local entities, through educational sessions and informational meetings. 

Helped to Develop IRS' Compliance SelfAssessmenl Tool 

To offer an additional tool to the States, we assisted the IRS, in collaboration with NCSSSA, 

with the creation of the Federal, State, and Local Govemment Compliance Self-Assessment tool 

(IRS Form 1458 1). We promote this tool on our external section 2 18 website, as a way to allow 

employers to test their coverage compliance and to identify areas where there may be issues or 

that may require their increased attention. It also expla ins several common types of errors and 

offers resources for States' use. 

Created a Section 218 Agreement Dalabase 

We are also streamlining our coverage review process by allowing greater internal access to 

relevant documents. We have created a database of Section 218 Agreements, modifications, and 

related documents, which will allow us to complete a portion of the research needed for Staterequested coverage determinations with greater ease. Once fully functional, this database will 

allow our employees to search for entities among a State's Section218 Agreements and 

modifications, saving our legal team valuable research time. 

7 
18 

f 


Insert 33479A.011

Reviewing State and Local Regulations, Standardizing Lists of Covered Emities 

SSA's role within the coverage and tax withholding compliance process is limited. Our primary 

function is to assist State Administrators in executing coverage modifications that effectuate the 

State's coverage scheme; to interpret and confirm the coverage provisions contained in State 

Section 218 Agreements; and to serve as a partner and educator to the IRS and the States. But we 

are redoubling our effons to complete our role more effectively and to assist our government 

partners. To that end, we are currently reviewing our regulations and guidance related to State 

and local government coverage. We are looking for ways to streamline, clarify, or eliminate such 

guidance, while keeping our underlying policy and business processes intact. TI1ese changes 

should provide better clarity for our employees as they evaluate and execute Section 218 

Agreements. We are also looking to standardize the maintenance of comprehensive lists of 

covered entities for each State. These lists provide a quick reference of covered entities under 

each State's agreement and help SSA and State Administrators detern1ine employees' coverage 

efficiently. We are looking at ways we could enhance our maintenance of these lists across all 

regions with greater uniformity. 

Through our educational presentations, online tools, and recurring conversations, we strive to 

provide the State Administrators with the infonnation they need to ensure proper implementatioo 

of coverage. Through conference participation, annual meetings with NCSSSA leadership, and 

ongoing conversations with IRS and NCSSSA, we have developed relationships that enable State 

Administrators to facilitate better and more frequent communication with us when issues arise 

and to help prevent coverage errors from occurring. 

Conclusion 

Thank you for the oppommity to describe the history and complexity of Social Security coverage 

under section 210 and section 218 of the Social Security Act, as well as SSA's role in the 

coverage and tax withholding compliance process. Our relationship with the State Administrators 

and with the IRS is a vital one and we are committed to continuing to do our part to strengthen it. 

8 
19 

Chairman JOHNSON. Thank you, ma’am. 

Ms. Lough, welcome. Please, proceed. 

STATEMENT OF SUNITA LOUGH, COMMISSIONER, TAX EXEMPT 

AND GOVERNMENT ENTITIES DIVISION 

Ms. LOUGH. Chairman Johnson, Chairman Buchanan, Ranking 

Member Larson, Ranking Member Lewis, and members of the subcommittees, thank you for the opportunity to testify on issues surrounding the proper withholding and payment of Social Security 

and Medicare taxes in regard to State and local government employees. 

Mandatory Social Security and Medicare coverage for State and 

local employees is a relatively recent development. Under the original Social Security Act of 1935, State and local government employees were excluded from Social Security coverage. Beginning in 

1951, States were allowed to enter into voluntary agreements with 

the Federal Government to provide Social Security coverage to public employees. These arrangements are called Section 218 agreements because they are authorized by the Section 218 of the Social 

Security Act. 

In 1991, Congress made Social Security coverage mandatory for 

State and local government employees who were not already covered by a Section 218 agreement. But this mandate does not apply 

to employees participating in a qualifying public retirement system 

sponsored by their government employer. So today Social Security 

coverage of Government employees varies greatly among State and 

local employers. 

In general, employers are required to withhold Social Security 

and Medicare taxes from employees’ wages and also pay the employer’s share of these taxes. Employers are responsible for furnishing Form W–2 Wage and Tax Statement annually to each employee when income, Social Security, or Medicare tax was withheld. 

Employers above a certain size report quarterly to the IRS on total 

wages, wages subject to Social Security and Medicare taxes, and 

Federal income taxes using the Form 941, Employer’s Quarterly 

Federal Tax Return. Smaller employers file annually using Form 

994, Employer’s Annual Federal Tax Return. 

For State and local employers, determining proper withholding of 

FICA taxes for employees is especially challenging because some or 

all employees may or may not be covered by Social Security. For 

example, a school district may provide a qualifying retirement system only for a particular group of employees who meet certain criteria, not just teachers, making that group of employees exempt 

from Social Security coverage. 

The IRS has the responsibility for ensuring that all employers, 

both public and private, properly withhold and pay Social Security 

and Medicare taxes for their employees. The IRS and the SSA routinely match Social Security and Medicare wages on Form 941 with 

amounts reported on Form W–3, the Transmittal of Wage and Tax 

Statements, and follow up where there are discrepancies. 

In addition, the IRS reviews employment tax return information 

to classify returns for potential discrepancies that would indicate 

compliance action should be taken, including an audit. The IRS, 

through our Federal, State, and local function, has provided extenVerDate Sep 11 2014 10:22 Feb 13, 2019 Jkt 033479 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\33479.XXX 33479
20 

sive outreach services and training to units of State and local governments. As indicated above, we conduct audits to evaluate employment tax and information reporting compliance at the State 

and local level. 

The IRS also works with the SSA and State Social Security administrators on an ongoing basis on significant issues related to Social Security and Medicare coverage of public employees. This includes coordinating, when necessary, with the SSA or State Administrators when there is an audit of a public employer. 

We look forward to continuing collaboration with State and local 

government employers, the SSA, and the State Social Security Administrator, to ensure that Social Security earnings are accurately 

reported for public employers. 

This concludes my statement. I would be happy to answer your 

questions. 

[The prepared statement of Sunita Lough follows:] 

21 


Insert 33479A.012

WRITTEN TESTIMONY OF 

SUNITA B. LOUGH 

COMMISSIONER 

TAX-EXEMPT/GOVERNMENT ENTITIES DIVISION 

INTERNAL REVENUE SERVICE 

BEFORE THE 

HOUSE WAYS AND MEANS COMMITTEE 

SUBCOMMITTEE ON SOCIAL SECURITY 

AND SUBCOMMITTEE ON OVERSIGHT 

ON COMPLEXITIES AND CHALLENGES OF SOCIAL SECURITY COVERAGE 

AND PAYROLL COMPLIANCE FOR STATE AND LOCAL GOVERNMENTS 

JUNE 29,2017 

INTRODUCTION AND BACKGROUND 

Chairman Johnson, Chairman Buchanan, Ranking Member Larson, Ranking 

Member Lewis and Members of the Subcommittees, thank you for the 

opportunity to testify on issues surrounding the proper withholding and payment 

of Social Security and Medicare taxes in regard to state and local government 

employees. 

Mandatory Social Security and Medicare coverage for state and local employees 

is a relatively recent development. Under the original Social Security Act of 1935. 

state and local government employees were excluded from Social Security 

coverage because of unresolved Constitutional questions regarding the federal 

government's authority to impose taxes on state and local governments and their 

employees. 

Beginning in 1951, states were allowed to enter into voluntary agreements with 

the federal government to provide Social Security coverage to public employees. 

These arrangements are called "Section 218 Agreements," because they are 

authorized by Section 218 of the Social Security Act. All 50 states, along with 

Puerto Rico, the Virgin Islands, and approximately 60 interstate instrumentalities 

have Section 218 Agreements with the Social Security Administration (SSA). 

providing varying degrees of coverage for employees in the state. 

In 1986, Social Security and Medicare coverage for state and local government 

employees became subject to different rules. Prior to 1986, the only way for 

public employees to be covered for Medicare was under Section 218 

Agreements. In 1986, Congress mandated that almost all public employees hired 

after March 31 , 1986, must be covered for Medicare and pay Medicare tax 

regardless of their membership in a public retirement system. A limited exception 

is provided to exempt from Medicare certain state and local government 

employees who have been in continuous employment with the same public 

employer since 1986 and who are not covered under a Section 218 Agreement. 
22 


Insert 33479A.013

Originally, the SSA collected Section 218 taxes from governmental employers, 

but that responsibility was transferred to the IRS in 1987. However, the SSA 

retains the responsibility for assisting public employers as they follow applicable 

federal laws regarding Social Security and Medicare coverage, and for helping 

them ensure earnings records for workers paying into Social Security and 

Medicare are accurate. 

In 1991 , Congress made Social Security coverage mandatory for state and local 

government employees who were not already covered by a Section 218 

Agreement. But this mandate does not apply to employees participating in a 

qualifying public retirement system sponsored by their governmental employer. 

Approximately one-fourth of the nation's public employees are exempt from 

Social Security because they are covered by a qualifying public retirement 

system. 

Today, Social Security coverage of government employees varies greatly from 

state to state. In 26 states, at least 90 percent of state and local government 

employees work in positions covered by Social Security. By contrast, in 

California, Colorado, Louisiana, Nevada, and Texas, fewer than half of state and 

local government employees are covered. 

Coverage also varies greatly among the 90,000 local government entities in the 

U.S. There are an estimated 12 million full-time equivalent employees at the local 

level with payrolls in excess of $50 billion. These local entities, which range in 

size from major cities to tiny villages and school districts, employ approximately 

20 percent of the U.S. workforce. 

In fact, the largest proportion of government employees not covered by Social 

Security work at the local level. The majority of uncovered local government 

public employees are police officers, firefighters and teachers. 

Within this context, the interaction of federal tax, Social Security and state 

statutes and Section 218 Agreements creates complexities for governmental 

employers trying to determine correct Social Security coverage for their 

employees. Educating employers and enforcing compliance requires the 

coordination of the SSA and the IRS, as well as Social Security administrators 

employed by each state, who act as a bridge between the federal agencies and 

state and local employers. 

PUBLIC EMPLOYERS' RESPONSIBILITIES UNDER FICA 

Generally, the funding mechanism for the Social Security and Medicare 

programs is established under the Internal Revenue Code as the Federal 

Insurance Contributions Act (FICA). In general, employers are required to 

2 
23 


Insert 33479A.014

withhold Social Security and Medicare taxes from employees' wages, and also 

pay the employer share of these taxes. 

Employers are responsible for furnishing Form W-2, Wage and Tax Statement, 

annually to each employee from whom income, Social Security and/or Medicare 

tax was withheld. Employers above a certain size report quarterly to the IRS on 

total wages, wages subject to Social Security and Medicare tax, and federal 

income tax, using Form 941 , Employer's Quarterly Federal Tax Return. Smaller 

employers file annually using Form 944, Employer's Annual Federal Tax Return. 

For state and local employers, determining proper withholding of FICA taxes for 

employees is especially challenging, because employees may or may not be 

covered by Social Security. As noted above, Social Security coverage does not 

apply to employees who are members of a qualifying public retirement system -

which is also referred to as a "FICA replacement plan" - unless those employees 

are covered under a Section 218 Agreement. Employers with workers in a 

qualifying public retirement system and not covered by a 218 Agreement do not 

withhold Social Security taxes or show any "Social Security wages" on the W-2 

form for those employees. 

Making this situation still more challenging, variations often exist in Social 

Security coverage among employees working for the same public employer. For 

example, a school district may provide a qualifying public retirement system only 

for a particular group of employees who meet certain criteria, such as teachers, 

making that group of employees exempt from Social Security coverage. Other 

workers, such as school bus drivers, who are employed by the same school 

district but not covered by that retirement system, would be covered by Social 

Security and thus subject to FICA withholding. Some employees may be covered 

by both the public retirement system and a Section 218 Agreement. 

An additional consideration for local employers involves determining whether 

their public retirement system does in fact qualify as a FICA replacement plan 

and thus allows their employees to be exempt from Social Security coverage. 

Making this determination has become more of a challenge in recent years 

because of the dramatic changes in retirement-plan design that have occurred 

since mandatory Social Security coverage was implemented in 1991. Confusion 

among public employers arises in part because employees must be covered for 

each payroll period, potentially creating a constant in-and-out-of-coverage 

situation with each pay period (depending on the plan design), for what the IRS 

defines as FICA equivalency. This can create situations where entities may have 

been paying Social Security in error, or not paying Social Security when they 

should have been. 

IRS COMPLIANCE EFFORTS IN THE STATE AND LOCAL AREA 

Ensuring Employment Tax Compliance among Public Employers 

3 
24 


Insert 33479A.015

The IRS has the responsibility for ensuring that all employers, both public and 

private, properly withhold and pay Social Security and Medicare taxes for their 

employees. 

In attempting to determine proper withholding and payment of employment taxes, 

the IRS and the SSA routinely match Social Security and Medicare wages on 

Form 941 with amounts reported on Form W-3, Transmittal of Wage and Tax 

Statements. 

When more wages are reported on Form 941 than on W-3, the SSA investigates, 

and the employer ultimately may be subject to penalties for inaccuracies under 

the tax law. When more wages are reported on Form W -3 than Form 941 , the 

IRS will investigate whether the employer underpaid employment tax, and can 

assess any additional tax that may be due. Typically, the first action the IRS will 

take when a discrepancy is found is to send the employer a reconciliation notice, 

giving them a chance to explain or correct the discrepancy. 

After compiling all the information from submitted employment tax returns, the 

IRS gathers employment tax data on government entities through its Return 

Information and Classification System (RICS) to classify returns for further 

attention. If the IRS determines that a potential discrepancy exists, it may take 

compliance action. This may involve an audit. 

Looking at the overall picture of a public employer's reported withholding and 

payment amounts does not always allow the IRS to uncover errors, because 

applicable exceptions apply at the employee level, not at the entity level. 

Coverage exceptions are based on the circumstances of each employee, such 

as job position and date of hiring. 

The IRS can glean some information from the W-2. because employers must 

report on line 13 if the employee is an active participant in a plan for federal, 

state or local employees. However, employees participating in such a plan may 

still be covered under a Section 218 Agreement. Generally, these line items 

indicate valid reasons why FICA may not apply, but not the precise amount of 

any exception, which may vary employee by employee. Moreover, a state or 

local employer- like all employers, public or private- may take a filing position 

under the tax law that certain payments to employees are excludable from 

wages, and thus not subject to FICA or reported to the IRS. 

The IRS's Federal, State and Local Function 

The IRS created the Federal, State and Local (FSL) function within the Tax 

Exempt/Government Entities (TE/GE) division in 2000 to serve as the focal point 

within the IRS for meeting its compliance responsibilities in the state and local 

4 
25 


Insert 33479A.016

government area. Since then, FSL has provided extensive outreach services and 

training to units of state and local governments. 

For example, the FSL section on IRS.gov provides a wealth of information to 

state and local employers, including the Public Employers Toolkit. The Toolkit 

includes links to various employment tax forms, along with IRS publications 

available to public employers to help them understand and comply with 

employment tax requirements. 

FSL has also focused on conducting audits to evaluate employment tax and 

information reporting compliance at the state and local levels. However, the 

number of these audits is relatively small. FSL completed 372 audits of public 

employers in Fiscal Year (FY) 2015 and 362 audits in FY 2016. 

As part of its efforts, FSL several years ago conducted reviews of state-level 

Section 218 Agreements in order to develop a more complete picture of these 

agreements and structures that define Social Security coverage of public 

employees in each state. The information gained from this assessment is helping 

improve FSL's overall service and compliance efforts at the state and local 

levels. 

FSL also works with the SSA and state-employed Social Security administrators 

on an ongoing basis on significant issues related to Social Security and Medicare 

coverage of public employees. This includes coordinating, when necessary, with 

the SSA or state administrators when there is an audit of a public employer. For 

example, during an audit of a local government, the IRS may contact the Social 

Security administrator for that locality's state to clarify the employer's status. This 

includes determining whether the entity's employees are covered under a 

Section 218 Agreement and, if so, what specific exclusions apply to that entity 

that must be taken into account during the audit, including exceptions that are 

unique to certain employees. 

The IRS also regularly receives helpful guidance and support from its Advisory 

Committee on Tax-Exempt/ Government Entities (ACT) on employment tax 

issues related to state and local governments. For example, in its 2017 annual 

report, the ACT noted the confusion that exists among various local 

governments, especially smaller entities, regarding whether their retirement 

systems can be considered FICA replacement plans. The ACT recommended 

that the IRS provide additional training and support, both to FSL examiners and 

local governments, on the complexities of retirement plan design. Additionally, 

the ACT recommended that auditors of state and local entities include Section 

218 coverage and FICA replacement plan requirements within the auditing scope 

for their financial statements. 

FSL will continue working to improve outreach, education and compliance 

activities related to state and local government employers. FSL also looks 

5 
26 

f 


Insert 33479A.017

forward to continuing collaboration with the SSA and state Social Security 

administrators, to ensure that Social Security earnings are accurately reported for 

public employees. 

Chairman Johnson, Chairman Buchanan, Ranking Member Larson, Ranking 

Member Lewis and Members of the Subcommittees, this concludes my 

statement. I would be happy to answer your questions. 

6 
27 

Chairman JOHNSON. Thank you, ma’am. 

Ms. Motza, is that correct pronunciation? 

Ms. MOTZA. It is Motza, but that is close enough. 

Chairman JOHNSON. Thank you. You are recognized. Please, 

proceed. 

STATEMENT OF MARYANN MOTZA, PH.D., LEGISLATIVE COMMITTEE CHAIR AND PAST PRESIDENT, NATIONAL CONFERENCE OF STATE SOCIAL SECURITY ADMINISTRATORS 

Ms. MOTZA. Thank you. 

Chairman Johnson, Chairman Buchanan, Ranking Member Larson, Ranking Member Lewis, and members of both subcommittees, 

thank you for inviting the National Conference of State Social Security Administrators, or NCSSSA, to testify about the States’ perspectives on Social Security coverage and payroll tax compliance by 

State and local government. 

To supplement our written testimony, I want to provide Members 

of Congress with a couple of examples of the types of issues and 

concerns the State Social Security administrators deal with. 

A small town calls the State Administrator in utter panic. The 

IRS’ service center in Cincinnati is about to seize all of the town’s 

police and fire vehicles for failure to pay FICA on their police officers and firefighters. The service center assumes Social Security 

payments were owed based on its review of 941 filings. 

The State Administrator’s record show that a town has a Section 

218 agreement that covers civilian employees under Social Security, but excluded police officers and firefighters. The State Administrator intervenes and provides the accurate coverage and tax obligation information to the IRS, and they reverse their erroneous assessment. The town can continue protecting and serving the public. 

Another example is that in the early 1950s a State provides public pension plan coverage for their employees, but not for employees 

of its cities and towns. State legislature authorizes voluntary Social 

Security coverage for employees of cities and towns. The city of last 

resort enters into a Section 218 agreement in 1954. In 1961, the 

State legislature establishes a separate public pension plan for employees of cities and towns. 

The next year, the city asked the State Administrator to file the 

necessary paperwork with the Social Security Administration to 

withdraw from the Section 218 agreement so they can join the new 

public pension plan. SSA approves the withdrawal from Social Security in 1965. If the city had waited to request permission to withdraw until the mid-1980s, the State Administrator would not have 

even contacted SSA and instead would have advised the city that 

withdrawal from Social Security was no longer an option. 

These two examples show how the State Administrator is the 

critical bridge or liaison and facilitator between the Federal Government, both SSA and IRS, and States, public employers, employees, and pension systems. Rather than being a one-way street and 

just sending information from the Federal Government down to the 

State and local governments, the Social Security State Administrator is the key conduit of information both ways. 

The proper performance of that facilitator role, however, has 

been problematic since 1987, in part because of how the Treasury 

28 

Department and IRS interpreted an IRC Section 6103. The State 

Administrators are no longer aware of noncompliant public employers. The lack of communication between the IRS and State Administrators results in erroneous Social Security and Medicare coverage and benefits, as well as incorrect FICA tax assessments by 

the IRS. 

Since 2012, the IRS has identified approximately 10 major risk 

areas nationwide among State and local governments. The IRS cannot, however, tell State Administrators what specific issues exist in 

their individual States. Thus, the State Administrator cannot assist 

the public employers to voluntarily comply like they did prior to 

1987. 

The valued partnership with SSA also needs to be renewed and 

reinvigorated. Prior to 1987, the States and SSA worked closely together to ensure proper coverage and collection of contributions. 

Since 1987, the efficiency and effectiveness of that partnership has 

been erratic and has even at times resulted in inconsistent advice 

from different regional offices and the headquarters policy office. 

A further complicating factor is that the Government Accounting 

Standards Board, GASB, disclosure standards and other auditing 

oversight organizational guidance standards do not test for Social 

Security or Medicare. As a result, when public employers receive 

a so-called clean audit, they have no idea that a potentially significant noncompliance area isn’t even being examined. A FICA standard will account for 71 percent of State and local government employees’ earnings nationwide that are currently not even reported 

on financial statements. 

In conclusion, the irony of the State Administrator job is that 

when our role is performed properly and completely, it gives the 

impression that either nothing is being done or the job is minimal. 

To me, the job of State Social Security administrator is like a duck 

on a pond, everything looks smooth and unlabored on the surface, 

but underneath you are padding like crazy. NCSSSA would appreciate congressional, SSA, Treasury Department, and IRS help with 

the paddling. 

I am happy to answer questions. Thank you. 

[The prepared statement of Maryann Motza follows:] 

29 


Insert 33479A.018

Introduction 

Statement by Or. Maryann Motza 

Legislative Committee Chair and Past President of the 

National Conference of State Social Security Administrators (NCSSSA) 

on 

Complexities and Challenges of Social Security Coverage and 

Payroll Tax Compliance for State and Local Governments 

before 

Committee on Ways and Means, 

Subcommittees on Social Security and Oversight 

U.S. House of Representatives 

June 29, 2017 

Chairman Johnson, Ranking Member larson, Chairman BuChanan, Ranking Member lewis, and Members of 

both Subcommittees: thank you for inviting the National Conference of State Social Security Administrators 

(NCSSSA) to testify about the states' perspectives on Social Security coverage and payroll tax compliance for 

state and local governments. 

I am Or. Maryann Motza and I served as tile State Social Security Administrator for the State of Colorado from 

April 1993 through December 2016. I am proud to say I was elected to serve as NCSSSA President on three 

separate occasions and currenUy continue to serve as the NCSSSA legislative Chair. I am honored to be 

selected by NCSSSA to testify on tlleir behalf about roles of the states related to state and local governments' 

Social Security and Medicare coverage, FICA taxes, and public pension system compliance matters 

(collectively referred to in the remainder of this document as "state and local coverage" unless otherwise 

stated). 

NCSSSA is available to assist members of Congress, and our federal partners in the Executive Branch (i.e., 

U.S. Social Security Administration "SSA", the Treasury Department, and Internal Revenue Service ' IRS"), 

when any legislative or regulatory proposals or other issues arise associated with state and local government 

Social Security/Medicare coverage and FICA) taxes, and matters related to public pension systems to the 

extent they impact state and local coverage. 

To provide the members of Congress with the proper context for our testimony we will start with a brief 

background on NCSSSA, followed by a high-level overview of key dates. specifically when changes to Federal 

laws affected state and local government Social Security and Medicare coverage. We will then address the role 

or the State Social Security Administrator (State Administrator) In administering Section 218 Agreements and 

ensuring FICA and employment tax compliance by public employers, challenges the State Administrators face, 

and areas for improvement. Finally, we will provide some cautionary comments about possible unintended 

consequences if certain actions are taken by Congress. 

Background on NCSSSA 

NCSSSA was founded in 1952, after the U.S. Social Security Act was amended by Congress to include Section 

218 (codified as 42 U.S.C. 418) in 1950. NCSSSA is the only professional organization lor State Administrators 

in the country. The NCSSSA was established to provide a unified state perspective at the federal level, an ongoing medium for problem solving, and an open forum for the development of new policy with the federal 

government. Since its inception, the NCSSSA has provided an effective network of communk:ation for federal, 

state, and local governments concerning Social Security (and Medicare) coverage, federal employment tax 

compliance, and public pension system policies.' 

History of State and Local Social Security and Medicare Coverage 

A brief history of some or the most significant federal law changes that apply to state and local coverage is 

important to understand the remainder of our testimony. 

' For furlher details on NCSSSA, State Social Security Administrators, and tile unique legal requirements that apply to public 

employers and employees associated with Social Security and Medicare coverage and benefits. public 

pension plan requirements, and employment taxes, go to: http://www.ncsssa.org/ and the Federai·Stale Reference Guide 

(IRS Pub. 963), which is a joint publication of the IRS, SSA. and NCSSSA: http://www.irs.gov/!l!Jblirs·pdf/p963.odf. See, 

also, M. Motza and D. Conder. "Common Errors in State and Local Government FICA and Public Retirement System 

Compliance'", Government Finance Review, August 2009. 

P&QO t ol iO 
30 


Insert 33479A.019

1935: Social Security was first created. State and local government employees are not eligible to 

participate due to the Constitutional limitations regarding the power of the federal government to tax 

sovereign entities, i.e .• the states. (Amendment X, U.S. Constitution) 

1950·1951: Many government employers did not, at the time, have their own retirement systems so the 

U.S. Congress amended the Social Security Act by adding Section 218 to allow states to voluntarily enter 

into agreements with the Social Security Administration to extend Social Security coverage to state and 

local government employees in their respective states who were not covered by a public retirement system. 

That approach ensured compliance with the state sovereignty requirement of Amendment X of the U.S. 

Constitution. Both •mandatory• and "optional" exclusions apply to Section 218 coverage agreements. 

Voluntary Social Security coverage became available for state and local government employees for those 

not in a public retirement plan position (these types of Section 218 coverage groups are referred to as 

"Absolute Coverage Groups'). Modifications to these •master· Section 218 Agreement are used to add or 

change coverage for the state and its political subdivisions. Dissolutions are filed by the State Administrator 

to notify SSA that a public employer no longer legally exists. 

Under federal law each slate's Governor was charged with implementing the voluntary coverage 

agreements on behalf of their state and its political subdivisions. State enabling legislation delineated how 

each state wanted to apply the U.S. Social Security Act (within federal guidelines). The State 

Administrators collect the Social Security contributions. 

1954-- Voluntary Social Security coverage became possible for those in a public retirement plan via a 

referendum process. The State Administrator must conduct the referendum elections and submit proper 

paperwork to SSA for final approval of Modifications to the state's master Section 218 Agreement to 

effectuate such coverage. 

1965 - Medicare program created and added to coverage for positions under a Section 218 Agreement. 

April 20, 1983 - Section 218 Agreements became irrevocable going forward. State & local governments 

can no longer terminate all or part of their Section 218 Agreements with the SSA. 

April1, 1986 -- Mandatory Medicare applies to all new-hires by all state and local governments who are 

covered by a public retirement plan. Employees hired prior to this date and who have been in continuous 

employment with the same employer are exempt from Medicare coverage. 

January 1, 1987 •• IRS became the direct collection agent for FICA taxes with enforcement authority. State 

Administrators no longer perform that function and SSA is no longer responsible for overseeing the Social 

Security/ Medicare collections by state and local governments. 

July 2, 1991 -The effective date for changes In federal law that were made in the Omnibus Budget 

Reconciliation Act of 1990, commonly referred to as "Mandatory Social Security." Social Security coverage 

became required for most state and local government employees who are not already covered by a Section 

218 Agreement or members of a ~ ll;A replacement public pens1on plan ('Quallfy!!!S f-'lan") WhiCh IS 

different from a qualified public pension plan. 

Section 218 defines the states as excluding the District of Columbia, Guam, and American Samoa, therefore, 

tor Section 218 purposes. NCSSSA refers to the states as 52 in total-all 50 states plus Puerto Rico and the 

Virgin Islands. collectively representing the more than 90,000 state and local government (public) employers 

and their more than 16.2 million employees2 Section 218 allowed states the option of voluntarily providing 

Social Security (and, since April 1986, Medicare-only) coverage for state and local government employees. 

Direct involvement of each state in determining the extent of Social Security (and later Medicare-only) coverage 

it wanted to provide to their state and local governmental employees ensured compliance with the state 

sovereignty requirement of Amendment X of the U.S. Constitution. Section 218 represents a mutual 

federaVstate commitment to assure that voluntary participation in the Social Security program is a viable part of 

2 U.S. Department of Commerce, Ecooomics and Statistics Administration, Census Bureau, "2012 Census of Governments: 

Employment Summary Repor1". released March 6, 2014: httos:/lwww2.census.gov/govsfapesl2012 summarv reoort.odf; 

and 'Government Organization Sommary Rep011: 2012". released September 13,2013: 

https;/1Www2.cenws.aov/govsJooglg12 org.pdf: and State and local Government Payroll Data: 2012. released March 

2012: State and Local Government Employment and Payroll Data: March 2012, 2012 Census of Governments: 

https:llfactfinder.census.govlfacesltablesefVices/jsf/oages/productview.xhtml?src=bkmk . 

Page 2 of 10 
31 


Insert 33479A.020

employee benefit options available to state and political subdivision employees. The responsibility for 

administering the Section 218 Social Security program tor public employees varies depending on eaCh state's 

enabling legislation. 

State Social Security Administrator Responsibilities and Value 

NCSSSA wants to remind members of Congress of the long-standing responsibility each State Administrator 

must fulfill as the principal liaison between all of its state and local government employers, employees, and 

public pension systems and the federal government, especially the SSA and the IRS. Proper performance of 

that liaison function on a continuing basis helps avoid serious financial and public relations issues for the states 

and their political subdivisions as well as tor the federal government. 

The essence of each State Administrator's role and responsibililies In administering Section 218 and aiding in 

proper compliance with Section 210 (and Internal Revenue Code Section 3121) is to be a "bridge" between the 

federal government -- both the SSA and the IRS - and the nation's public employers and employees and their 

legal and financial advisors. SSA Regulation 20 C.F .R. §404.1204 requires eaCh state to designate at least one 

state official to administer that state's Section 218 Agreement. 

The SSA is responsible for proper administration of Section 218 Agreements from the federal perspective. The 

SSA's Program Operations Manual System (POMS) includes a policy that outlines every state's duties 

applicable to proper administration of Section 218 Agreements. The detailed State Administrators' 

responsibilities are outlined in SSA's Program Operations Manual System (POMS) SL 10001.130, State 

Administrator Responsibilities (ht1Qs://secure.ssa.gov/apps10/ooms.nsfllnxl1910001130 ). The major 

responsibilities of State Administrators that are listed In that policy are: 1. Administer Section 218 coverage; 

2. Notify SSA about any state administrator Changes; 3. Communicate with SSA, IRS, employers, and 

stakeholders; 4. Maintain Section 218 related records; 5. Perform education and outreach; 6. Determine 

necessary funding; 7. Determine necessary staffing; 8. Understand legal framework; and 9. Program strategies. 

Legal opinions and interpretative documents such as those issued by each State Attorney General's Office, the 

SSA, or the Treasury DepartmenVIRS are vital to proper interpretation of the agreements and their 

Modifications. The State Administrator's records are usually the sole repository of suCh interpretative 

documents, thus reinforcing the importance of State Administrators being actively involved In all Social Security 

and Medicare coverage and FICA tax enforcement actions involving state and local governments. 

Thus, each State Administrator is the principal state official who ensures compliance with federal employment 

lax laws under Section 218 and related law and for verifying that state laws enacted in the future are not in 

conftict with federal requirements. EaCh Administrator also protects the interests of their individual state and its 

political subdivisions by property analyzing current and proposed state laws coupled with the federal law, 

thereby ensuring the efficient and effective administration of Social Security and Medicare coverage, 

employment tax laws, and public pension system obligations for state and local government employers and 

employees. There are profound advantages to ali levels of government nationwide in having a dedicated and 

knowledgeable State Administrator. Failure for stales to continue funding these positions would be ·penny wise 

and pound foolish"; the money ·saved• by the stales in defunding or otherwise reducing support for these 

positions will be more than offset when compliance problems are found by the IRS and/or SSA among state and 

local governments. The State of Missouri experienced first-hand the negative political consequences of 

ignoring the State Administrator function for many years.' Their errors resulted in Congress requesting a 

special study by the U.S. Government Accountability Office (GAO). The GAO issued its final report In 

September 2010, which addressed: (1) how the Social Security Administration (SSA) works with states to 

approve Social Security coverage to ensure accurate coverage of public employees, and (2) how IRS identifies 

incorrect Social Security taxes for public employees• 

To address budgetary constraints and pension liability concerns. many state and local governments throughout 

the country have also been making Changes to their pension systems and looking for ways to reduce their 

costs. These changes, however, without knowledgeable scrvtiny, can have an adverse effect upon a state or 

3 Social Security Administration Program Operations Manual System (POMS). SL 10001.130, State Social Security 

Administrator Responsibilities, https://secura.ssa.gov/apps1 Ofooms.nsf/lnx/1910001130). 

'M. Grochowski, el al., REPORT: Federal Section 218 Task Force For Missouri School Districts, March 31, 2009. 

http://oa.mo.gov/accV033109FederaiTaskForceReoort.pdf. 5 SOCIAL SECURITY ADMINISTRATION: Management Oversight Needed to Ensure Accurate Treatment of State an<! 

Local Government Employees GA0-10·938, Published: Sep. 29, 2010. Publicly ReleaSed: Oct. 4, 2010, 

hllp:/{www.gao.gov/products/GA0·1 0-938. 

Page 3of 10 
32 


Insert 33479A.021

local government's federal tax compliance, as these state laws may conflict with federal law. As noted in the 

Federal-State Reference Guide (IRS Pub. 963; www.irs.govlpub/irs-odf/p963.od0 and the above noted GAO 

study, this area of state and local government federal employment tax is intricate and seemingly minor changes 

can result in a federal tax liability. 

Unlike their private sector counterparts, state and local governments not only face financial problems if they 

make errors in FICA tax compliance, they also have negative media and public relations consequences 

because they are supported by taxpayer funds. State Administrators are vital partners with the SSA and IRS in 

helping all levels of government avoid the negative financial, media, and political consequences that occur 

when federal and state laws are not properly complied with by state and local governments and public pension 

systems. 

Thus. it is evident that the State Administrator has great responsibilities which impact the state's obligations 

under the Social Security Act. Internal Revenue Code, the Section 218 coverage Agreement, under state laws. 

and also on the Social Security and Medicare-only coverage of Individual public employees. It is important that 

there continue to be a central point within each State where this expertise and experience is brought together 

for these purposes. 

Challenges 

The major challenges faced by the states in administering Section 218 and aiding in proper employmenVpayroll 

tax compliance by state and local government employers are: 

1. Since January 1987 when the IRS became responsible for collecting FICA taxes from state and local 

governments communication by the IRS with State Administrators about the nature and extent of 

Section 218 coverage has been virtually non~xlstent due to how the Treasury Department and IRS 

have interpreted I.R.C. §6103. From the inception of Section 218 coverage in 1950-51 through 1986, 

State Administrators were responsible for collecting Social Security (and later Medicare) contributions from 

public employers and transmitting the funds to the U.S. Treasury Department. SSA exercised 

administrative oversight of the states for all aspects of Section 218, including ensuring both proper 

coverage and contribution payments. 

NCSSSA thinks It is logical to assume that it was merely inadvertent oversight that the Treasury 

Regulations were not updated when the FICA tax obligations were transferred on January 1, 1987, from the 

states to the IRS. Thus, this change would be far less controversial than requests of others who have 

desired access to tax records from the IRS, especially since the states are one of the parties to each 

Section 218 Agreement and Modification (SSA is the other party), No individual local government or state 

agency or department can enter into a Section 218 Agreement without the state through that state's State 

Administrator. 

The restriction on open communication with State Administrators due to the current interpretation of IRC 

§6103 places IRS Federat State and Local Government (FSLG) Specialists at a disadvantage and wastes 

IRS time and other resources. FSLG agents cannot discuss specific public employer tax information with 

the State Administrators even though that individual officially represents the state which is one of the parties 

to every agreement. Without this direct communication between the State Administrator and the IRS/FSLG. 

the IRS cannot correctly interpret coverage and, thereby, proper1y assess and resolve tax issues. This 

information is held solely by State Administrators who maintain their state's Section 218 Agreements and 

relevant supporting documentation, including critical interpretative rulings and determinations issued by 

SSA. the state's Attorney General's office. and IRS. 

Since 1987, when the IRS assumed the tax collection responsibility, State Administrators no longer receive 

feedback on non-complaint public employers. The lack of communication between the IRS and State 

Administrators results in both erroneous Social Security and Medicare coverage and benefits as well as 

incorrect FICA tax assessments by the IRS. These errors have been documented in numerous places, 

including the study done by the Government Accountability Office {GAO). 

Of particular note, that GAO report found that the lack of shared information among the SSA, IRS, and 

State Administrators is problematic to proper Social Security coverage and tax administration for this 

community. This constraint can readily be overcome by reinterpreting Treasury Regulations under 26 

Pege4 ol 10 
33 


Insert 33479A.022

U.S.C. §6103(d) and 26 USC 3121 (FICA tax), which is explained further in the next section (Areas for 

Improvement). 

2. NCSSSA is seeing an unprecedented level of erosion of the states' political and financial support 

for the State Administrator function throughout the country. As with other issues in this area, the 

beginning or this problem began in most states after their responsibility for collecting Social Security and 

Medicare contributions was removed as of 1987. Administration of Section 218 in many states relied on the 

"float• from interest earned from Social Security and Medicare contributions they received from employers 

of their covered employees. Those and other sources of funding for State Administrators, such as General 

Funds, have been diminished significantly especially since the economic downturn that occurred in 2007-

2008. State Administrators need Congressional, SSA, and Treasury DepartmenVIRS assistance to help 

reverse that trend. Details on our recommendations to address this challenge are noted, below, in the 

"Areas for Improvement", number 3. 

3. Proper administration of state and local coverage and tax compliance requires a robust succession 

planning and training program for all officials. Since 1987 there has been a steady diminishment of 

planning and training in many states as well as within both the SSA and IRS. The SSA regional offices 

have been delegated responsibility for being the main resource for State Administrators, with SSA's 

headquarters having less of a role in Section 218 administration and oversight than was the case prior to 

1987. Due to federal funding constraints, and high turnover in the individuals designated as contacts in this 

area, the SSA regional offices have less knowledgeable and experienced staff with state and local 

government policy and compliance. As a result, the regional offices sometimes provide inconsistent 

feedback to the states resulting in disparate treatment nationwide on similar issues. 

Similar financial reductions at the IRS. especially in recent years, have been undermining the ability of the 

IRS's FSLG section to provide services to their state and local government customers. The problem is now 

further exacerbated by organizational changes the IRS implemented this year by placing FSLG under the 

Exempt Organizations office within the Tax Exempt and Government Entities Division. That change is likely 

to further dilute the ability of FSLG to focus on state and local governments' voluntary compliance with FICA 

and other employmenttaxes.

8 

4. Need for improved communication among the states and our federal partners (both SSA and IRS). 

One mechanism for accomplishing that goal already exists, the Section 218 Council. This is a collaborative 

group intended to bring out and hopefully address areas of mutual concern, but needs to be consistently 

used by all parties. 

The Section 218 Council was an outgrowth of a special meeting in Baltimore that was convened in April 

2010, by Mr. Ken Anderson, who was at the time, SSA's State and Local Government Policy Team Leader. 

The purpose of this meeting was to discuss issues, concerns, and develop recommendations for how to 

improve state and local government coverage and compliance. The meeting was called due to concerns 

that arose out of the Missouri Task Force Report and the Congressional request for the Government 

Accountability Office (GAO) to study Section 218 administration issues and concerns nationwide. The April 

2010 meeting included officials from throughout the country who represented the SSA (headquarters Policy, 

Office of General Counsel, and Regional Offices), IRS (Federal, State, and Local Governments section), 

and states (Alabama, Arizona, Colorado, Idaho, Illinois, Kentucky, Louisiana, Maryland, Missouri, and New 

York). The meeting resulted in creation of several committees, each composed of SSA, IRS, and state 

officials, that were to follow-up on the April 2010 recommendations. 

One of the key recommendations that came out of the April meeting was the need for the states to have a 

voice and direct involvement with SSA and IRS by increasing communication, provide a venue to raise and 

address issues and concerns, and facilitate feedback regarding ongoing efforts to address state concerns. 

The Section 218 Council Charter was finalized and the Council began meeting in September 201 1. 

Implementation of, and support for, the Council has been inconsistent since it was created, appearing to be 

due to inadequate succession planning which, in tum, seems to be the result of funding constraints within 

the IRS and SSA. NCSSSA, however, has noticed improvement over the last few years; continuing the 

6 This subject was included as a recommendation to IRS Commissioner Koskinen by the Tax Exempt alld Government 

Entities (TEIGE) Advisory Committee's 2017 Report of Recommendations, issued June 7, 2017: 

https :/lwww.irs gov/pubJirs~QdUp4344 pdf. 

Page 5of1D 
34 


Insert 33479A.023

practice will greatly help bolh the federal and stale governments assist stale and local governments wilh 

Social Security and Medicare coverage and FICA/payroll tax compliance. 

5. Need a better understanding of, and appreciation by, the SSA and the IRS of the critical fact lhat !!£ 

Section 218 Agreement or Modification can be entered into by local governments unless the state 

authorizes doing so. The state must be a party to each agreement and modification and the Stale 

Administrator Is the vital official who oversees and ensures proper processing of all such agreements. The 

Stale Administrator coordinates education of the stale and local government employers and employees 

regarding their options under all relevant aspects of federal laws (bolh Social Security Acl and Internal 

Revenue Code) and state laws is essential to ensuring public employers and employees make informed 

decisions aboul lheir financial futures. Unfortunately. in recent years. bolh SSA and the IRS have largety 

been unavailable in assisting the slates in such educalion efforts. 

6. Need for greater understanding and appreciation of the Importance of the State Administrator as the 

central repository of knowledge about both federal and state laws and critical interpretative 

documents applicable to each state's Section 218 Agreement/Modifications and public pension 

system coverage. Neither lhe SSA nor the IRS have the insight into the nuances that exist in each slate 

vis-a-vis their decision when each Implemented Section 2181o the extent to which Social Security coverage 

was deemed appropriate for their public employees via their enabling statutes. The Stale Administrators 

also are familiar with the public pension systems and coverage that is unique to each state. Without 

including the State Administrator and the documentation held in his/her office, it is impossible for the IRS to 

property oversee and enforce employment taxes for state and local governments. and for SSA to administer 

Section 218. That is where each State Administrator can be a vital partner in ensuring proper Social 

Securily coverage and payroll lax compliance by slate and local governments. That partnership and 

cooperation between the slate and each federal agency is vital to ensuring lhe continued viabillly of 

Amendment X of the U.S. Constitution. 

7. Need for improvement in SSA and Treasury Department/IRS policy interpretations and issuance of 

regulations to be In consistent with the federal laws. Issuance of new, and even amending existing, 

policies and regulations in this area without the unique insights the slates can offer result in unnecessary 

complications lo state and local coverage and FICA tax compliance. thereby making the program appear 

more complex than the law that governs il 

Areas for Improvement 

NCSSSA has a number of recommendations that will improve state and local government coverage and 

compliance and proper administration of Section 218 and Section 210 oflhe U.S. Social Security Act and 

Internal Revenue Code Section 3121 and Seclion 6103 while ensuring adherence to state sovereignty 

guaranteed by Amendment X of lhe U.S. Constitution: 

1. Restore the strong worl<lng relationship between the states, SSA, and the IRS. As noted above in lhe 

"Challenges' portion of this testimony, the relationship between the slates and SSA was exlremely strong 

and mutually respecllul prior to the federal law changes that went into effect on January 1, 1987, when the 

IRS became responsible for collecting FICA taxes from state and local governments' From 1987 until the 

mid-1990's SSAwas focusing on reconcmng lhe pre-1987 Social Security and Medicare conltibutions by 

the states and the IRS was still learning about their new FICA tax customers and beginning implementation 

of lhe changes lo federal law. 

A positive turning point came in 1995 when the SSA. IRS, lhe Stale of Colorado. and Mercer cooperatively 

developed the Federal-State Reference Guide (IRS Pub. 963), which became lhe first-ever joint publication 

of lhe IRS. SSA. and a slate. Publica lion 963 consolidated all of the key information needed by state and 

local governments about their unique Social Security and Medicare coverage and benefits as well as their 

public pension system and FICA tax obligations. It qulddy became a key reference source not only for 

federal officials and State Administrators. but also for state and local government employers. employees. 

and lhelr legal and financial advisors. To lhis day, NCSSSA (which assumed responsibility for fulfilling lhe 

1 These issues wete previously examined by the Offioe of lnspectof General. U.S. Social Security AcJministtation. in "Social 

Security Coverage of State and Local Government Employees", Audit Number A-04·95·06013, Issued December 13, 1996: 

htto~llokJ.ssa.oov/sociat-security=90vemoe-s ate..a!ld-locat·qovemmen -emDioyees . 

Page &of 10 
35 


Insert 33479A.024

role originally played by Colorado) is actively involved in providing input to the IRS and SSA on keeping the 

Guide current with federal law changes as well as recommending ways to Improve it 

Publication of the Guide, as well as joint training sessions for public employers and their legal and financial 

advisors were conducted by SSA, IRS, and state officials in many of the states which resulted In increased 

revenue to the Social Security and Medicare Trust Funds from state and local governments due to their 

voluntary compliance because they now had a better understanding of their legal obligations. As reported 

at the NCSSSA annual conference in Rapid City, South Dakota, In July 2002, the Director of the IRS's 

FLSG section reported a four-year estimate (1997 through 2000) of $12 billion in both Social Security and 

Medicare Trust Fund payments attributable to the joint nationwide education and outreach effort that began 

when the Guide was first published. The funds were paid in without the expense of IRS examinations or 

compliance checks, but simply because the public employers were given an easily understandable 

description of what they were required to do lor each of their employees. That is a perfect example of what 

the states. SSA, and the IRS can do when we work together cooperatively rather than in an adversarlal 

manner. 

Cooperation between the federal partners (both SSA and IRS) and State Administrators has consistently 

had the most profound impact on voluntary compliance by state and local governments' Social Security and 

Medicare coverage and FICA tax compliance. We encourage Congress to reinforce the vital role of the 

State Administrator as an integral partner in ensuring accurate Social Security and Medicare coverage and 

voluntary FICA tax compliance by state and local governments. This is discussed further in number 3. 

below. 

2. NCSSSA recommends that the U.S. Treasury Department adopt a reinterpretation to the Treasury 

Regulations associated with Internal Revenue Code §6103 (1). That change would facilitate state and 

localgovemments' compliance with U.S. Code sections (both the U.S. Social Security Act and U.S. Internal 

Revenue Code). Naming State Administrators (State Administrators) as a group to be allowed to receive 

information from the U.S. Internal Revenue Service (IRS) will improve voluntary compliance by state and 

local government entities, reduce improper Social Security or Medicare coverage and taxation. and also 

reduce the tax gap. 

NCSSSA recommends an amendment to the Treasury Regulation by adding a new provision to the 

regulations that interpret and apply Internal Revenue Code (IRC) §6103. Likewise. regulations pursuant to 

26 USC 3121 (FICA tax) should make it clear that the State Administrator. and his/her designee. shall be 

considered a taxing authority. These changes will clarify the unique situation associated with state and local 

governments' FICA and public pension system requirements that exist under both federal and state laws 

due to the Amendment X of the U.S. Constitution and Section 218 of the U.S. Social Security Act. They will 

also permit the disclosure of tax information to State Administrators who are designated pursuant to 20 

C.F.R. §404.1 204. 

State Administrators can help all levels of government avoid the negative financial. media, and political 

consequences that occur when federal and state laws are not properly complied with by state and local 

governments and public pension systems. Unlike their private sector counterparts. state and local 

governments not only lace financial problems if they make errors in FICA tax compliance. they also have 

negative media and public relations consequences because they are supported by taxpayer funds. 

Allowing full and open discussion of all information associated with state and local governments' Social 

Security and Medicare coverage and public pension system coverage by the IRS and SSA will reduce IRS 

expenses. That. in turn, will save U.S. citizens money because all of the parties involved in state and local 

coverage are funded from various types of taxes. 

3. To address the diminishing state support for the State Administrator positions in many states 

nationwide, NCSSSA and our member states need Congressional, SSA, and the Treasury 

Department/IRS assistance to help reverse that trend. It sounds self-serving and hollow for State 

Administrators to tell state officials how important the role is, but having the federal government reinforce 

that fact has historically had a profound impact on the states. albeit oflen short-lived. SSA and IRS 

communicalion with states is valuable. such as another joint letter from either or both SSA and the IRS to 

Governors and State Administrators that references the federal law and on-going responsibilities associated 

with administering the Section 218 Agreement. The letter should also stress the importance of maintaining 

and proactively managing the federally mandated Section 218 program. Similar letters sent in the past 

Pog• 7 ofiO 
36 


Insert 33479A.025

letters have brought to the forefront the importance of the Stale Administrator position. NCSSSA provided 

to botll SSA and IRS some past sample tellers of support In May 2016 and prepared a recommended first 

draft of a letter in September 2016. however. the SSA is still working on vetting a final version. IRS notifted 

us several months ago that they do not want to intervene because the main area of federal law that governs 

the State Administrator function falls under the jurisdi¢tion of SSA, not the tRS 

Congressional action, however, is best. Although tellers from SSA and/or IRS are helpful, they do not have 

any long·range impact largely because of curnover and new political officiats assuming various positions in 

the states. A formal Resolution from Congress. therefore. would be preferable or, at a minimum, a valuable 

adjunct to letters from SSAIIRS. Such a Resolution should strongly reinforce the critical importance of the 

State Administrator as the bridge between the federal government and each state/local government. 

Congress should provide grants to the State Administrators, SSA, and IRS that are earmarked to provide 

on-going education and outreach to state and local governments, public pension plan officials, and their 

legal and financial advisors. AS documented eartier in this testimony, education and outreach have 

consistently proven to be far less costly and have a longer-term effectiveness, espedally with state and 

local governments, than enforcement efforts, such as examinations and compliance checks. 

Further, all parties need to reinstate and reinforce the federal-state partnership which was so effective prior 

to 1987. A critical component of doing so is for Congress, SSA, and Treasury/IRS to reinforce the 

importance to all states of providing political and funding support of tile State Administrator function. Doing 

so benefits all parties, but most importantly ensures state and local governments have a secure retirement, 

survivor. and disability insurance available to them so they do not need public assistance to survive. 

Partial federal funding of the State Administrator positions, through grants, would be a means to ensure 

consistent and reliable state support for the federally mandated responsibility. To ensure such funding does 

not undermine adherence to tile Tenth Amendment, however, such grants should be restricted to funding 

the State Administrator function with the understanding that the role and position remain free of federal 

inHuence vis-a-vis choosing to provide Social Security and/or public pension plan coverage for their state 

and local government employees. 

4. Support revision of, and clarifications to, Treasury Regulations associated with FICA public pension 

replacement plans. The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) Included requiring 

Social Security coverage for state and local government employees who are not already covered by Social 

Security under a voluntary Social Security coverage agreement (i.e .. Section 218 Agreement) or a public 

pension plan that provides comparable benefits to those afforded by Social Security. Although there are 

other nuances, OBRA 1990 and the Treasury DepartmenVIRS regulations implementing that law basically 

identified two major types of public pension plans that are considered to be •qualifying FICA replacement 

plans": defined benefit plans (Revenue Procedure 91-40) and defined contribution plans (Treasury 

Regulation Section 31.3121(b)(7)-2(e)(2)(iii)(A)J. These qualifying plans allow for participating employees to 

be exduded from the required payment of FICA contributions under Section 210 of tile Social Security Act, 

commonly referred to as Mandatory Social Security. 

Since OBRA 1990 was enacted and the Treasury DepartmenVlRS adopted regulations implementing tile 

state and local government employees' Social Security coverage provisions. administrators of public 

pension plans have created additional types of pension plans beyond defined benefit and defined 

contribution, such as hybrid plans, cash balance plans, and so forth. There is no guidance for determining 

qualifying FICA replacement plan status of the newer and evolving types of plans. NCSSSA recommends 

that the Treasury Department/IRS prioritize new or revised guidance for these non-traditional plan types. 

The new or revised guidance should also address the fact that existing guidance for defined contribution 

plans of 7.5 percent combined employer, employee. or both does not appear to be an actuarial equivalent 

to the benefit provided under the Social Security program. the latter of which has a 12.4 percent combined 

contribution (both employer and employee equally contributing half). The use of 7.5 percent as the 

minimum contribution threshold appears to rely on the Employee Retirement Income Security Act (ERISA). 

wllich does not apply to state and local government employees. II should further darily use of the terms 

"qualified" participant in a public pension plan yet current Treasury OepartmenVlRS guidance refers to tile 

requirement that public employees are members of a qualifying FICA replacement plan. NCSSSA has 

reduced the confusion between 'qualified" and 'qualifying" by using the phrase ' FICA replacement plans. • 

NCSSSA urges the Treasury DepartmenVIRS to adopt a similar approach to reduce the confusion over use 

Page8ol 10 
37 


Insert 33479A.026

of those tenns. NCSSSA supports the recommendations made by the ACT Committee related to this issue 

(see footnote 6). 

5. As noted above In the " Challenges" portion of this testimony, the SSA, IRS, and NCSSSA should 

recommit to the principles and purposes of the Section 218 Council. Many of the areas of concern 

NCSSSA has outlined can be ameliorated, if not completely eliminated, if the Council becomes a more 

robust communication and problem resolution forum. The Council's purpose statement is: 

"The Council will serve as a forum to increase communication between the federal agencies and state 

administrators, provide a venue in which to raise and address developing issues, and facilitate feedback 

regarding ongoing efforts to address State concerns. The Council will also attempt to reduce administrative 

burdens by fostering coordination between agencies; reinforce knowledge and understanding of Section 

218 policy and mandatory regulatory provisions; and emphasize the importance of education and training 

for State and local government employees." 

Adoption and editing of regulations and policies by the SSA and the Treasury DepartmenUIRS associated 

with state and local government coverage and FICA tax compliance should involve preliminary discussion 

with NCSSSA so the states' perspectives can be taken into account prior to any federal agency or 

department taking formal action. Such an approach will reduce expenditure of taxpayer funds long-tenn 

because the states can help our federal partners recognize and address implementation issues that will 

otherwise be created if the SSA and IRS act independently. The Section 218 Council's charter can readily 

be amended to permit such involvement by NCSSSA. In fact, it would be best if Congress authorized 

establishing the Section 218 Council as another federal advisory committee pursuant to the Federal 

Advisory Committee Act (FACA). Obviously, the final decision would still remain with either the SSA or 

Treasury DepartmenVIRS on any proposed federal regulation that would be vetted through the Federal 

Register process or federal policy. 

Beware of Unintended Consequences 

NCSSSA wants to advise Congress and our federal partners of actions associated with slate and local 

coverage that could have devastating negative unintended consequences. We want to highlight two such 

areas, both of which are closely interrelated: 

1. We oppose repeal of the voluntary Social Security Coverage (Section 218 of the U.S. Social Security 

Act) statute for state and local government employees- commonly referred to as universal Social 

Security. NCSSSA urges Congress to be wary of the many unintended consequences that would occur if 

Social Security was mandated for all non-Social Security covered public employees.• We affirm our support 

for and confidence in the Social Security system. However, we wholly support Old Age-Survivor-Disability 

Insurance (OASDI) coverage for governmental employees on the lawful voluntary basis as enacted in 

Section 218 of the U.S. Social Security Act. as amended. 

This stance is based on the following major reasons: (a) preserves the integrity of the Tenth Amendment to 

the U.S. Constitution and state sovereignly that was guaranteed by that amendment; (b) the Omnibus 

Budget Reconciliation Act (OBRA) of 1990 required Social Security coverage for any employee not covered 

by a voluntary Section 218 Social Security Agreement or a public pension plan so basic protections are 

already ensured for all public sector employees, thereby precluding the need for Congress to mandate full 

Social Security coverage to protect such wor1<ers; and (c) negative financial implications for state and local 

governments and pension plans (e.g., undermining of the retirement security of public employees since the 

Social Security replacement rate is usually far below that of the vast majority of public pension systems; 

injuring entire state, federal, and global economies due to reducing available investment capital as many 

public pension plans would, by necessity, be reduced because most public employers could not afford to 

pay into both Social Security and also continue their current contribution levels into the existing pension 

plan designs). 

2. We also oppose federal intervention into, and financial assistance for, public pension systems. The 

vast majority of the numerous state- and locally-administered pension systems in the nation are financially 

8 Some contelld. altematlvety, that Imposition of universal (or mandatory) Social Sewrity coverage on only newty hired 

state and locaJ government employees woofd solve financial and complexity issues associated with the Social Security 

program. That is unt11.1e because there woutd still be s generation of non-<:overed public employees who would fall under 

exisUng federal and Slate laws. i.e., au or those hired prior to the date Social Security coverage is mandated for newly hired 

employees who are only covered by a qualifying FICA replacement pension plan. 

Page 9oft0 
38 


Insert 33479A.027

sound and well managed. Most state and local government pension plans do not want, nor need, federal 

financial assistance. In fact, many public pension systems are in better financial shape than are either the 

Social Security or Medicare Trust Funds. 

Due to the existence of Section 218 of the U.S. Social Security Act, public employers and employees 

already have the ability to obtain Social Security coverage voluntarily. Those who desire to augment their 

existing public pension plan with Social Security can do so by contacting their State Administrator and 

requesting a referendum election voted on by eligible public pension plan members. If approved by the 

referendum election voters, Social Security coverage is granted to alfected employees by way of approval 

of a Modification to that state's master Section 218 Agreement with the SSA. 

Properly administered and pre-funded defined benefit pension plans provide for adequate retirement 

security thereby preventing their members and beneficiaries from having to get assistance from the public 

welfare system. The National Institute on Retirement Security (NIRS) documented that in 2014 public and 

private sector defined benefit plans paid nearly $4 77 billion in pension benefits to 24 million retired 

Americans• In fact, such public pension systems are actually significant economic engines for the total 

economy. '

0 The analysis found that the benefits provided by state and local government pension plans 

have a sizable impact that ripples through every state and industry across the nation. Further, according to 

the U.S. Census Bureau, during 2012, those public pension systems represented more than 19.6 million 

members and nearly 9.0 million beneficiaries who received periodic benefit payments totaling $225.2 

billion." 

Conclusion 

By having Congress. the Administration, the Treasury Department, SSA, IRS, and NCSSSA working together 

we can assure that state and local coverage, under the law. is handled properly while remaining true to the 

Tenth Amendment of the U.S. Constitution. This is accomplished by continuing to allow each state to choose 

the combination of public pension plan and Social Security coverage or bOth a pension plan and Soda I Security· 

coverage for its public employees. NCSSSA's members can assist IRS and SSA in reducing and preventing 

future problems by, for example, advising all state and local governments of the issues and concerns that are 

identified, and by focusing NCSSSA's trainings and future Annual Conference topics on these issues. 

As issuance of IRS Publication 963 in 1995 showed, such cooperative efforts by the federal government and 

the State Administrators can reduce payroll tax enforcement and Section 218 administration costs by 

generating Improvements in voluntary compliance by state and local governments with all applicable federal 

and state laws. 

Thank you for inviting NCSSSA to testify on behalf of the states and their political subdivisions. 

9 NIRS conducted a number of studies reJated to the financial impact of defined benefit pension plans. They concluded that 

a typical defined benefit pension plan provides equivalent retirement benefits at about half the cost or a typical defined 

contribution plan. and 29 percent lower cost than an ideal defined cootribution plan that Is modeled using very generous 

assumptions. See: William B. Fomia, FSA, and Nari Rhee, PhD, "Still a Better Bang for the Buck: An Update on the 

Economic Efficiencies of Defined Benefit Pensions·, published by the National Institute on Retirement Security, Deoember 

2014, available at http:/lwww.nirsonline.orgftndex.php?option•com content&tas~·vlew&id•871&1lemid=48. Other NIRS 

studies of interest can be found at: 

http:Jiwww.nirsonline.org/index.php?option=com content&task-=bloacateaorv&id=70&1temid=49 and relevant NIRS Issue 

Briefs at' htlo:/fwyffl nirsonUne orgliodex.ohp?option-=com content&task=bloacategorv&id=70&1!emid:49 and general 

Information on the National Institute on Retirement Sec\Jrltv is available at: http:t/www.nlrsonline.org.l . 10 National Institute on Retirement Security. "PENSIONOMICS 2014: Measuring the Economic Impact of State and Local 

Pension Plans" available at: 

http~lwww.nasra.Q!lllfiles!Topicai%20Reports1Economlc%20Effects/pensionomlcs2014 final.pdf. NIRS also documented 

that Defined Benefit public pension benefits have a significant economic impact: 6.2 million American jobs and $943 billion 

in economic output and paid neariy $477 billion in pension benefits to 24 million retired Americans and beneficiaries. 

"Stale and Locally-Administered Defined Benefit Pension Systems-All Data by State and Level or Government: 2012, 

2012 Census or Governments: https:llfactfinder census gov/facesltableser;lcesflsrtpagesloroducMew xhtml?src•bkm~. 

PageiOoltO 
39 

f 


Insert 33479A.028

Commltttt 011 Ways aad Mtans 

Wible$$ Discloow<> R<quir=enl- "Tnnb io Testimony" 

Requir<d by House Rule Xl. Cbuse 2(J) 

Your Name: /'7 e<r Yti'~n .-dlol-zP. I. Are you tes~ify~~ ~ beba1fofa Fcder~l. State, or Local Government cnttty? 

a. Name of enlily(i<s). f'l of' J;v:/. J. / 

;1/,<t;,,"-'( Co" (>re"'ce ~ (,oCtA f<'c-<r~ 4tiP~ ,7iJ/YffO r .r ,t/t.f.!'.//1) b. Briefly ibe the capacity ln wbkh you represent this entity. 

Dc!.r J~etf 6i' ,1/C f.-0'/"1 l'r!!M't,.:/ 

J;,~~o' fo lo/J /.; d., '"·A A/!' ,.(';t(' j/J/f l. Areywi<Sti~onbehalfofony-·p-...memalmrily(oes)? 

L Na:mc of cotity(ics). 

b. Bri~Oy describe the capacity in wh1ch you represent this entity. 

Yes 

l!Sr 

Yes 

0 

3. Please li51 any Feder.\) grants or conU'fiCIS (including subgrams or subconttlch) which you have 

received during tbe current fiscal year or c.ilber oftbe two previous fiscal ycau th1t are related to tbe 

Jubject matter of the hearing: 

No11t' 

No 

0 

~ 

4, Pkut liA MY araw. CODb'IIClS,. « paymnns ori,pnati..ftc from foreJpaonnwnenu: *hieb )'OU have 

rccc:avcd dunn,s tbe current ealmdar 'fUI or ather of the rwo pte'Yious caleodat )"t'lll that an: rdated 10 

the Jubjccc maner of cbe hearina; 

,v~,~ <= 

5. Pk-ue list any officc:s or elected potlt!OIU you hotd. 

;V.,l~ 6. Docs the cntity(ies) you represent. 01.her lbtn yOUJ'$Cif. have pa.ren1 ora3niuliocu .• 

subsidiaries. or pan.nerships you are noc representinf? Ye< No 

0 ~ 

7. PIUJC list a.oy Federa1 granu or contrKts (tneluding subgranu or suboonti"'C:IS) which were received 

by !he cnul)'(ieo) yw -"''""""'!he CIIIT<ftl fOJCal yearor.;lheroflheiWO --fiscal yean. 

which exceed 10 perc:co~ of eoril){ics) revenues '"!he year remv¢4. Include !he-and amouot of 

~Kh .,-..nt or contrxt. Attacb a sccood paac t( necessary. 

Non t. 

Jt rr,."''" li.ott ~~ny gran1 . Mnrrac-u:, or paymen11 oria.inalina from foreian aovemment8 which were 

rec-eived by the cntity(ies) you represent during the rrcnt fiscal year or either of the two previous fiscal 

ye&l'$ related to the subject matter of the hearing. Include tbe souroe and amou.nt of each &rant or 

oontrlet. Attach 1 socond pas.e if ntctSIIty. f'/one 
40 

Chairman JOHNSON. Thank you. I thank you for your testimony. 

We will turn to questions now. As is customary for each round 

of questions, I will limit my time to 5 minutes, and I will ask my 

colleagues to also limit their questioning time to 5 minutes as well. 

Ms. LaCanfora, this clearly is a complicated topic, and I want to 

be sure we all understand Social Security’s role in this process with 

a few yes-or-no questions. Our time is limited, so just answer yes 

or no, if you can. 

Is Social Security responsible for making sure that workers receive the correct Social Security benefit amount? 

Ms. LACANFORA. Yes. 

Chairman JOHNSON. Is the amount of benefit a worker receives 

based on his average lifetime earnings? 

Ms. LACANFORA. Yes. 

Chairman JOHNSON. And to determine a person’s benefit accurately, does the person’s earnings record need to be correct? 

Ms. LACANFORA. Yes. 

Chairman JOHNSON. You have said yes to these questions, and 

it is clear that earnings information is the basis for the most important thing Social Security does, paying the right amount of benefits to the right person. Yet, in your testimony you say Social Security’s role in the 218 coverage and compliance process is limited. 

Why is your role limited when these processes are at the very 

heart of your mission when it comes to correctly paying benefits for 

State and local workers? 

Ms. LACANFORA. Our role at the Social Security Administration is limited only to the extent that we cannot operate alone. But 

our role is both substantive and integral to making this process 

work. We just have to do so in conjunction with the IRS and the 

State Administrator. 

Chairman JOHNSON. So you think the IRS—does the IRS have 

a collar around your neck? 

Ms. LACANFORA. I wouldn’t say that, no. I would say it is a 

partnership between the three entities that are here testifying 

today. I think Dr. Motza in her testimony said that the State Administrators have a profoundly important role, and I would agree 

with that. the State Administrator role is sort of the lynchpin to 

making this process work. But the Social Security Administration, 

as I said, also has a very substantive integral role that we take 

very seriously. 

Chairman JOHNSON. Okay. Do you think the system is working 

properly right now? 

Ms. LACANFORA. I think, as you will find out through this 

hearing, the statutory construct is extremely complicated, making 

it a challenge to administer perfectly, and thus, employers do make 

mistakes in this area. And I am sure that we can all improve. But 

I think we are all doing due diligence to make sure that we are 

having this process work as well as possible. 

Chairman JOHNSON. Thank you. 

Ms. LaCanfora, the bedrock of Social Security is that an earned 

benefit, workers pay taxes on their hard-earned wages for the 

promise of future benefits. But in your testimony you said what 

41 

matters is that a worker had earnings, not that they properly paid 

taxes on their earnings. Why is that? 

Ms. LACANFORA. The law stipulates that the way in which we 

credit earnings is based on the money that is earned as opposed 

to the taxes that are paid. 

Chairman JOHNSON. Well, that has to be a drain on the trust 

fund since benefits are being paid without taxes ever being received. How often do you think that happens? 

Ms. LACANFORA. I don’t know how often we have errors, but 

I think it is safe to say that we uncover them rarely, and when we 

do, we try to address them in collaboration with our partners expeditiously. 

Chairman JOHNSON. Mr. Larson, do you care to question? 

Mr. LARSON. Thank you, Mr. Chairman. 

I want to thank all of our witnesses as well. 

And along the same line of questioning that the chairman had, 

Ms. LaCanfora, Social Security is widely known as being the most 

efficient governmental program that we have. I believe your loss 

ratio, a term that is used in the private sector frequently, is at 1 

percent. Is that correct? 

Ms. LACANFORA. That is a fair characterization. 

Mr. LARSON. Could you explain what that means in terms of 

the delivery of service and what that means in the private sector? 

In the insurance industry in the private sector, they say between 

70 and 75 percent loss ratio is a good mark to achieve. 

Ms. LACANFORA. I think a simple way of explaining it would 

be to say that our administrative expenditures, that is, the money 

that it takes to actually run the agency, hire employees, and so 

forth, our administrative budget is less than 1 percent of our outlays or what we pay out in benefits. 

Mr. LARSON. That is correct. And along those same lines, and 

yet, what we have seen consistently is that the budget for Social 

Security has fallen by 10 percent since 2010, while the number of 

beneficiaries, primarily the often referred to baby boomers, has increased by 13 percent. Has that placed a strain on the ability of 

Social Security to administer this very complicated program that 

we have been talking about this morning? 

Ms. LACANFORA. I think, like all Federal agencies, we have 

challenges. Our objective is really to try to operate as efficiently as 

we can within the constraints of the budgetary environment, and 

to try to automate where we can, and to try to improve processes 

and policies, which I think is what we are trying to do today. 

Mr. LARSON. Is there anywhere in the private sector where you 

could pick up an insurance plan that is as comprehensive as Social 

Security? 

Ms. LACANFORA. I am probably not well-qualified to answer 

that question. 

Mr. LARSON. Ms. Lough or Ms. Motza, if you want to answer 

that? 

Ms. LOUGH. I wouldn’t know. 

Ms. MOTZA. No. 

Mr. LARSON. I can answer it for you: There is not. But, nonetheless, I raised that point because this is an insurance program. 

42 

The last time there was a premium increase in this insurance 

program was 1983. I ask everybody in the audience and all of our 

panelists up here, have any of your other insurance programs gone 

up since 1983? Have any of you seen an increase in what you have 

to pay in terms of a premium? 

I think we all know what the answer is, it is a resounding yes, 

they have. And yet, Social Security, what we have managed to do, 

is cut it back in terms of the services that we provide, while baby 

boomers are coming through the process. 

And we know from previous testimony that oftentimes the best 

individuals that are equipped to detect fraud are those that are in 

the front lines, who are in there doing the actual screening of citizens that take up Social Security. That is why, Ms. Motza, you 

were able to say that you are like a duck that keeps in calm water, 

but there is an awful lot of paddling that goes on underneath. 

The point that I would like to make is this. We do have to continue, and I applaud the chairmen, both chairmen, because we 

have to be persistent to make sure that we are wringing out any 

kind of fraud, abuse and waste. But in the process, we shouldn’t 

throw the baby out with the bathwater. Meaning, we shouldn’t be 

cutting back on quality employees that can actually assist and help 

better navigate these very complicated waters and do it in an efficient matter with a 1 percent loss ratio that also provides these 

kinds of benefits. 

And I think when there is a final examination about what insurance is, and to look at the fact that there hasn’t been an increase 

since 1983, and to understand that if you were making $400,000 

a year, about six-tenths of 1 percent of the American people do, it 

would cost you less than this Starbucks latte to make Social Security solvent into the next century. And I know that is a goal of everybody on this committee. 

It is our goal on this side to talk about how we make it more efficient, how we root out any kind of fraud and inefficiencies, but how 

also we expand this program, the most efficient Government program that is run, so that it assists the American people in a way 

that they have become accustomed to, so that no one, especially 

women, can retire into poverty, that they got the COLA that they 

deserve. And, yeah, even so that many seniors, because we haven’t 

indexed this right, get a tax break as well. 

And with that, I will yield back my time. 

Chairman JOHNSON. Thank you. 

Mr. Buchanan, you are recognized. 

Chairman BUCHANAN. Thank you, Mr. Chairman. 

And I want to thank our witnesses today. 

Ms. LaCanfora, let me mention, you said, just so I get a sense 

of this, you said that there are 23 million people part of this program, now there are 6 million. Explain exactly what you mean. 

There are six million who are still involved where the funds are 

being managed on a State or a local basis? Is that what you are 

referring to? 

Ms. LACANFORA. There are 23 million people who are State or 

local employees in total. 

Chairman BUCHANAN. Okay. 

43 

Ms. LACANFORA. Of that 23 million, about a fourth of them, 

about 6 million, are not covered by Social Security. And the reason 

for that is because the law gives States discretion about which of 

those public employees to cover or not to cover, and there is a wide 

variety of different scenarios across the states. 

Chairman BUCHANAN. Okay. So they are paying into some various state, county. Who is managing the funds? 

Ms. LACANFORA. Well, all of the public pension systems at the 

State level are different. Some of them are statewide, some of them 

are not, so there is great variation there. 

Chairman BUCHANAN. How big of a problem do you think 

there is? I mean, with someone managing the fund, let’s say someone puts in their—35 years they pay in—I grew up in the Detroit 

area and Detroit went bankrupt—what happens to the funds and 

what risk does the Federal Government have if somehow it is mismanaged or the funds there aren’t for a worker’s retirement? 

Ms. LACANFORA. I think that might be a question better addressed by the IRS. 

Chairman BUCHANAN. Okay. Well, let me ask you. 

Ms. LOUGH. So the State employees, if they are covered by a 

qualifying public retirement plan and they don’t have a 218 agreement, they don’t pay into Social Security. So the question I think 

is whether the plan is a qualifying retirement plan or is it solvent? 

I think that is the question. 

Chairman BUCHANAN. The question is, is it solvent? It is kind 

of like what we did with Social Security in the mid-1960s, we commingled the funds into general funds and we have a trust fund but 

there is no money in there. What happens locally if it gets mismanaged, there is not the funds? What responsibility does the Federal Government have with those workers? 

Ms. LOUGH. Just like any other qualifying plan, if it is covered 

by the PBGC or—it is a question of whether it is—it is fully funded 

is—— 

Chairman BUCHANAN. In other words, if you have six million 

people with their funds are being managed at the State or local 

level, if somehow they don’t get what they expected or what was 

going to be paid out to them over time—that is what happened in 

the Detroit area, my understanding—what happens, what responsibility does the Federal Government have, if any? 

Ms. LOUGH. So the IRS looks at the plans to see if they are run 

properly according to the requirements of the Tax Code. But if the 

funds are not properly funded, the responsibility is outside the IRS’ 

purview. 

Chairman BUCHANAN. Ms. Motza, let me ask just quickly. You 

mentioned about the firefighters as one example. How big of a 

problem is it for these six million workers? 

I am concerned that at the end of the day they paid in, their employer probably paid in, there was some kind of match, those funds 

need to be managed, you want to make sure it is there. I agree 

with my friend, Mr. Larson, that Social Security, I think, is one of 

the best programs on the planet. You can count on it. 

I am worried, frankly, about cities, counties, and states mismanaging funds and there being some question about whether they are 

going to get paid out. I have seen that happen on a local level. So 

44 

I wanted to get your sense of it. How big of a problem or challenge 

is this? 

Ms. MOTZA. Thank you, Chairman Buchanan. I would be happy 

to address it. 

I actually—one of my hats I wore before I retired from the State 

in January was to serve as a trustee for the Colorado Public Employees’ Retirement Association, the biggest public pension plan in 

Colorado and one of the biggest in the Nation. And we recognized 

when the financial downturn occurred that the way the benefit 

structure was configured and the contribution rates were configured, we couldn’t sustain it. And so we actually went to our State 

legislature, we came up with a game plan—— 

Chairman BUCHANAN. We are going to run out of time. I want 

to ask you one other question along those lines. 

Ms. MOTZA. Okay. But basically most pension funds in the Nation are not in dire straits. Unfortunately, Illinois is one of the 

worst—— 

Chairman BUCHANAN. Okay. But let’s say Illinois has got a 

problem. Do they look to the Federal Government? Does the Federal Government, in your opinion, have liability if somehow it gets 

mismanaged for a worker in Illinois? 

Ms. MOTZA. Not that I know of under current law. 

Chairman BUCHANAN. Thank you. I yield back. 

Chairman JOHNSON. Thank you. Good question. 

Mr. Lewis, you are recognized. 

Mr. LEWIS. Thank you very much, Mr. Chairman. 

Let me thank each of you for being here and for your testimony. 

My question is for the panel, for each one of you. I understand 

that the Tax Code, Section 6103, does not allow the IRS to share 

the name with the local government, the State Administrator when 

requesting information to ensure payroll compliance, tax compliance. 

Would each of you please share with us how the law makes compliance difficult? 

Ms. LOUGH. Section 6103 of the code, you are absolutely right, 

doesn’t allow us to share—unless there is an exception in there— 

specific taxpayer information with other Federal agencies. But 

there is an exception in 6103 for us to share information with the 

Social Security—— 

Mr. LEWIS. You said there is an exception? 

Ms. LOUGH. There is an exception under 6103(l) for us to share 

that with the Social Security Administration, and we do share information when it becomes necessary with the Social Security Administration with regard to specific public employers. But we are 

not permitted to share that with the State Social Security administrators. 

Mr. LEWIS. Ms. Motza, would you like to comment? 

Ms. MOTZA. Yes, please. This is an area that has been problematic ever since 1987, since the Federal responsibility for FICA tax 

collection went to the IRS, and previously State and local government contributions to Social Security were collected by the State 

Administrator. 

NCSSSA believes that it was inadvertent oversight when the 

Treasury regulations related to 6103 were adopted, because when 

45 

6103 was originally adopted by Congress, the State Administrator 

was collecting the contributions. So it wasn’t even thought that 

they would need to have them carved out as a separate classification. 

The fact that IRS cannot talk with State Administrators and find 

out what information we have, which is extensive in our records, 

we have lots of interpretative documents and legal opinions that 

don’t exist anywhere else. As a matter of fact, many of our public 

employers think that the 218 agreements and documents they have 

can be thrown out. We know they can’t be, they are permanent 

binding agreements and all the important information is in those 

files. 

The IRS when they are—because of 6103, they can’t reach out to 

us and find out all the coverage requirements for that particular 

entity. It would be far more efficient and effective for everybody, 

including the Federal and State and local governments, as well as 

save taxpayers’ dollars, if the IRS was able to contact the State Administrator initially, find out exactly what the coverage requirements are under that particular 218 agreement, and also the particular pension systems that exist in that State, and any other nuances that exist. They can’t do that. 

So it has really been a significant hampering of the efficiency 

and effectiveness of administering this program, in my opinion. 

Mr. LEWIS. So you are suggesting that as Members of the Congress and members of the Ways and Means Committee, we can fix 

it? 

Ms. MOTZA. You can fix it. You absolutely can, and we would 

definitely appreciate it. And we would encourage you to work with 

the Treasury Department and NCSSSA and all of us. And I think 

everybody on this panel would recognize that that would be a vast 

improvement because it would make all the difference. It would 

save tons of time and effort, and it would reduce the error rate dramatically, I am convinced. 

Mr. LEWIS. The other two members of the panel, are you prepared to say yes? 

Ms. LOUGH. So implementing the tax law, we implement the 

law as currently written. If it is a matter of policy we defer that 

to the Treasury Department. 

Mr. LEWIS. Thank you very much. 

Do you want to respond? 

Ms. LACANFORA. I think my colleagues summed it up well. I 

would say generally that information sharing is absolutely critical 

to making this process work well. 

Mr. LEWIS. Thank you. I yield back. 

Chairman JOHNSON. Thank you. Thanks for your question. 

Mrs. Walorski, you are recognized. 

Mrs. WALORSKI. Thank you, Mr. Chairman. 

Thank you to our witnesses for being here and lending your expertise, I appreciate it. 

Ms. Lough, I just wanted to walk back through your testimony 

to make sure I understand exactly what we are talking about here. 

When the IRS receives tax information for a public employee, 

does the IRS know whether the employee is covered by Social Security? And then my question is, if not, so is there additional inforVerDate Sep 11 2014 10:22 Feb 13, 2019 Jkt 033479 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\33479.XXX 33479
46 

mation that could help? And how would the IRS or other parties 

go about getting or setting up that line of communication? Is it just 

the line of communication that you are talking about here between 

the sharing that you have done? Help me understand. 

Ms. LOUGH. So the IRS receives from the employers Form 941 

and W–3 statements, and we can match to look to see if the 

amounts that are listed on the 941 and W–3 match. We also get 

W–2 returns for each employee. And based on the percent of Social 

Security listed on the W–2 and the wage amount, we can guess 

whether the employee has paid the correct amount of Social Security. 

But my office looks at the 941s and W–3s because we have jurisdiction over the employers, not the employees. And so we look at 

that, and if there is a mismatch between what they told us in the 

941 and the W–3 filed, then they get an automatic reconciliation 

notice, depending on the difference between the mismatch. 

But we also look at the 941s and W–3s to see why there is less 

Social Security or the percent is so little. And then we look to see, 

in our database that Marianna just talked about, whether there is 

a 218 agreement or not. And based on those filters, we make a determination whether the employer may be potentially noncompliant, and we reach out with regard to some compliance action, 

which could be a compliance check or an audit. 

But on the face of the returns, we can’t with certainty tell whether all the employees of that public employer were appropriately 

covered or not. 

Mrs. WALORSKI. You can or can’t? 

Ms. LOUGH. Cannot. 

Mrs. WALORSKI. Cannot. Okay. So short of an audit that you 

just mentioned, you really don’t know whether an employer reported and paid the correct amount of FICA taxes without an 

audit? And is an audit the only fail-safe mechanism here? 

Ms. LOUGH. Short of an audit, that is the only way for us to 

know certainly, by 100 percent certainty whether the employer is 

covering all the employees appropriately. 

But we do provide extensive outreach, and we have a questionnaire and an assessment tool that the employers can use to have 

a checklist to make a determination whether a group of employers 

should or shouldn’t be covered. We do webinars. 

And for the most part, this is a very compliant employer base. 

If they do make errors, like my colleague from Social Security Administration said, most of the time it is because of the complexity 

of the laws and the lack of understanding. 

In my opinion, there is no aggressive noncompliance or trying to 

hide. It is basically an education up front by all of us, and also an 

audit at the back end to do the checks. 

Mrs. WALORSKI. So since there is not an audit on every single 

person, since you do some of the sharing of information back and 

forth, and it is the result of this massive complexity of how this 

thing is tied together, which I think reiterates, again, how badly 

we need reform in a much more simple kind of system than we 

have now, so short of an audit there is really no way to tell for sure 

if these records actually match. 

47 

And what do you think the error rate is, I mean, that comes 

through your office? Is it 10 percent of people that never get 

matched up? Or is it 5 percent of people that don’t get matched up 

and don’t have an audit? How many just percentage do you think 

are out there where we never actually get this right? 

Ms. LOUGH. I really don’t have the percent. I will be happy to 

get back with you on the exact change rates that we have in an 

audit. But I do want to reiterate that the changes we do see are 

generally as a result of not understanding the rules. 

Mrs. WALORSKI. . . . But, so short of an audit, there’s really 

no way to tell, for sure, if these records actually match and what 

you think the error rate is, I mean, that comes through your office? 

Is it 10 percent of people that never get matched up or is it five 

percent of people that never—that don’t get matched up and don’t 

have an audit? How many, just percentage, do you think are out 

there where we never actually get this right? 

Ms. LOUGH. I really don’t have the percent. I’ll be happy to get 

back with you on the exact change rate that we have, in an audit. 

Public as well as private employers are responsible for reporting 

Social Security coverage on Forms 941 and W–3, which are mechanically matched. For both public and private employers, Federal 

Insurance Contributions Act (FICA) and unemployment tax are 

about 3 percent of the tax gap for under-reporting (TY 2008- 10 annual average). https://www.irs.gov/pub/newsroom/ 

tax%20gap%20estimates%20for%202008%20through%202010.pdf, 

Table 2. 

The IRS audited approximately 0.6 percent of all returns (including income, employment, and other taxes) filed in CY 2015. IRS 

Pub. 55–B, Data Book (2016) at pg. 21, https://www.irs.gov/pub/irssoi/16databk.pdf. 

Each year, the IRS Federal, State & Local (FSL) function selects 

for audit a few hundred from tens of thousands of public employers. In FY 2016, of 362 audits, FSL proposed adjustments to taxable wages in 254, 78 of which related to FICA, including but not 

limited to Section 218 coverage. 

Mrs. WALORSKI. Of the complexity, right? 

Ms. LOUGH. The complexity of the laws. And not only the complexity, but also the various timings in which the laws came and 

when the employer came on board—the employee came on board. 

So that makes a difference also. 

Mrs. WALORSKI. I got it and I appreciate it. 

Thank you, Mr. Chairman, I yield back. 

Chairman JOHNSON. Thank you. 

Ms. Sanchez, do you care to question? 

Ms. SANCHEZ. Thank you, Mr. Chairman. 

And I want to thank the witnesses for being here today to provide us with some insight as to what you deal with. 

Social Security lifts many millions of Americans out of poverty, 

and after a lifetime of hard work, every American deserves the 

peace of mind to know that they are going to be able to retire with 

a little bit of financial security and a little bit of dignity. 

For 94 percent of American workers, knowing that Social Security is going to be there when they retire is a great peace of mind 

48 

that they can carry with them. But Social Security generally 

doesn’t cover State and local employees. 

For example, in my home State of California, there are 1.3 million Californians who are not covered by Social Security, who likely 

participate in the California State Retirement Plan or CalPERS, as 

it is known. For them, knowing that CalPERS will be there in retirement provides them with the same sense of security. 

But there are cities or school districts that can sign agreements 

with the Social Security Administration which specify that certain 

State and local employees will be covered by Social Security. And 

these agreements might say that principals are not covered by Social Security, but administrative staff is. And so they can get a little complicated. And the IRS is tasked with enforcing these agreements, but they aren’t always able to take proactive steps if they 

think that there is a problem. 

I know that this particular case happened in D.C., but I can’t 

imagine how troubling it would be for a worker to find out that 

after 10 years of work they had not been paying into State retirement or into the Federal Social Security program. And I am glad 

that D.C.’s own audit discovered that and they quickly corrected 

that. 

Most of us here today just want to make sure that this isn’t happening in our districts or that our constituents aren’t similarly affected by technical mistakes like this. And it is our job to try to 

figure out ways to make it easier to identify these issues early on 

to prevent that kind of situation from happening again. 

So I will begin with Ms. Lough. In the 218 agreement assessment 

project the IRS identified some risk areas. I understand that the 

IRS can’t work directly with the State Social Security agencies. So 

how does the IRS handle those situations? What kind of proactive 

steps is the IRS able to take? And are you able to inform the cities 

so that they can take some remedial action? 

Ms. LOUGH. With the risk areas, our first step is to try to educate and do outreach on areas where we see that employers are 

having noncompliance as a result of not understanding the rules. 

So we do webinars. We have very robust education tools on our 

IRS.gov. And we also have a Desk Guide that we have. It is pretty 

lengthy. We worked with the Social Security Administration on the 

Desk Guide, which is on our website. 

And then we have approximately 50 agents that are spread 

throughout the country. 

They build good relationships with their State Social Security 

Administrators and the employers, and they are available to answer questions when employers have those questions. Although we 

can’t talk to State Social Security Administrators about specific 

taxpayers, we do have conversations with them on general questions when they reach out to us. We have quarterly meetings with 

the Social Security Administration. Regularly, we attend meetings 

with the National Council of State Social Security Administrators. 

So our first preference is always outreach and education. 

Ms. SANCHEZ. Okay. Do you know roughly how many 218 

Agreements the IRS helps to administer? 

49 

Ms. LOUGH. We are not party to the 218 Agreements. We just 

get copies, and we look at them to see who is covered or not. So 

I wouldn’t know the answer. 

Ms. SANCHEZ. You don’t have an answer. 

Can you just tell me, in the little remaining time that I have, 

how have budget cuts impacted your agents’ ability to perform compliance check? 

Ms. LOUGH. So resources are always an issue. We have had attrition in resource, but we do the best we can. And as I stated, the 

best way to make sure there is voluntary compliance, which is the 

Federal tax system, is that employers voluntarily do their correction and comply with the rules of education and outreach. So we 

do that with the best use of resources, like doing a webinar. Do it 

once and put it out so people can listen to it. And so resource is 

always an issue, and we try to allocate them appropriately. 

Ms. SANCHEZ. Great. Thank you so much for your testimony 

and for your answers. 

And I yield back. 

Chairman JOHNSON. Mr. Bishop, do you care to question? 

Mr. BISHOP. Thank you, Mr. Chairman. Yes. 

Ms. Motza, I understand that, under section 218 of the Social Security Act, State/local governments may extend social security benefits to their employees. Can you give us more information about 

exactly what a 218 agreement is, what is in it, and what type of 

information is included in an agreement like that? 

Ms. MOTZA. Certainly. I would be happy to. 

The basic information is that the section 218 agreement with 

each State was entered into originally, usually in the fifties. And 

that is what we commonly call the 218, Main Master 218 agreement. Modifications to that agreement are made to add employers 

and their employees. 

The agreements are contracts effectively between the State and 

the Social Security Administration. No individual State or local 

government can enter into a 218 agreement independent of going 

through the State, because of section 218 of the Social Security Act. 

And that is why the State Administrator is such a key liaison with 

administering those. 

The agreements basically outline that the employer understands 

and appreciates that, since 1983, once they enter into a section 218 

agreement, it is a permanent, binding agreement. They can no 

longer withdraw. Prior to that, they could withdraw from coverage 

with the 2-year period and approval from Social Security Administration. 

It includes what positions that are employed by that employer 

are to be covered under Social Security. Sometimes there are optional exclusions that they choose. Some of the most common ones 

are student optionally excluded. And there are obvious things, like 

mandatory exclusions, that are just in Federal law. Like emergency 

workers during a flood, for example, are automatically excluded. It 

includes the effective date. It includes, you know, basically, you 

know, typical terms and conditions of a contract, saying, going forward, this is how it is going to be. 

And then we submit the agreements. The State Administrator 

does all the work up front, works with the employer, educates them 

50 

about what they need to know to make an informed decision, because of the mandatory Social Security provisions of OBRA–90. 

And that they don’t have to be permanently bound to Social Security if they fall under OBRA–90. So, basically, it is a contract that 

outlines, you know, who is covered, who is not, and effective dates 

and agreeing to be taxed. 

Mr. BISHOP. Okay, thank you for that. So there are a lot of subentities, local governments. Each State has one agreement then 

with several sub—— 

Ms. MOTZA. It is a master agreement that has been modified 

over the years. For example, in Colorado, where I am from, there 

are about 750 agreements. There are States—I can’t think of some 

of the numbers, but, you know, there are States, like the GAO report in appendix II documented that virtually every public employee in Vermont—there are some exceptions—is covered under, 

you know, Social Security. 

Mr. BISHOP. But it is one agreement per State, and then subsections to each. 

Ms. MOTZA. There is one—that is exactly right, yes, uh-huh. 

Mr. BISHOP. What triggers a modification? Exactly what is the 

process? 

Ms. MOTZA. It can be a variety of things. It can be a change in 

State law, for example, where a—let’s say a State that has added 

a new pension plan, they decide that, in addition to the pension 

plan, they also want Social Security coverage. So, in that case, the 

State Administrator would amend or modify the agreement. 

Mr. BISHOP. Okay, thank you. That is helpful. I have so little 

time, but—— 

Ms. MOTZA. I know. 

Mr. BISHOP.—I would love to hear more. 

Ms. Lough, a 2010 GAO report on Social Security coverage for 

the State and local governments noted that the IRS has a database 

of public employees. I just wondered how the Social Security Administration validates that database and what it is used for. 

Ms. LOUGH. So we have a database, like my colleague from Social Security Administration said, of the modifications and the master agreement. So we know, to the best that we can, when we are 

provided the modifications every time there is a modification that 

occurs, but we can’t be 100 percent certain we have all of them. So 

we have created a database. And if there is a mismatch, if the 941 

shows very little Social Security coverage, we look to see if there 

is a 218 agreement or not, whether we should do a compliance action or not. Now, we don’t validate with the Social Security Administration. It is a matter of resources for the Social Security Administration and IRS to go over that. Given the fact that this is a 

largely compliant taxpayer base, it just comes down to resources. 

Mr. BISHOP. Thank you. 

And I yield back, Mr. Chairman. 

Chairman JOHNSON. Thank you. 

Mr. Pascrell, you are recognized. 

Mr. PASCRELL. Thank you, Mr. Chairman. Great to see you. 

Mr. Chairman, I want to commend this panel, particularly when 

public employees have been under so much of an assault—I mean 

assault—over the last several years. You come before us, objecVerDate Sep 11 2014 10:22 Feb 13, 2019 Jkt 033479 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\33479.XXX 33479
51 

tively, knowing that everybody on this panel is on some bill or 

other to cut waste and fraud in government. That is a given. But 

you stood tall today. 

I really appreciate what you have done and what you are doing. 

And at the same time, we know that the Social Security Administration’s phone service has so deteriorated over the last 10 years. 

Why? Because they don’t have enough people. I mean, they didn’t 

decide to talk to one another and say: I will only take two phone 

calls today; I will be busy the rest of the day. 

No, they have their schedule every day, I know this. 

So, to get back to the major topic, retirement security is essential 

for all Americans. I think Mr. Larson pointed that out dramatically. For those workers who rely on retirement funds other than 

Social Security, which you are talking about today, they need that 

certainty. They need predictability about their retirement income. 

So ensuring compliance with agreements about how State and local 

government employees participate in Social Security can help provide this certainty. 

In order to have robust oversight of compliance, you have to have 

well-trained personnel in place to do it. You have got to have training programs. You have got to make sure that people participate 

in those training programs. 

So this is not a sexy discussion today. I don’t know if the media 

will even cover it, because to them, it is immaterial because it is 

not sexy. But this is critical to a lot of people. And I thank you for 

what you are doing. Many times I have said this: In the context 

of the IRS, Medicare, Social Security, my friends on the other 

side—and I call them my friends, and they know that—cannot continue to make deep cuts in agencies’ operating budgets, or the resources, and simultaneously expect to have a world-class service. 

That is what we want. That is what you are capable of. So training 

for the administration of State and local coverage and tax compliance is critical. 

Dr. Motza, let me ask you this: In your written testimony, you 

discuss a shift in the training in section 218 and the oversight in 

many States as well as within the SSA and the IRS. You attribute 

these changes to funding reductions. 

Can you discuss the shift and give us a sense of how it has impacted the quality of this training? 

Ms. MOTZA. Thank you, Congressman. 

Yes, I would be happy to. The lack of resources at SSA and IRS, 

because of limited funding, has dramatically impacted their ability 

to help State and local government employers and employees comply voluntarily. And as Ms. Lough indicated, it is a group that 

wants to comply. 

Mr. PASCRELL. You provided in your written testimony, you 

made certain recommendations. 

Ms. MOTZA. Absolutely. We would like to see—— 

Mr. PASCRELL. Tell us all. 

Ms. MOTZA. We would like to see grants from Congress that go 

to the States, SSA and IRS, so that we can conduct ongoing education outreach to make sure that these employers and employees 

know exactly what they need to do, when and how to do it. And 

they will comply. When Pub 963, IRS Pub 963, the Federal-State 

52 

Reference Guide, was first published in 1995, IRS documented 

that, within the next 4 years, voluntary contributions to the Social 

Security and Medicare trust funds skyrocketed. That is important. 

Mr. PASCRELL. Yes. I want to thank the gentleman from Georgia who brought up the question about—and you will elaborate 

on—6103, which is my favorite part of the Tax Code. I wonder why. 

Ms. MOTZA. It is certainly not our favorite. 

Mr. PASCRELL. I know. Thank you. 

Ms. MOTZA. Unless you change it. 

Mr. PASCRELL. Thank you. 

Chairman JOHNSON. Mr. Rice, you are recognized. 

Mr. RICE. Ms. Motza, who do you work for? 

Ms. MOTZA. I am gloriously retired. I worked for the State of 

Colorado for over 41 years. And yes, I was hired before child labor 

laws went into effect. That is why. But—that is a joke. 

But I am here representing the National Conference of State Social Security Administrators, because I was the State Social Security Administrator for nearly 24 years for Colorado. 

Mr. RICE. Who do the State—who does the Colorado State Social 

Security Administrator work for? 

Ms. MOTZA. It is actually in the Labor and Employment Department. It was placed there as a fluke. There was 2 years, my understanding, at the beginning of the 1950s, when the Social Security 

Administration at the national level was under the U.S. Department of Labor. So I think the State legislature there just took the 

easy out and said: Well, let’s throw it in the Labor Department. 

Mr. RICE. So that is the Colorado State Labor. 

Ms. MOTZA. Colorado State Labor and Employment. 

Mr. RICE. Not Federal, it is the State. You work for the State. 

Ms. MOTZA. It was the State. It is part of the State, yes. Department of—— 

Mr. RICE. So do all of the State Social Security Administrators 

work for the various States and not the Federal Government? 

Ms. MOTZA. Absolutely. And we want to keep it that way, because of the 10th Amendment. The independence and State sovereignty is important. Each State was given the option, under the 

Social Security Act, based on section 218, to determine what the 

configuration of coverage for their employees, their public employees was—— 

Mr. RICE. What is the function of the State—does every State 

have a State Social Security Administrator? 

Ms. MOTZA. They are required to under Federal law. Unfortunately, because of funding cutbacks and since the transfer of responsibility for collecting contributions in 1987, a number of States, 

I am sad to say, no longer take that job seriously. And that is one 

of the things we would encourage Congress to help us with. We 

would appreciate a resolution or something that gives us clout to 

say to State officials that this is a vital and critical role, an important role that helps not only the public employers and employees, 

but taxpayers. 

Mr. RICE. So not every State has one. 

Ms. MOTZA. They do have a named official. But are they active? 

Not necessarily. 

53 

Mr. RICE. All right. So Federal law requires that every State 

have at least one, but they are not paid for by the Federal Government. 

Ms. MOTZA. No. They are—— 

Mr. RICE. So, in some States, you say there is only one person 

that works for this entity, this group. And in other States, do they 

have big staffs? 

Ms. MOTZA. No. In most—they used to have big staffs when 

they were collecting the contributions, but most State officials, it 

is one or two people. And in very many States, it is a portion of 

a job. It has been really relegated to—— 

Mr. RICE. You are saying some folks don’t even have a full-time 

person. 

Ms. MOTZA. No, many do not have a full-time person. 

Mr. RICE. And it is the job of this position to be an intermediary 

between the Federal Government and the State and local governments? 

Ms. MOTZA. Absolutely. And to know exactly what is going on 

at the Federal level and within their own State to make sure that 

they are reconciling and they are staying compliant. 

Mr. RICE. When you did it, was it a full-time job? 

Ms. MOTZA. Part of the time, it was a full-time job. Other times, 

I was wearing other hats. 

Mr. RICE. Did you, in the course of your undertaking this activity, frequently find municipal governments and county governments that thought they were complying with the law but weren’t, 

as we have discovered here of late? 

Ms. MOTZA. Yeah. And we—early on, when I took on the job in 

1993, I was very fortunate to have an excellent executive director 

of that department who did training and outreach. 

Mr. RICE. So that was a frequent thing that you found people—— 

Ms. MOTZA. It wasn’t frequent, but it was enough—— 

Mr. RICE. Was it once a year, every 2 years, every 3 years? 

Ms. MOTZA. Pardon me. I am sorry? 

Mr. RICE. Was it annually that you found somebody who 

thought they were complying with the law? 

Ms. MOTZA. Initially, yes. And then, again, once Pub 963 came 

out and they had a clear understanding of what was necessary and 

appropriate, the noncompliance was less. And we were doing education and outreach jointly with IRS and Social Security that really 

enhanced the improvement rate. 

Mr. RICE. All right. 

Ms. LaCanfora, IRS does most of your compliance testing, right? 

Ms. LACANFORA. I am sorry, can you repeat the question? 

Mr. RICE. The IRS does most of your compliance testing, is that 

correct? 

Ms. LACANFORA. That is correct. 

Mr. RICE. I am out of time. 

I yield back, Mr. Chairman. 

Chairman JOHNSON. Well, thank you. You can go ahead and 

get an answer to that question, because I would like to hear it. 

54 

Mr. RICE. Well, my next question was going to be, the way that 

you determine whether or not somebody’s in the Social Security 

system is just from their 941s and their W–2s. Is that right? 

Ms. LACANFORA. As Ms. Lough described, there is a reconciliation process to determine whether the employee wage reports 

match up with the employer tax return. 

Mr. RICE. Well, here is my question: Do you have cases with relative frequency where people have not had Social Security withheld 

from their paycheck and that you determined that it should have 

been and you go ahead and pay them their Social Security benefits? 

Ms. LACANFORA. Not with relative frequency, no. 

Mr. RICE. Okay. Thank you. 

Chairman JOHNSON. Thank you. 

Ms. DelBene, you are recognized. 

Ms. DELBENE. Thank you, Mr. Chairman, and thank you to all 

of you for being with us today. 

For more than 80 years, Social Security has kept seniors out of 

poverty and provided a vital safety net for our middle class. But, 

unfortunately, due to a legal technicality, Tribal governments are 

currently prohibited from entering into agreements with Social Security Administration to allow their elected leaders to participate 

in the program. This makes elected Tribal leaders one of the few 

classes of Americans that are prohibited by law from paying into 

Social Security and receiving benefits from it. I believe that is unfair and punishes Tribal members who wish to give back to their 

people through government service. And that is why I, along with 

my colleague Congressman Reichert, my Washington State colleague Congressman Reichert, introduced the Tribal Social Security 

Fairness Act earlier this year, allowing elected Tribal leaders to opt 

into the Social Security program. 

There is really no reason the same benefit shouldn’t be extended 

to Tribal leaders who choose to participate, putting them on par 

with pretty much every other American. 

And so, Ms. LaCanfora, I assume you are very aware of this 

issue, and could you tell us how you feel about allowing elected 

Tribal officials to be able to participate and contribute to the Social 

Security system in the same manner as every other American? 

Ms. LACANFORA. I think you explained it very well. The legislation that you are referring to would allow Tribal governments to 

voluntarily opt into Social Security coverage, and we would be 

happy to work with the committee to provide any technical assistance you may need. 

Ms. DELBENE. And do you agree that this is a technical issue, 

in terms of why they have been excluded? 

Ms. LACANFORA. I think there could be views on various sides 

of the issue. And I don’t think we have a particular position on it, 

but we can certainly provide assistance as needed. 

Ms. DELBENE. I want to thank—both the IRS and the Social 

Security Administration have provided technical assistance to the 

drafting of legislation we put together. 

Ms. Lough, do you believe this legislation or legislation like this 

would have a positive impact on Indian country? 

55 

Ms. LOUGH. I defer. That is a policy issue, and I defer that to 

the Office of Tax Policy. And we are willing to work with them to 

implement anything that is enacted. 

Ms. DELBENE. Thank you. This legislation is really about equity for Tribal nations and removing barriers from talented native 

leaders who really wish to serve their communities. And all Americans, I think we can all agree all Americans deserve to retire with 

dignity and economic security. 

And I will continue to work in a bipartisan fashion, like this legislation was put together, to advance forward-looking reforms to 

improve Social Security for all Americans. 

Thank you for your time, and I yield back. 

Chairman JOHNSON. Thank you, ma’am. 

Mr. Curbelo, you are recognized. 

Mr. CURBELO. Thank you, Mr. Chairman, for allowing us the 

opportunity of this hearing, and I thank all of the witnesses for 

their testimony today. 

Ms. Lough, 70 percent of taxes collected are payroll taxes. Does 

that sound right? 

Ms. LOUGH. Yes, 70 percent are payroll taxes, but that includes 

individual income tax as well, that 70 percent. 

Mr. CURBELO. Well, given that significant number, it seems to 

me that this should be a compliance priority for the IRS. Does that 

make sense? 

Ms. LOUGH. Again, it is a compliance priority for the IRS, the 

payroll income tax. But 70 percent of the tax that is collected—I 

just want to make sure I understand your question—38 percent is 

the income tax part of it and 32 percent is the Social Security and 

Medicare tax part of the 70 percent. 

Mr. CURBELO. I understand that, but either way, we are talking about at least around a third of total collections. So my question to you is, what percentage of audits conducted by the IRS are 

related to payroll taxes? 

Ms. LOUGH. So a large number—this also includes public and 

private government, public and private employers. And I have jurisdiction over the public employers, which are about 90,000 government entities. So we do audit. We audit a few hundred per year, 

but we also provide extensive outreach to these government entities. That can be small towns or large States and cities. 

Mr. CURBELO. So do you have empirical evidence that this is, 

indeed, a compliant group? 

Ms. LOUGH. From the basis of the audits that we have done and 

our relationships that we have with the State and local governments, my opinion is that this is largely a compliant group. Not 

that they always meet 100 percent of the requirements, but the 

reason often is because of the complexity of the rules and lack of 

understanding of where the employee falls, whether they are covered or they are not, whether they are under a qualified retirement 

plan. When did they start working? Was there a break in service? 

It is an exceedingly complex area of the law. 

Mr. CURBELO. Well, we have heard many examples over the 

years of local employers being noncompliant. So I just want to 

make sure—and I understand the issue of resources, and I certainly believe that we need to make sure not just the IRS but the 

56 

entirety of our government is adequately resourced. But it does 

seem to me like we are leaving a significant amount of money on 

the table. And I still wonder if there is a focus on enforcing compliance in this area, given that it represents around a third of collections for the IRS. 

Ms. LOUGH. The IRS does have a robust payroll employment 

tax audit program, whether it is a private or public employer program, commensurate to the amount of resources we have. But for 

the public employers, one in five employees works for the public 

employer. So the large portion are private employers. And public 

employers are largely a very compliant taxpayer base. 

Mr. CURBELO. Thank you, Ms. Lough. 

Ms. Motza, a question for you. I want to focus on this issue of 

classification. What role specifically do State Social Security Administrators play to ensure that workers within the State who are 

covered by Social Security are properly classified? What oversight 

role should State Social Security Administrators play in this process? 

Ms. MOTZA. Thank you, Congressman. 

Ideally, the State and local governments should contact the State 

Social Security Administrator to verify what their obligations are 

under both Federal and State laws. You know, also, the State Administrator should also monitor changes in pension laws in their 

State to make sure that pension laws that are being changed or 

have been changed aren’t causing confusion and causing somebody 

who is under a 218 agreement and must continue paying into Social Security to suddenly stop and join a pension plan. 

So, as far as classification, it is just a matter of advising them 

that, if they have a 218 agreement, certain positions are covered 

under Social Security and others are optionally excluded, or whatever the case may be. 

Mr. CURBELO. And quickly, do you think that SSA and the IRS 

can do more to support States in getting this classification issue 

right? 

Ms. MOTZA. Yeah. I think, again, it is back to our bugaboo, 

1987. If we could communicate more openly and directly upfront, 

I think it would make it easier on all of us and certainly would 

save taxpayers money, because everybody that we are dealing with 

is funded by some form of tax. 

Mr. CURBELO. Thank you very much. 

Chairman JOHNSON. The time of the gentleman has expired. 

Mr. Reichert, do you care to question? 

Mr. REICHERT. I do, Mr. Chairman. 

Chairman JOHNSON. You are recognized. 

Mr. REICHERT. Thank you. I thank Chairman Johnson and 

Chairman Buchanan for allowing me to make a brief appearance 

today at your hearing. I am not on either committee, but I am on 

the Ways and Means Committee, and I chair the Trade Subcommittee, so I appreciate this opportunity. Thank you both. 

I want to follow up with a line of questioning that Ms. DelBene 

was pursuing. As we have heard today, State and local government 

employees may participate in Social Security through voluntary 

coverage agreements. However, no such option exists for members 

of Tribal Councils. And I know that has been discussed briefly. 

57 

I understand, in 2006, the SSA issued a policy ruling clarifying 

that Tribal Council members cannot receive Social Security coverage because of a 1959 IRS ruling which states that service performed by Tribal Council members do not constitute employment 

for FICA purposes. While the SSA says that this clarification did 

not represent a policy change, the effect was that Tribal Council 

members could no longer contribute to Social Security or have their 

earnings count toward any future benefits. 

And the real question I have, as you might guess, Ms. 

LaCanfora—close enough?—why did it take SSA over 45 years to 

provide clarification on this issue? So, from 2006 to 1959, what took 

so long? What was happening in the meantime? 

Ms. LACANFORA. We periodically put out clarification when 

questions arise. My understanding is that Tribal Council leaders 

were not paid by Tribal Governments until the eighties. And we 

really didn’t receive a lot of questions on the issue. It was only 

when questions began to come into the Social Security Administration that it was clear that we needed to clarify what was always 

our longstanding policy. 

Mr. REICHERT. You don’t do systematic reviews of policy or 

anything that may be controversial or disconnected within the organization? 

Ms. LACANFORA. We do. But, again—— 

Mr. REICHERT. Audits? 

Ms. LACANFORA.—we generally clarify issues when questions 

arise. And in this case, around 2006 was when it became very clear 

to us that clarification was necessary on that particular issue. 

Mr. REICHERT. So now we have a problem. You have identified 

a problem. How do you think this problem should be addressed? 

Ms. LACANFORA. As I mentioned in response to the earlier 

question, we would certainly be pleased to support you with any 

technical assistance on the legislation that you proposed. 

Mr. REICHERT. Okay. So I would guess that you would agree 

this is an unfair policy that has been in existence for these past 

number of years? 

Ms. LACANFORA. We don’t have a position on the policy itself. 

Mr. REICHERT. But you would be happy to help us correct it. 

Ms. LACANFORA. Absolutely. 

Mr. REICHERT. Whatever the problem is. 

Okay. I think that the situation has created an unfair environment for our Tribal friends. And I have heard from Tribal Council 

members, from the Muckleshoot Tribe in Washington State and 

others across the country. They want to participate in Social Security, and I think we need to make that happen. I have introduced 

a bill to make this possible. So I will have my staff reach out to 

you and look forward to your cooperation in resolving this issue. 

Ms. LACANFORA. Thank you. 

Mr. REICHERT. Thank you. I yield back. 

Chairman JOHNSON. Thank you. 

I appreciate the testimony of everyone. As we have heard today, 

Social Security and the IRS don’t have their act together when it 

comes to State and local workers. Social Security doesn’t know 

whether State and local governments are reporting the right 

amount of wages, and Social Security counts earnings toward fuVerDate Sep 11 2014 10:22 Feb 13, 2019 Jkt 033479 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\33479.XXX 33479
58 

ture benefits, even if taxes weren’t paid. The IRS doesn’t know 

whether an employee, employer, or worker is paying the right 

amount of payroll tax. 

When errors go unnoticed for years, like in Missouri, this has a 

real effect on workers’ retirement security and on the Trust Funds. 

Social Security, the IRS, and States must accept the responsibility 

for the roles they play in making this process work the way it 

should. I think you all would agree: Americans deserve nothing 

less. 

I want to thank our witnesses for your testimonies. Thank you 

so much. And thank all the Members for being here. 

With that, the Subcommittee stands adjourned. 

[Whereupon, at 11:33 p.m., the subcommittees were adjourned.] 

[Member Questions for the Record follows:] 

59 


Insert 33479A.029

Q:ongrrs.s of the 'llnitfd ~mtrs 

tl.~. 1Jousr of 'Rrprcscntatiots 

Marianna LaCanfora 

COMMilTEE ON WAYS AND M EANS 

1102 LoNGWORTH HOU$C Off!(( B!AOtNO 

(2021 225-3625 

-Uloshington, Bit l051Hil1S 

tlttp:AWI'Y"M«<NI'IS,tl<MJM.gov 

July 13,2017 

Acting Deputy Commissioner 

Office of Retirement and Disability Policy 

6401 Security Boulevard 

Baltimore, MD 21235 

Dear Ms. LaCanfora: 

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Thank you for your testimony before the Commiuee on Ways and Means at the June 29, 

2017 Social Security and Oversight Subeommitte<!S' joint hearing entitled, "Complexities 

and Challenges of Social Security Coverage and Payroll Tax Compliance for State and 

Local Governments." l.n order to complete our hearing record, we would appreciate your 

responses to the following questions: 

I. If a state or local government fails to pay payroll taxes for an employee who is 

supposed to be covered under Social Security, only the last three years of unpaid 

taxes must be repaid due to the statute of limitations. Is there a similar statute of 

limitations for the Social Security Administration (SSA) to C·redit earnings to a 

worker's account? Will the SSA credit earnings for years when taxes were not 

paid? 

2. Since the amotmt of revenue that goes to the Social Security Trust Funds is based 

on covered earnings instead of taxes paid, what happens if covered earnings arc 

higher than payroll taxes received and there is a gap between the amount of 

payroll taxes received and the amount of revenue going to the Tnast Funds? Are 

general revenues being used to fill that gap? 

3. What data sources are used to arrive at the earnings amount used to calculate the 

amount of revenue that goes to the Social Security Trust funds? If an individual 

goes through the process of getting his/her earnings record corrected, arc the 

corrected earnings always f.•ctored into this calculation? 

4. I fan employer reports an error to the SSA. what is the process for updating the 

affected employees' earnings records with Social Security? Does the SSA provide 

the corrected information to the IRS? 
60 


Insert 33479A.030

5. If an individual finds an error with his/her earnings record when reviewing his/her 

Social Security statement or claiming benefits, what is the process for correcting 

the error? Does the individual have to prove that he/she paid Social Security 

taxes or will the SSA accept other types of evidence? What types of evidence are 

acceptable? 

6. When a state or local government mischaracterizes an employee as non-covered 

when they actually are, how would that impact the employee when he/she begins 

to apply for benefits? Is it possible that the person may receive a lower benefit 

amount than he/she is entitled to or appear to not be eligible for benefits at all? 

7. If the SSA identifies an issue with a public employer, does the SSA share this 

information with the Internal Revenue Service and the State Social Security 

Administrator? Under what circumstances would the SSA share this information? 

8. How does the SSA plan to use and maintain the Section 218 database? When will 

the database to be ready for use? 

9. Following the addition of Section 218 to the Social Security Act, the SSA 

required states to create the role of State Social Security Administrator, which 

states may not have done otherwise. What was the rationale for requiring the 

establishment of a state-funded position? Do you view the responsibilities of the 

State Administrator as strictly state functions, or in absence of such a person, 

would additional work by the SSA be required? 

Question from Rep. Jim Renacci 

I. As you know, a worker's salary isn't always the same as the earnings Social 

Security uses. If the worker's position isn't covered for Social Security, then 

earnings from that job will not be counted toward future benefits. For exan1ple in 

my state of Ohio, less than 5% of state and local government employees are 

covered by Social Security. If an individual's earnings are covered, Social 

Security earnings may be lower than her salary because some things, like the 

health insurance premiums, are exempt from Social Security taxes. Since the 

amount of Social Security earnings is used to calculate benefits, this is an 

important number to get right. Does Social Security have a way to know whether 

a worker should be covered by Social Security and to check whether the amount 

of Social Security earnings reported on the W-2 is correct? What information 

would you need that you don't have today? 
61 


Insert 33479A.031

We would appreciate your responses to these questions by July 27, 2017. Please send 

your response to the attention of Amy Shuart, Sta.ff Director, Subcommittee on Social 

Security, and Meinan Goto, Professional Staff, Subconm1ittee on Oversight, Committee 

on Ways and Means, U.S. House of Representatives, 2018 Rayburn House Office 

Building, Washington, DC 20515. ln addition to a hard copy, please submit an electronic 

copy of your response in Microsoft Word fonnat to Liz.Navin@mail.house.gov and 

MM.Russell@mail.house.gov. 

Thank you for taking the time to answer these questions for the record. If you have any 

questions concerning this request, you may reach Amy or Meinan at (202) 225-9263. 

Sam Johnson 

Chairman 

Sincerely, 

Subcommittee on Social Security 

Vern Buchanan 

Chainnan 

Subcommittee on Oversight 
62 


Insert 33479A.032

.,t-'- SEt.'(/-? 

1 

\ 1 WiiiiJ iVtST\\?'-

SOCIAL SECURITY 

Office of Retirement a nd Disability Policy 

September 26, 2017 

The Honorable Sam Johnson 

Chairman, Subcommittee on Social Security 

Committee on Ways and Means 

United States House ofRepresentatives 

Washington, DC 20515 

The Honorable Vern Buchanan 

Chairman, Subcommittee on Oversight 

Committee on Ways and Means 

United States House of Representatives 

Washington, DC 20515 

Dear Chairman Johnson and Chairman Buchanan: 

Thank you for the opportunity to provide information to complete the record from the June 29, 

2017 hearing entitled "Complexities and Challenges of Social Security Coverage and Payroll 

Compliance for Staie and Local Governments." Enclosed please find our answers to your and 

Congressman Renacci's questions. 

I hope this information is helpful. When I appeared before you in June it was in my capacity as 

the Acting Deputy Commissioner for the Office ofRet.iremcnt and Disability Policy. I am 

sending the enclosed information to you on that office's behalf. However, I have since changed 

positions, and look forward to working with you and your staff in my current role as the Deputy 

Commissioner for Hwnan Resources. If you or your staff have any further questions, please do 

not hesitate to contact me or Royce Min, our Acting Deputy Commissioner for Legislation and 

Congressional Affairs, at (202) 358-6030. 

Enclosure 

Sincerely, 

4~,.;),;1t>vt,e-­ Marianna ~:rf Deputy Commissioner for 

Human Resources 

SOCIAL SECURITY ADMINISTRATION BAL TIMOR£, MD 2 1235·000 I 
63 


Insert 33479A.033

Enclosure- Page 1- The Honorable Sam Johnson and the Honorable Vern Buchanan 

I. If a state or local government fails to pay payroll taxes for an employee who is 

supposed to be covered under Social Security, only the last three years of unpaid 

taxes must be repaid due to tbe statute of limitations. Is there a similar statute of 

limitations for the Social Security Administration (SSA) to credit earnings to a 

worker's account? 

In general, the Social Security Act ("Act") allows us to correct our earnings records 

within three years, three months, and 15 days of the year in which the wages were paid or 

self-employment income was derived.' After this time limit bas expired, we are 

generally prohibited from changing our earnings records, except in certain situations. For 

example, the Act allows us to correct our earnings records after that period has expired 

when new and more accurate wage information becomes available.2 For example, we 

can add earnings to a person's earnings record after the period has expired if he or she 

provides proof such as a corrected wage and tax statement (Fonn W-2c)3 We can make 

such corrections at any time. 

Will the SSA credit earnings for years when taxes were not paid? 

If a state or local government were to fail to withhold payroll taxes for an employee 

whose wages are covered under the Act, we can add those wages to the person's earnings 

record, provided again that SSA has proof that wages were paid (for example, a Forrn W2c with the wage amount displayed in the Social Security wages and tips boxes). The 

Act ties our earnings records to the amounts of wages paid, and not to the taxes paid 

under the Federal lnsurance Contributioos Act (FICA) nor the Internal Revenue Service's 

(IRS) ability to collect those taxes. 

Our understanding is that, in general, the IRS is limited in recovering the unpaid payroll 

taxes in such scenarios to the three prior years. Therefore, depending on bow long ago 

the error occurred, we may be able to correct our earnings record, but the IRS could be 

unable to recover the unpaid taxes. 

2. Since tbe amount of revenue that goes to the Social Security Trust Funds is based on 

covered earnings instead of taxes paid, what happens if covered earnings a re higher 

than payroll taxes received and there is a gap between the amount of payroll taxes 

received and the amount of revenue goi.ng to the Trust Funds? Are general 

revenues being used to fill that gap? 

The Department of the Treasury ("Treasury") credits the Social Security Trust Funds 

based on the total amount of the FICA and Self Employment Contributions Act (SECA) 

tax liabilities, rather than the amount of these taxes it actually receives. Treasury 

determines this amount by multiplying the tota l taxable wages and self-employment 

income for a year by the Old-Age, Survivors, and Disability Insurance (OASDI) portion 

of the FICA/SECA tax rate, adjusted to account for the OASDI wage base. Treasury 

1 See Social Sccurily Acl § 205(c)(I)(B), (c)(4) [42 U.S.C. § 405(c)( tXb), (cX4)]. 

' See Social Sccurily Acl § 205(c)(5) L42 U.S.C. § 405(c)(5)j. 

'See Social Sccurily Acl § 205(c)(5)(F). (H) [42 U.S.C. § 405(cX5)(F),(H)]. 
64 


Insert 33479A.034

Enclosure-Page 2- The Honorable Sam Johnson and the Honorable Vern Buchanan 

credits the Trust Funds daily based on estimates, and every quarter reconciles the credited 

amounts for all prior years based on the latest wages and self-employment income data. 

Prior to the enactment of the Social Security Act Amendments of 1950, Treasury credited 

Social Security's Tn1st Fund based on the amount of taxes received4 However, that 

system was expensive for Treasury to administer. Furthermore, it could have caused a 

shortfall in the Trust Fund- SSA's monthly benefit payments are predictable and regular, 

whereas tax receipts fluctuate over time. Congress recognized aud addressed these issues 

by creating the current process with the euactment of the Social Security Act 

Amendments of 1950. 

Under the current system, Treasury uses general funds to cover the difference between 

tax liabilities and receipts. We would defer to Treasury regarding the scope of the 

difference between liabilities and receipts over time. 

3. What data sources are used to arrive at the earnings amount used to calculate the 

amount of revenue that goes to the Social Security Trust Funds? 

SSA's role in the process of crediting the Trust Funds is to "certify" to the Treasury the 

total amount of covered wages and self-employment income subject to Social Security 

tax. We determine the total amount of wages for a year by using the greater of the total 

wages on Forms W-2 (provided by employers) and the total wages on employers' 

quarterly tax returns (Fonn 941 ), which is provided by the IRS. We determine the total 

amount of taxable self-employment income using data from individual taxpayers' 

Schedules SE (Form 1040), which is again provided by the IRS. As mentioned in 

response to question 2 above, Treasury applies the applicable tax rates to this amount to 

dete1mine the amount it should credit to the Trust Funds. 

lf an individual goes through the process of getting his/her earnings record 

corrected, are the corrected earnings always factored into this calculation? 

We always adjust the wage totals to reflect corrected wages (e.g., any wage corrections 

made as a result of processing Fom1s W-2c). We consider any corrections when 

determining the total amount of wages and self-employment income to certify to the 

Treasury. 

4. If an employer reports a n error to the SSA, what is the process for updating the 

affected employees' earnings records with Social Security? 

To correct an error in an employee's wages filed on a Form W-2, an employer would 

most commonly fi le a corrected wage and tax statement (Fonn W-2c) with us. 

Depending on the nature of the error and when it occurred, we may be prohibited from 

correcting it, as T noted in response to question I above. 

• Pub. L. No. 8 1· 734, § I 09(a). 
65 


Insert 33479A.035

Enclosure- Page 3- The Honorable Sam Jolmson and the Honorable Vern Buchanan 

Does the SSA provide the corrected information to the IRS? 

Yes. When we process Fonns W -2c, we share all of the corrected earnings information 

with the IRS. 

5. If an individual finds an error with his/her earnings r ecord when reviewing his/her 

Social Security statement or claiming benefits, what is the process for correcting the 

error? What types of evidence are acceptable? 

When someone applies for retirement or disability insurance benefits, we review their 

earnings record with them. During this review, we make sure the individual's earnings 

record is accurate and identify any errors such as incorrect amounts or unexplainable 

gaps. 

If an individual finds an error on his or her earnings record, he or she must provide 

evidence of the correct amount of the earnings before we can update our records. An 

individual must generally submit what we consider to be primary evidence (e.g., a Forn1 

W-2, a Form W-2c, or an end-of-year pay stub) or two pieces of secondary evidence (e.g. 

union records or records from State unemployment insurance agencies). When we 

change our earnings records, we also share the earnings correction detemlination with the 

IRS for their purposes. 

Does the individual have to prove that he/she paid Social Security taxes or will the 

SSA accept other types of evidence? 

The Act does not require that we obtain proof that an individual has actually paid FICA 

taxes before we add the earnings to a person's record. A failure to pay FICA has no 

impact on our ability to correct tbe earnings record under current law. We do, however, 

sbare updated wage information with the LRS so they can recover any unpaid taxes, to the 

extent per111itted by law. We ensure accurate earnings records, and the IRS is responsible 

for ensuring accurate payment of FICA. 

6. When a state or local government mischaracterizes a n employee as non-cover ed 

when they actually are, bow would that impact the employee when he/she begins to 

apply for benefits? Is it possible that the person may receive a lower benefit amount 

than he/she is entitled to or appear to not be eligible for benefits at all? 

Eligibility for OASDI benefits, and the amount of those benefits, depends on an 

individual's covered wages and self-employment income. If a State or local government 

were to mischaracterire an employee's earnings as being non-covered, it could cause the 

person to either be ineligible for benefits or receive a lower benefit amount. However, as 

stated in response to question 5 above, we review an individual's em1ings record with 

them when they apply for retirement or disability insurance benefits, to make sure their 

earnings record is accurate. 

As I noted in response to question I above, if someone recognizes that bis or her covered 
66 


Insert 33479A.036

Enclosure-- Page 4-The Honorable Sam Johnson and the Honorable Vern Buchanan 

wages have been mischaracterized as non-covered wages, we can correct the affected 

person's record, provided that we receive proof of the person's covered wages. As I noted 

in response to question 5, our ability to correct the affected person's record does not 

depend oo the payment of FICA taxes. 

7. If the SSA identifies an issue with a public employer, does the SSA share this 

information with the .Internal Revenue Service a nd the State Social Security 

Administrator? Under what circumstances would the SSA share this information? 

Sometimes a public employer may mischaracterize a group of employees as being 

covered by Social Security, despite the State 's Section 218 Agreement and the Act not 

supporting that determination. We most often hear of such issues by way of a State's 

Social Security Administrator or the IRS. They may have discovered the issue through 

State or IRS compliance efforts. It is rare for SSA to discover tltis informatioo 

independently. 

Each Section 218 coverage issue is different, aod the resolution depends on the case's 

facts and applicable laws. Our first priority in these situations is to work with the 

employer and the Administrator to resolve the issue. This can entail, for example, 

executing a modification to the Section 218 Agreement to provide prospective coverage 

for the employee group and retroactive coverage for wages for which the group had 

erroneously paid FICA taxes. We share modifications with the IRS, but we otherwise 

have no requirement or fonnal process for notifying the IRS when such an issue comes to 

our attention. 

As I noted in response to question 4 above, we do share information with the IRS 

whenever we make an earnings correction determination. When a public employer fi les a 

Fon11 W-2c with us, we process it, update our records as appropriate, and share the 

earnings correction infonnation with the IRS. 

Our ability to disclose information to State Social Security Administrators is more 

limited. We disclose cenain tax return and non-tax return information to the State Social 

Security Administrators under the terms and conditions of our Section 218 Agreement 

with the State. However, we may only disclose tax return information to a State Social 

Security Administrator that was originally provided to the agency by the State Social 

Security Administrator. 

8. How does the SSA plan to use and maintain the Section 218 database? When will 

the database to be r eady for use? 

The Secti on 2 18 Agreemeot database houses Section 218 Agreements, modifications, and 

their related documents. The database allows us to search for entities and positions 

among a State's Section 218 Agreement and its modifications. This allows us to 

complete a ponion of the research needed for State-requested coverage determinations 

with greater ease. 
67 


Insert 33479A.037

Enclosure-Page 5- The Honorable Sam Johnson and the Honorable Vern Buchanan 

The database is curremly operational and in use by our employees, all hough we continue 

to look for ways to enhance it. We have scanned approximately 90% of Section 218 

Agreements, modifications, and their related documents. We are working to scan the 

remainder, ensuring that all documents are legible and organized correctly. We expect 

that we will have all documents scanned into the database by the end of20 18. We will 

maintain the database, adding new modifications and supporting docwnents as the 

modifications are executed. 

9. Following the addition of Section 218 to the Social Security Act, the SSA required 

states to create the role of State Social Security Administrator, which states may not 

have done othem·ise. What was the rationale for r eq uiring the establishment of a 

state-funded position? 

It is imponant tl1at public employers get their employees' coverage status right. When a 

State voluntarily enters into a Section 218 Agreement with us, it agrees to perfonn cenain 

duties (listed below) in order to implemem the Agreement's corresponding coverage. 

Because of this, we believe it is critical that the official who is executing 218-related 

matters acts on behalf of and with the full authority of the State. This is why our 

regulations require the States to designate an Administrator if they enter into a Section 

218 Agreement with us. 

Do you view the responsibilities of the State Administrator as strictly state 

functions, or in absence of such a person, would additional work by the SSA be 

required ? 

A State Social Security Administrator's basic responsibilities are to: 

Permanently maintain physical custody of the Section 218 Agreement and 

associated documents; 

• Detern1ine which State and political subdivision employees' positions are covered 

by approved Section 2 18 Agreements and modifications; 

• Work with employers to guarantee proper Social Security and Medicare 

withholding and reponing; 

• Take appropriate steps with respect to the execution of modifications to the 

original agreement to include additional coverage groups, correct errors in 

coverage, or identify additional political subdivisions that join a covered 

retirement system; 

Conduct referenda on the coverage of services of individuals in positions under a 

retirement system; 

Identify new, inactive, merged or dissolved political subdivisions, and take the 

appropriate coverage related action; 

Provide SSA with notice and evidence of the legal dissolution of covered State or 

political subdivision entities; 

Provide guidance to government employers on issues related to Section 218 

coverage; 
68 


Insert 33479A.038

Enclosure- Page 6-The Honorable Sam Johnson and the Honorable Vern Buchanan 

• Work with SSA and the fRS to address coverage and taxation questions related to 

the Agreement and any modifications; and 

Serve as an intennediary for federal, State and local agencies, and educate public 

employers on coverage and benefit issues. 

While we currently duplicate some of these responsibilities out of administrative 

necessity, such as document retention, we cannot properly perform others because we 

have no authority to act as an agent for the State itself or intervene in the State's process 

of deciding what positions it wants to cover. The Act, rather, requires us tO agree to 

whatever coverage tenns the State requests. Therefore each State must remain 

responsible for many of these functions with respect to its employees and its compliance 

with the Act, the Internal Revenue Code of 1986, and other applicable laws. In the 

absence of an Administrator, other State officials would have to perform such functions. 

Requiring a State Administrator ensures that the person perfonning these functions has 

existing familiarity with the complexity of coverage. 

Question from Rep. Jim Renacci 

I. As you know, a worker's salary isn't always the same as the earnings Social Security 

uses. U the wor ker's position isn't covered for Social Security, then earniugs from 

that job will not be counted toward future benefits. For example in my state of Ohio, 

less than 5% of state and local government employees are cover ed by Social 

Security. 1f an individual's earnings ar e covered, Social Security earnings may be 

lower than her salar y because some things, like the health insurance premiums, a re 

exempt from Social Security taxes. Since the amount of Social Security earnings is 

used to calculate benefits, this is an important number to get right. Does Social 

Security have a way to know whether a worker should be covered by Social Security 

and to check whether the amount of Social Security earnings r eported on the W-2 is 

correct? 

The Internal Revenue Code of 1986 generally requires each employer to detennine 

whether its employees' wages should be covered, withhold and remit payroll taxes, 

accurately complete a Form W-2 for each employee, and file a copy of that fom1 with us. 

The IRS ensures compliance with these requirements by conducting periodic 

examinations and audits of employers, to the extent its resources allow. 

In the course of processi ng Fonns W-2, we do certain checks to make sure that we are 

crediting the wages to the right person's record and that the total earnings reported by an 

employer on its Fonns W-2 are consistent with the earnings reported on its quarterly tax 

return (Form 941 ). Otherwise, we do not have a way to know whether an employer has 

reported its employees' wages accurately. For this reason, employers are important 

partners in this process, as they are responsible for identifying their employees' coverage 

status and withholding and paying the appropriate amount of FICA. 

What information would you need that you don't have today? 
69 

f 


Insert 33479A.039

Enclosure-- Page 7- The Honorable Sam Johnson and the Honorable Vern Buchanan 

Because the IRS has oversight in this area, we would defer to them. 
70 


Insert 33479A.040

Sunita B. Lough 

Commissioner 

~ongrts.S or thf 'Bnitfd ~mtr.s 

'll.,S. }louse or 'Rcprr.smtatiucs COMMITitE ON WAYS AND MEANS 

1102 I.ONQWOI'ITH HOVSl 0ffiC:t 8VILOING 

(202.1 22&-3626 

illasllington. !Ht lOl!Hli& 

htt~*"Adl'nNns,hOus.,goy 

July 13, 2017 

Tax-Exempt and Government Entities Division 

Jill Constitution Avenue NW 

Washington, DC 20224 

Dear Ms. Lot•gh: 

Tilank you for your testimony before the Comminee on Ways and Means at the June 29, 

2017 Social Security and Oversight Subeommiuees' joint hearing entitled, "Complexities 

and Challenges ofSocial Security Coverage and Payroll Tax Compliance for State and 

Local Governments.'' In order to complete our bearing record. we would appreciate your 

responses to the following questions: 

I. Sometimes payroll tax withholding problems can go back I 0 or more years, what 

is the statute of limitations for correcting payroll tax withholding errors? How 

does the current statute of limitations affect the ability of the Internal Revenue 

Service (IRS) to recover lost payroll taxes? 

2. Do the issues with Social Security payroll tax noncompliance also apply when it 

comes to Medicare payroll taxes? 

3. In the event that an employer inadvertently withholds too little in payroll ta.xes. 

yet reports the same amount on both forms when reporting to both the Social 

Security Administration (SSA) and the IRS, would the reconciliation process flag 

this? If not, what other ways can the IRS ideotil)' this error? 

4. If an employer's quarterly tax return has a zero for ta.xable Social Security wages, 

does this automatically generate a flag for follow up? If not, under what 

circumstances would there be a flag? Are obvious anomalies flagged for review 

by the IRS, such as everyone in a firm having a salary of SO or having the same 

salary? 

5. How do the majority of compliance issues come to light? Do state and local 

employers self-identify the issue or are they typically found through IRS audits? 
71 


Insert 33479A.041

6. What is the percentage of payroll tax noncompliance for aU employers? What is 

this percentage for state and local government employers? 

7. State and local governments regularly make changes to their qualifying retirement 

plans. How does the IRS make sure that a state/local government's pension plan 

continues to meet the requirements for being a FICA-replacement plan? How is 

the assessment made and bow often are plans reevaluated? Does this assessment 

take into account the ultimate benefit amount paid to the pension recipient or just 

the amount contributed by the employer or employee? 

Question from Rep. Tom Rice 

I. Ms. Lough, you mentioned that 26 U.S.C. § 6 103 contains an exception that 

would allow the IRS to share information with the Social Security 

Administration. Additionally, you stated that the IRS does share information 

"when it becomes necessary ... with regards to specific public employers." Under 

what specific situation does the IRS share information with the SSA? When the 

IRS does share information with the SSA, what data e lements are shared? 

We would appreciate your responses to these questions by July 27,2017. Please send 

your response to the attention of Amy Shuart, Staff Director, Subcommittee on Social 

Security, and Meinan Goto, Professional Staff, Subcommittee on Oversight, Committee 

on Ways and Means, U.S. House of Representatives, 2018 Rayburn House Office 

Building, Washington, DC 205 15. In addition to a hard copy, please submit an electronic 

copy of your response in Microsoft Word format to Liz.Navin@mail.house.gov and 

MM.Russell@mail.house.gov. 

Thank you for taking the time to answer these questions for the record. If you have any 

questions concerning this request, you may reach Amy or Meinan at (202) 225-9263. 

Sam Johnson 

Chairman 

Sincerely, 

Subcommitt e on Social Security 
72 


Insert 33479A.042

Questions for the Record 

Complexities and Challenges of Social Security Coverage and Payroll Compliance for 

State and Local Governments 

House Ways and Means Committee 

Subcommittee on Social Security and Subcommittee on Oversight 

June 29, 2017 

I. Sometimes payroll tax withholding problems can go back 10 or more years, what 

is the statute of limitations for correcting payroll tax withholding errors? How 

does the current statute of limitations affect the ability of the Internal Revenue 

Service (IRS) to recover lost payroll taxes? 

The normal period of limitations for assessment of tax with respect to a tax return 

expires three years after the return is filed or due, whichever is later. See 26 U.S.C. 

§ 6501 (a) and (b)(1 ). The date that the period of limitations expires is also referred to as 

the •statute date." 

For certain employment tax returns, the statute date is based on a "deemed filing date." 

Employment tax returns filed quarterly, such as Form 941 , Employer's QUART£RL Y 

Federal Tax Return, must generally be filed by the last day of the month following the 

end of the quarter (for the quarter ending 3/31/17, the return would be due by 4/30/17). 

For the purpose of determining the period of limitations for assessments, a quarterly 

return filed for any of the quarters of the calendar year has a deemed filing date of April 

15 of the succeeding calendar year, per 26 U.S.C. § 6501 (b)(2). For example, the 

deemed filing date for Forms 941 for the quarters ending 3/31/17, 6/30/17, 9/30/17, and 

12/31/17, would be 4/15/18. The deemed filing date applies to withholding of tax on 

non-resident aliens and foreign corporations (26 U.S.C. §§ 1441-1464), Social Security 

tax and Medicare tax (Federal Insurance Contributions Act, 26 U.S.C. §§ 3101-3128), 

and federal income tax withholding (Collection of Income Tax at Source on Wages, 26 

u.s.c. §§ 3401-3406). 

The "deemed filing date" rule generally applies if a payroll tax return for any of the 

quarters of the calendar year is filed on or before April15 of the succeeding calendar 

year. When the "deemed filing date" rule applies, the period of limitations will expire 3 

years after the deemed filing date. Any return filed after April 15 of the succeeding year 

has a statute date three years from the date the return is actually filed. See 26 C.F.R. 

§ 301 .6501(b)-1(b). 

Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, is due by 

January 31 following the end of the calendar year. Form 940 does not have a deemed 

filing date. Thus, the statute date for the Form 940 is three years from the date the 

return is filed or due, whichever is later. Because remuneration for service in the employ 

of a state or local government is generally excepted from FUTA tax under 26 U.S.C. 
73 


Insert 33479A.043

§ 3306(c)(7), FUTA tax liability does not generally arise in state and local government 

audits. 

There are certain exceptions to the general statute of limitations rules. A taxpayer may 

voluntarily agree with the IRS to extend the statute of limitations for an open period, 

which is often done during the course of an audit. For employment tax returns, 

taxpayers execute Form SS-10, Consent to Extend the Time to Assess Employment 

Taxes, to extend the statutory period for assessment. Under 26 U.S.C. § 6501(c)(3), tax 

may be assessed at any time if no return was filed by the taxpayer. Additionally, there is 

no time limit on assessment of tax when a taxpayer has filed a false or fraudulent return 

with the intent of evading tax. See 26 U.S.C. § 6501 (c)(1) and (2). 

In summary, the IRS is unable to assess additional employment taxes three years 

beyond the deemed filing date or actual filing date (whichever is later), except in 

situations where (1) the taxpayer agrees to extend the applicable limitations period, (2) 

the required return(s) have not been filed, or (3) dear and convincing evidence exists 

that the taxpayer has filed a false or fraudulent return with the intent of evading tax. 

2. Do the issues with Social Security payroll tax noncompliance also apply when it 

comes to Medicare payroll taxes? 

It depends on the situation, but issues with Social Security payroll tax noncompliance do 

not always apply when it comes to Medicare payroll taxes. Unlike with Social Security 

taxes, almost all public employees are subject to Medicare tax, even those in a public 

retirement system. In 1986, Social Security and Medicare coverage for state and local 

government employees became subject to different rules. Prior to 1986, the only way for 

public employees to be covered for Medicare was under Section 218 Agreements. In 

1986, Congress mandated that almost all public employees hired after March 31 , 1986 

must be covered for Medicare and pay Medicare tax regardless of their membership in a 

public retirement system. A limited exception (the continuing employment exception) is 

provided to exempt from Medicare only certain state and local government employees 

who have been in continuous employment with the same public employer since 1986 

and who are not covered under a Section 218 Agreement. 

For both public and private employers, a decision to exclude a particular payment from 

an employee's wages based on applicable law would typically result in potential 

noncompliance with respect to both Social Security and Medicare payroll taxes. For 

example, if an employer incorrectly determines that a payment to an employee is 

excludable from wages as a non-taxable fringe benefit, such determination would result 

in potential noncompliance with respect to both Social Security taxes (unless the Social 

Security tax wage base had already been reached with respect to wages paid to that 

individual) and basic Medicare payroll taxes (which are not subject to a wage base limit). 

2 
74 


Insert 33479A.044

3. In the event that an employer inadvertently withholds too little in payroll taxes, 

yet reports the same amount on both forms when reporting to both the Social 

Security Administration (SSA) and the IRS, would the reconciliation process flag 

this? If not, what other ways can the IRS identify this error? 

Generally, the reconciliation process will not flag this situation because that process is 

looking for discrepancies between the amounts reported to the SSA on Form W-3, 

Transmittal of Wage and Tax Statements, and the amounts reported to IRS on Form 

941 . In this example, since the amounts are the same, there are no discrepancies to 

reconcile. 

The way to identify the under-withholding is inspection of the underlying payroll records 

for individuals through the audit process. The IRS uses various data elements in filed 

returns to evaluate potential for compliance action. For example, the IRS reviews ratios 

of social security or Medicare wages to total wages. 

4. If an employer's quarterly tax retum has a zero for taxable Social Security wages, 

does this automatically generate a flag for follow up? If not, under what 

circumstances would there be a flag? Are obvious anomalies flagged for review 

by the IRS, such as everyone in a firm having a salary of$0 or having the same 

salary? 

For government employers, this situation of zero Social Security wages will not 

automatically generate a flag absent a discrepancy with the annual Form W-3 and Form 

W-2, Wage and Tax Statement, filings because a government employer and its 

employees are not necessarily subject to Social Security tax. For example, if a state or 

local government entity did not have a Section 218 Agreement and did have a FICA 

replacement plan for all of its employees, then Social Security wages for all of those 

employees would be zero. However, the employer would still be expected to report 

Medicare and income taxable wages, and if it did not, the payroll returns of that 

employer could be selected for audit. 

This situation of zero Social Security wages is of the type noted during routine 

classification of returns for audit. During classification of returns for audit, the IRS would 

check whether the taxpayer has a Section 218 agreement and review it for the coverage 

provisions. If the employer appeared not to be in compliance with those provisions. then 

those tax returns could be selected for audit. 

Also during the classification process, large, unusual, or questionable items on Form 941 

or W-2, such as the same compensation for every employee, could lead to audit 

selection. 

The IRS would not be able to flag identical compensation by review of a Form 941 , 

which reports compensation only in the aggregate. 

3 
75 


Insert 33479A.045

5. How do the majority of compliance issues come to light? Do state and local 

employers self-identify the issue or are they typically found through IRS audits? 

IRS receives a large volume of Forms 941-X. Adjusted Employer's QUARTERLY 

Federal Tax Return or Claim for Refund, which is a method by which employers selfidentify and correct compliance issues. Other compliance issues come to light through 

the audit process, which may result, for example, from a referral made by an employee, 

an unrelated taxpayer, or a state or local entity claiming there is an area of noncompliance that needs to be reviewed; classification filters; or projects on specific types 

of employment tax issues. See the response for question 6 below for information on IRS 

Federal, State & Local (FSL) audit activity rates. 

6. What is the percentage of payroll tax noncompliance for all employers? What is 

this percentage for state and local government employers? 

For both public and private employers, FICA and unemployment tax make up about 3 

percent of the gross tax gap, according to the most recent IRS study of the tax gap, 

which covers taxable years 2008 through 2010. The gross tax gap is the sum of the 

estimated non-filing tax gap, underreporting tax gap, and underpayment tax gap. The 

data are not compiled at a level of detail distinguishing between public and private 

employers. For more information on the tax gap, see 

https:llwww.irs.gov/pub/newsroom/tax%20gap%20estimates%20for%202008%20throug 

h%202010.pdf. 

The IRS audited approximately 0.6 percent of all returns (including income tax, estate 

and gift tax, employment tax, and excise tax returns) filed in calendar year 2015. IRS 

Pub. 55-B, Data Book (2016) at pg. 21, available at https:llwww.irs.gov/publirssoi/16databk.pdf. Each year, the FSL function selects for audit a few hundred from tens 

of thousands of public employers. In FY 2016, of 362 audits of public employers, FSL 

proposed adjustments to taxable wages in 254. 

7. State and local governments regularly make changes to their qualifying retirement 

plans. How does the IRS make sure that a state/local government's pension plan 

continues to meet the requirements for being a FICA-replacement plan? How is 

the assessment made and how often are plans reevaluated? Does this assessment 

take into account the ultimate benefit amount paid to the pension recipient or just 

the amount contributed by the employer or employee? 

The IRS may examine whether a plan met the requirements for a FICA replacement plan 

through an audit, by inspecting the plan and evaluating it in terms of the requirements. 

FICA replacement plan requirements do not affect whether the retirement plan is a 

•qualified" plan per 26 U.S.C. § 401(a). A retirement system that qualities as an 

alternative to Social Security provides for a retirement benefit to the employee that is 

comparable to the benefit provided by the Old-Age portion of the Old-Age, Survivor and 

4 
76 


Insert 33479A.046

Disability Insurance program of Social Security. For mandatory coverage purposes, the 

employee may be a member of any type of retirement plan, including a nonqualified 

deferred compensation plan such as a section 457 plan, as long as the plan provides the 

minimum level of benefits required for a FICA replacement plan. These requirements 

are discussed in 26 C.F.R. § 31 .3121 (b)(7)-2(e) and in Revenue Procedure 91-40. 

The IRS's assessment is based upon the type of retirement plan: 

• A defined contribution plan provides an individual account for each participant 

and provides benefits based solely on the amount contributed. 

• A defined benefit plan determines benefits on the basis of a formula, generally 

based on age, years of service, and salary level. 

Publication 963, Federal-State Reference Guide, Chapter 6 provides detailed 

explanations of the FICA replacement plan requirements with regard to the type of 

retirement system a state or local government may maintain. 

Question from Rep. Tom Rice 

I. Ms. Lough, you mentioned that 26 U.S.C. § 6103 contains an exception that 

would allow the IRS to share information with the Social Security 

Administration. Additionally, you stated that the IRS does share information 

"when it becomes necessary ... with regards to specific public employers." Under 

what specific situation does the IRS share information with the SSA? When the 

IRS does share information with the SSA, what data elements are shared? 

26 U.S.C. § 61 03(1)(1) allows the IRS, upon written request, to disclose to the SSA tax 

returns and return information relating to taxes imposed under chapter 2 (selfemployment income), chapter 21 (FICA), and chapter 24 (income tax withholding), to 

administer the Social Security Act; and chapter 22 (Railroad Retirement Tax Act), to 

administer the Railroad Retirement Act. The IRS may also disclose to the SSA 

information from Form 8955-SSA, Annual Registration Statement Identifying Separated 

Participants with Deferred Vested Benefits, pertaining to private retirement plans. 

Additional provisions allow disclosure for other SSA programs, including§ 6103(h)(5) 

(address and citizenship status for purposes of foreign withholding tax), § 61 03(1)(5) 

(information returns and epidemiological research), § 6103(1)(12)(A) (verification of 

spouse of Medicare beneficiary), § 6103(1)(20) (Medicare Part B premium subsidy 

adjustment and Part 0 base beneficiary premium increase), and§ 6103(m)(7) (address 

of person entitled to receive an SSA retirement account statement). 

The IRS may ask the SSA about the FICA coverage of particular public employees. A 

2002 Memorandum of Understanding between the IRS and the SSA for state and local 

government compliance issues says that the SSA is responsible for determining the 

coverage status of state and local government employees covered under a state's 

Section 218 agreement (including modifications). 

In the course of a specific examination, a public employer may direct the IRS to share 

information with the SSA, the State Social Security Administrator, or any other party. 

Form 8821, Tax Information Authorization, is available for this purpose. On this form, 

5 
77 

f 


Insert 33479A.047

the public employer may designate the type of tax, tax form, year or period, and specific 

tax matter for information sharing. 

6 
78 


Insert 33479A.048

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15002 East Walsh Drive 

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Thank you for your testimony before the Commiuee on Ways and Means at the June 29, 

2017 Social Security and Oversight Subeomminecs' joint hearing entitled, "Complexities 

and Challenges of Social Security Coverage and Payroll Tax Compliance for State and 

Local Governments." In order to complete our hearing record, we would appreciate your 

responses to the following questions: 

Question from Rep. Tom Rice 

l. In your testimony you wrote that "[s]tate Administrators can help all levels of 

government avoid the negative financial, media, and poUtical consequences that 

occur when federal and state laws are not properly complied with by state and 

local governments and public pension systems." Please provide a description of 

the types of tax compliance issues that additional information provided to State 

Social Security Administrators can help resolve. Please include: 

l. A description of the issue. 

2. The specific information that would be shared (for example, would 

Administrators only need the name of the taxpayer and a brief description 

ofthe issue or would additional information be ne<:dcd). 

3. How would the information assist federal agencies in resolving tax 

compliance issues. 

Question from Rep. Jim Renacci 

l. In yourtestimony you state that no Section 218 Agreements or even modifications 

can be entered into by a local government without the authorization from state 
79 


Insert 33479A.049

governments and that in recent years the Social Security Administration and the 

IRS have been largely unavailable in assisting states in education efforts. Can you 

go further into detail about this lack of coordination and what more could be done 

in order to improve the education efforts for local employers and employees? 

We would appreciate your responses to these questions by July 27, 2017. Please send 

your response to the attention of Amy Shuart, Staff Director, Subcommittee on Social 

Security, and Meinan Goto, Professional Staff, Subcommittee on Oversight, Committee 

on Ways and Means, U.S. House of Representatives, 2018 Rayburn House Office 

Building, Washington, DC 20515. In addition to a hard copy, please submit an electronic 

copy of your response in Microsoft Word format to Liz.Navin@mail.house.gov and 

MM.Russell@mail.house.gov. 

Thank you for taking the time to answer these questions for the record. If you have any 

questions concerning this request, you may reach Amy or Meinan at (202) 225-9263. 

Sincerely, 

~~~ Sam Johnson 

Chairman 

Subcommittee on Social Security 

Chairman 

Subcommittee on Oversight 
80 


Insert 33479A.050

NCSSSA 

July 24, 2017 

Ms. Amy Shuart 

Staff Director 

Subcommittee on Social Security 

AND 

Mr. Meinan Goto 

Professional Staff 

Subcommittee on Oversight 

Committee on Ways and Means 

U.S. House of Representatives 

2018 Rayburn House Office Building 

Washington, DC 20515 

National Conference of 

State Social Security Administrators 

RE: Responses to follow-up questions from the June 29, 2017, Committee on Ways and 

Means, Social Security and Oversight Subcommittees' joint hearing entitled, 

"Complexities and Challenges of Social Security Coverage and Payroll Tax Compliance 

for State and Local Governments 

Dear Ms. Shuart and Mr. Goto: 

This is in response to the questions posed by Representative Rice and Representative Renacci 

in the letter from Chairman Johnson and Chairman Buchanan dated July 13, 2017. 

Question from Re resentative Tom Rice: 

1. In your testimony you wrote that "(s)tate Administrators can help all levels of 

government avoid the negative financial, media, and political consequences that occur 

when federal and state laws are not properly complied with by state and local 

governments and public pension systems.• Please provide a description of the types of 

tax compliance issues that additional information provided to State Social Security 

Administrators can help resolve. Please include: 

1. A description of the issue. 

2. The specific information that would be shared (for example, would 

Administrators only need the name of the taxpayer and a brief description of the 

issue or would additional information be needed). 

3. How would the information assist federal agencies in resolving tax compliance 

issues? 

Page 1 of 7 
81 


Insert 33479A.051

Answer: 

In 2014, the Internal Revenue Service (IRSVFederai-State-Local Governments (FSLG) section 

identified many compliance risk areas that exist nationwide among state and local governments. The list and a description of each risk area are included as an attachment to this letter, 

but the major categories are: 

1. Public School "Teacher" Positions 

2. Policeman and Firefighter Positions 

3. Section 414(h)(2) employer pick-up issues 

4. Qualifying FICA Replacement Plans 

5. Retirement Plan Types 

6. Government Entity Restructuring 

7. Charter Schools 

8. Mandatory Medicare Coverage 

9. Part-time Positions 

10. Student Services 

All states have some or all of the above risk areas. If the IRS could direclly communicate with 

the State Administrator in each state about specific compliance issues unique to that state, the 

IRS' time and other resource expenditures would dramatically decrease. Further, if the IRS 

could discuss the issues specific to their state, then the State Administrator could focus 

attention on targeted education and outreach to public employers in their states that are 

experiencing those risks. 

When conducting a compliance check or examination, the IRS should be able to contact the 

State Administrator prior to reaching out to the individual governmental entity for specific 

information about the Social Security (and Medicare only) and public pension plan coverage 

that is applicable to each employee group and positions of that entity. SSA, IRS, and State 

Attorney General's Office interpretative information held by the State Administrator could be 

shared as well. By the IRS reviewing and discussing with the State Administrator all of the 

information contained in the files maintained by the State, the costs to all Qarties (especially 

IRS and the individual state or local government) would be significantly reduced. Even when 

the state or local government employer has historic records, due to staff turnover and lack of 

training, many of their officials are not familiar with all applicable federal and state law nuances 

that apply to their individual employees. This is why the State Administrator needs to be 

involved to aid all parties when such compliance checks and examinations are conducted by 

the IRS. 

Open communication between the IRS and State Administrator prior to the IRS initiating 

contact with an individual public employer will enable the IRS to know which positions are or 

are not required to be covered by Social Security (or Medicare only), those who are required to 

be covered by a combination of Social Security and a pension plan (and which one if the entity 

has more than one such plan), and those who are members of a FICA replacement plan. 

Accurate and complete information needs to be shared about individual employees within each 

governmental entity. 

The current payroll or finance officer of a public entity is often merely continuing to do what his 

or her predecessor did without knowing the reasons. Worse yet, due to budget constraints, 

most governments must leave positions vacant for a period of time after an employee resigns 

or retires. In some cases, an employee from the private sector is hired who is unaware of the 

unique laws that apply to state and local governments and may erroneously begin (or stop) 

Page 2 of7 
82 


Insert 33479A.052

withholding Federal Insurance Contributions Act (FICA) taxes. Also, state and local 

governments may erroneously begin (or stop) withholding FICA taxes when state legislative 

changes are made to public pension laws. The next two paragraphs contain, respectively, an 

excellent example of how a knowledgeable State Administrator can prospectively address what 

could become a significant compliance issue and, thereby, assist federal agencies by 

preventing future coverage and tax problems, followed by an example of what happens when a 

state has failed to properly support the State Administrator function. 

One state had an issue where the state's main retirement system made a change to the police 

retirement plan. The State Administrator was not the one reviewing proposed legislative 

changes and the person assigned to monitor state legislation missed the significance of the 

change. The State Administrator learned of the change in a retirement system newsletter that 

a new plan was created, and now the police would pay Social Security. The State 

Administrator immediately called the parties involved and was able to resolve the issue before 

any new police were hired into the new retirement plan. The new police plan had voted in a 

Section 218 referendum election not to pay Social Security so it would have resulted in 

significant errors in Social Security coverage and improper FICA tax payments that could have 

taken years to resolve and been costly to all police departments that improperly followed the 

changes to state laws that were contrary to the state's enabling legislation that implemented 

Section 218 of the U.S. Social Security Act. If the State Administrator had not become aware 

of the change erroneous payment into Social Security could have occurred for years. In the 

future, when the IRS conducts a compliance check or examination of a governmental entity in 

that state, potential non-compliance with federal laws have been avoided thereby assisting 

federal agencies in prospectively ensuring compliance. This results in a savings of time and 

resources by the federal government and the governmental entity which, in turn, saves tax 

revenue that can be used elsewhere. 

As the above example shows, one of the responsibilities of the State Administrator's office is to 

monitor proposed legislation related to public pensions within each of their states. An example 

of how important the role the State Administrator plays was documented in the Government 

Accountability Office (GAO) Report Number 10-938 (cited in NCSSSA's original testimony). 

That GAO report noted that Missouri had not monitored changes in their public school 

retirement plan, whereby errors in payments were made over decades, resulting in coverage 

errors in hundreds of school districts. 

Improved education and outreach efforts by the states, SSA, and IRS (explained below in my 

response to Representative Renacci's question) can reduce state and local governments' 

mistakes like those described above. Unfortunately, current budget limitations in the states 

and at the SSA and IRS have prevented them from conducting joint education and outreach 

sessions like those that occurred in the late 1990s' and early 2000's (described in our original 

written testimony on pages 6-7 as the first Area for Improvement). 

Thus, the best approach to address all state and local governments' FICA tax, Social Security 

and Medicare coverage, and pension system coverage matters would be for the IRS to 

continually have a dialogue with the State Administrator. That dialogue should include 

discussing the nature and extent of Social Security, Medicare, and public pension plan 

coverage that applies to each position of each entity. Further, ideally the State Administrator 

should monitor state legislative changes to public pension plans and coverage to ensure 

compliance with applicable federal laws and that State's Section 218 Agreement and enabling 

legislation. Any valid changes to state pension laws should, in turn, be shared with both SSA 

Page 3 of7 
83 


Insert 33479A.053

and the IRS by the State Administrator so both the federal and state officials are kept apprised 

of applicable coverage and tax obligations. The State Administrator is the most knowledgeable 

resource for the SSA, IRS, all state and local governments (and their legal and financial 

advisors}, and public pension system officials within their state. 

To help further respond to subquestion 1 of Representative Rice's follow-up question, I am 

providing a copy of a Government Finance Review article that was published in 2009 entitled: 

·common Errors in State and Local Government FICA and Public Retirement System 

Compliance: That article describes common mistakes that occur related to state and local 

governments' coverage and FICA taxation. The article can help Congress understand and 

appreciate how coverage and taxation vary not only among the states, but also among different 

public employers within each state, and even from employee-to-employee. 

My response to this question also includes a copy of a letter sent to U.S. Treasury Department 

officials on September g, 2016, when I was the President of the National Conference of State 

Social Security Administrators (NCSSSA). The letter provides more in-depth information that 

addresses subquestion 3, including problems associated with Internal Revenue Code (IRC) 

§6103 vis-a-vis the IRS' inability to communicate directly with State Administrators and the 

recommended solutions to the problem that have been developed by NCSSSA. 

Question from Representative Jim Renaccl: 

1. In your testimony you state that no Section 218 Agreements or even modifications can 

be entered into by a local government without the authorization from state governments 

and that in recent years the Social Security Administration and the IRS have been 

largely unavailable in assisting states in education efforts. Can you go further into detail 

about this lack of coordination and what more could be done in order to improve the 

education efforts for local employers and employees? 

Answer: 

There are several situations where the SSA and IRS could be more available for education 

efforts, both for state and local government employers and for State Administrators. 

Employer education efforts: SSA maintains the official wage records for each employee. 

SSA staff are also the experts on the benefits their programs provide. Each time a State 

Administrator holds a referendum, it is possible the entity and their employees may request 

more information about the vote and how employees' benefits could be affected by the 

outcome of the vote. In recent years, SSA has only physically attended two states' (Idaho and 

Missouri) educational sessions, and even then, only sporadically. Any other requests for SSA 

to assist State Administrators have been attended via phone, often by a Public Affairs 

Specialist who was not well versed in Section 218 coverage issues. To the best of my 

knowledge, the IRS has not assisted in any educational sessions for a referendum election with 

the exception of the State of Idaho, where a specific referendum being held needed an indepth explanation regarding potential refunds. 

Improvements could be made both in the availability of SSA for these employer educational 

sessions, as well as better training internally within SSA itself. State Administrators have 

experienced under-trained staff within SSA regarding Section 218 coverage, mainly due to the 

many 120-day appointments and backfilling of positions due to retirements. Succession 

planning has been virtually non-existent due to turnover and the lack of longevity in many 

positions. 

Page 4 of 7 
84 


Insert 33479A.054

The IRS has been given many suggestions by their Advisory Committee on Tax Exempt and 

Government Entities (ACT) for improvements in educating state and local government entities. 

Most notably in 2010 was the addition of Form 14581-FSLG Compliance Self-Assessment 

Tool ' The ACT recommended revisions to this form in the 2015 Report, but no revisions have 

been made to date. Also noted in the 2015 Report, based on an extensive survey of state and 

local government entities, respondents noted that "face-to-face outreach is the most successful 

means in achieving an understanding of the special details related to State and Local 

government issues.· The Agents need to perform their outreach activities in a face-to-face 

setting, but funding constraints within the IRS have caused them to move to virtual training, 

which is far less effective. 

NCSSSA is concerned about the recent reorganization by the IRS' Tax Exempt and 

Government Entities (TE/GE) Division that moved FSLG from the Governmental Entities 

section to the Exempt Organizations section. We fear that change will undermine the progress 

that has been made with state and local governments' compliance with FICA tax laws, Social 

Security and Medicare coverage, and public pension plan requirements since FSLG was first 

established in the late 1990's. If the IRS thinks it no longer belongs within TE/GE's 

Government Entities section (which still includes Indian Tribal Governments and Tax Exempt 

Bonds), then a far more logical place for FSLG than Exempt Organizations would be Employee 

Plans. Employee Plans oversees compliance with federal laws by all types of pension plans, 

including those administered by state and local governments and the federal government itself. 

This concern was also expressed by citizen members of the Advisory Committee on Tax 

Exempt and Government Entities (ACT) in this year's report.2 

Education efforts with the IRS: The State Administrators value their partnership the IRS and 

the assigned FSLG Agents. Specifically, we rely on FSLG Agents' expertise on employer tax 

processes. It is important for the FSLG Agent to be in attendance with NCSSSA's "New 

Administrator" trainings that are conducted each year. typically as regional two-day sessions. 

These FSLG Agents increase the value of these educational events as well as during 

NCSSSA's Annual Conference3 by providing input and perspective to a unique area of payroll 

tax. In recent years. the FSLG Agents have not attended "New Administrator" trainings, and 

only executive level personnel or one local agent have attended the Annual Conference. It is 

important that those from the field also experience the trainings and networking opportunities 

so they can have improved outreach efforts overall. Better informed IRSIFSLG staff will, in 

turn, enable them to improve their educational efforts with state and local governments' 

employers and their legal and financial advisors, public employees, and public pension plan 

officials. It will also assist them in being more efficient and effective when conducting 

compliance checks and examinations. 

1 Advisory Commrttee on Tax Exempt and Government Entities (ACT) 2010 Report of Recommendations, June 9, 

2010: https·tJwww)rs.govlpubllrs-te_genege_acLrpt9 pdf . 2 Advisory Commfttee on Tax Exempt and Government Entities (ACT) 2017 Report of Recommendations, June 7, 

2017: hi!PSI/www lrs.govlpubltrs-pdflp4344.Qdr. 3 The 2017 NCSSSA 67-, Annual Conference wilt be held in Charleston, West Virginia, September 9-13; information 

on the planned agenda, conference registration, hotel. and olller details are available at 

ht1111!!!.cs.§sa~o.rgiJ1!:esen confe ences~htrnl . NCSSSA encourages Congressional Member$ and staff to attend 

Ill is yea( s Annual Conference to learn more about state and local governments' Social Security and Medicare 

coverage, public pension plan coverage, and FICA tax matters. Also, we encourage Congressional Members and 

staff to review presentations and proceedings from past Annual Conferences Which are available at: 

htt~l/ncsssa orglconfllli!~R!:esentaiiOns htrnl and http://ncs§sa Q!QIP!ooeedmsb.QQ!t.html • 

Page Sol 7 
85 


Insert 33479A.055

Education efforts with SSA: State Administrators also value the partnership with SSA. The 

education efforts SSA has made with State Administrators has been relatively well attended, 

especially during NCSSSA's Annual Conferences, but the underlying issues with policy and 

processing questions described in our original written testimony remain. State Administrators 

are still experiencing inconsistent practices from Region-to-Region as well as staff turnover 

within the Regions. 

As explained in our written testimony for the June 29111 hearing, the idea of the Section 218 

Council was originally intended to be a joint problem-solving group between SSA, IRS and 

NCSSSA; however, it has not been as successful as it could be due to limitations of SSA's 

ability to accept advice. As noted in NCSSSA's written testimony, we recommend that the SSA 

be given Federal Advisory Committee Act {FACA) authority to allow the Section 218 Council to 

become Advisory Group so that NCSSSA's policy recommendations can be considered. See 

number 5 under Areas for Improvement. on page 9, of our written testimony. 

The SSA, IRS, and NCSSSA need to more effectively use the Section 218 Council which was 

formed in 2011 to help prevent state and local governments' compliance problems that were 

documented by the Government Accountability Office study (described in our June 29"' written 

testimony on page 3). Many of the areas of concern NCSSSA outlined in our written testimony 

can be successfully addressed, including better coordination among the SSA, IRS, and State 

Administrators, if the Council is used as a problem resolution mechanism by all parties and the 

State perspective is included in the process. Cooperation between the federal partners (both 

SSA and IRS) and State Administrators has consistently had the most profound impact on 

voluntary compliance by state and local governments' Social Security and Medicare coverage 

and FICA tax compliance. 

As noted on page 8 of our June 29'" written testimony, we encourage Congress to provide 

grants to the State Administrators, SSA, and IRS that are earmarked to provide on-going 

education and outreach to state and local governments, public pension plan officials, and their 

legal and financial advisors. We reiterate that request in this response as one of the best ways 

to improve coordination among the states and our federal partners which will, in turn, facilitate 

state and local governments' compliance. 

As mentioned above in footnote 3, NCSSSA encourages Members and staff of Congress to 

attend this year's Annual Conference that will be conducted in Charleston, West Virginia, 

September 9"' to 13'". Participation in the Annual Conference will help Congress gain a better 

understanding of the issues, concerns, and value of the partnership between State 

Administrators and the federal government (both SSA and the IRS). In addition to checking out 

the link to the Annual Conference that is included in footnote 3, feel free to contact NCSSSA 

President James Sawyer, Texas State Administrator, by phone at: (512) 867-7373 or email at: 

jsa~r@ers.state.tx.us or Vice President Dean J. Conder, Colorado State Administrator. by 

phone at (303) 318-8060 or email at: dean.conder@state.co.us . 

Thank you for inviting NCSSSA to participate in the hearing on this important subject that has 

nationwide significance for all state and local governments, their employees, and public 

pension systems and, indeed, the federal government, and the Social Security and Medicare 

Trust Funds. 

Let me know if you have any questions or need anything further from me or others in NCSSSA. 

I can be reached at: MMotza@msn.com or 719-651-3291 . 

Page 6 of 7 
86 


Insert 33479A.056

Sincerely, 

Maryann Motza, PhD 

NCSSSA Legislative Committee Chair. 2016-2017 

Enclosures 

cc: Mr. James Sawyer, NCSSSA President 

Mr. Dean J. Conder. NCSSSA Vice President 

Mr. T J Reardon. NCSSSA Vice President Designate 

Page 1 of1 
87 


Insert 33479A.057

Summary of Section 218 Compliance Risks 

Received from IRS/FSLG April 2014 

1. Public School " Teacher" Positions 

The greatest compliance risk discovered during the Section 218 assessment project 

concerns states improperly discontinuing social security withholding on absolute coverage 

positions due to expansion of pension plan coverage. This is the same issue that has 

received so much attention the last few years. The potential for this particular issue exists in 

states that have pension plans that are not covered by a system-wide Section 218 

modification. So far, we have identified twenty-five states and one territory that have these 

specific attributes. Of course, this does not necessarily mean that a problem exists. We are 

following up with the State Administrators to evaluate the Section 218 attributes in these 

states. 

2. Policeman and Firefighter Positions 

The primary Section 218 risks involving policeman and firefighter positions are similar to the 

risks previously discussed in regard to the public schools positions. The risk arises when 

governmental entities expand retirement system coverage to include absolute coverage 

positions. We need to work with the state administrators to ensure that entities do not 

erroneously discontinue Social Security coverage in these situations. 

3. Section 414 hH£)1ssues 

Generally, employee contributions to retirement plans must be included in both federal 

income taxable wages and in FICA taxable wages in the year of contribution. However, IRC 

§ 414(h)(2) provides an exception for§ 401(a) qualified plans established by certain State 

and local government entities. If an employer meets the requirements of§ 414(h)(2), the 

contributions will be treated as employer contributions for both federal income tax purposes, 

and for FICA tax purposes unless the contributions are deducted from the 1!!J1Io~ee's 

wages subject to a salary reduction agreement. 

Internal Revenue Code Section 3121(v)(1)(B) includes in wages any amounts treated as 

employer contributions under § 414(h)(2) where the employer picks up the contributions 

pursuant to a salary reduction agreement (whether evidenced by a written instrument or 

otherwise). 

Entities making 414(h)(2) contributions to their retirement plans via salary reduction, and 

who have Section 218 modifications, would be liable for both Social Security and Medicare 

taxes on those contributions. Entities making these type of retirement plan contributions for 

employees who were hired after March 31 , 1986, and who do not have Section 218 

modifications. would be liable only for Medicare taxes on those contributions if the 

retirement plan was Social Security equivalent. If the retirement plan was not Social 

Security equivalent, the contribution amount would be subject to both Social Security and 

Medicare taxes per the mandatory rules. 
88 


Insert 33479A.058

The question of 'What constitutes a Salary Reduction Agreement?' is critical. We have 

encountered situations where taxpayers do not include the employee contribution to the 

retirement plan in FICA wages because they maintain the contributions are mandatory, thus 

no salary reduction agreement exists. This position has been litigated and defeated by the 

10"' Circuit Court of Appeals in the Shalala case. 

4. Qualifying FICA Replacement Plans 

In 1990, Congress amended the Internal Revenue Code and the Social Security Act, making 

Social Security and Medicare coverage mandatory for most state and local government 

employees who were not covered by a qualifying FICA replacement public retirement 

system or a Section 218 Agreement. This law became known as mandatory Social 

Security, which is different from mandatory Medicare. Medicare is mandatory regardless of 

the existence of a retirement system, but Social Security is mandatory only in the absence 

of a retirement system or Section 218 Agreement. However, a qualifying FICA replacement 

retirement system must provide a 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 (OASDI) program of Social Security. 

In today's economic climate many states are modifying their pension plans to such an extent 

they may, inadvertently, no longer qualify as a FICA replacement retirement system. In this 

situation, with no Section 218 Agreement, employee compensation would then become 

subject to the mandatory Social Security provisions. 

This is a prime example of why we need your assistance in monitoring information 

concerning the various pension plans in each state. All three stakeholders have a role to 

play in assisting the governmental entities in navigating these highly complex issues. 

5. Retirement Plan Types 

Many state and local governments are considering, or have enacted, retirement plans other 

than, or in addition to, the traditional defined benefit and/or defined contribution plans. 

FSLG specialists have become more aware of "401-k like" plans being implemented or 

considered in several states. We expect to see many of these hybrid plans in future years. 

FSLG has also found numerous instances concerning ineligible employers (for example 

housing authorities) participating in 403(b) plans. 

Again, this is an area where we all need to work together to ensure the governmental 

entities are eligible for the pension plans they participate in. 

6. Government Entity Restructuring 

I think everyone would agree, that given the current budgetary limitations we are working 

under there is increasing pressure for government entities to find more cost effective means 

to deliver the required services. 

2 
89 


Insert 33479A.059

For example, a variety of factors ranging from declining student enrollment to budgetary 

considerations have led to an overall drop in the number of school districts across the 

country. In many instances a Section 218 referendum may be necessary when a new entity 

is formed for Social Security and/or Medicare tax to be legally withheld from employees' 

compensation. If a state has not had a Section 218 modification in several years, this may 

be indicative of a potential compliance problem. FSLG is currently following up with the 

State Administrators to determine if the required referendums have been held. We also 

covered this topic in our August 8, 2012 webinar entitled "Social Security Section 218 

Agreements and Government Entity Restructuring.• This webinar can be viewed at 

!J.!!p'Jiwww.irsvideos.gov/Governments/EmQ!Q}Iers. 

7. Charter Schools 

We are working closely with state administrators and SSA in a few states on this highly 

complex issue. 

The primary issue we have encountered is whether or not the charter school is a 

governmental entity. A secondary issue is then whether the charter school is covered by 

the local school district's Section 218 modification or if the charter school requires their own 

modification. 

This is a highly complex area of the law. We are only scratching the surface so far. We will 

continue to work with you in the future to ensure accurate and consistent application of the 

law. 

8. Mandatory Medicare Coverage 

We have found problems in this area more commonly in relation to police and firefighter 

positions where Medicare tax is not being withheld on payments made to anyone hired on or 

after April 1, 1986. We need to work together to increase awareness of this section of the 

law. 

9. Part-time Positions 

Incorrect Social Security and Medicare tax withholding may occur when an entity improperly 

interprets the Section 218 Agreement in regard to part-time exclusions. To make a proper 

determination, we must research the applicable state law to determine what the definition of 

part-time includes and to which position the exclusion may apply. 

We have found that 24 of 52 states have a part-time exclusion included as part of their 

Section 218 Agreement. Of those 24, only 12 provided a definition of part-time while 15 

stated the exclusion was made on an entity by entity basis and 7 stated it was for specific 

positions. 

This is an example of a risk where one size does not fit all. We need to accurately 

document the provisions of the Section 218 Agreement and state law as it existed on the 

applicable date to ensure accurate and consistent application of the law. 

3 
90 


Insert 33479A.060

1 0. Student Services 

Our research has found thirty-three states opted to exclude student services from FICA 

coverage under the State's Section 218 Agreement. Sixteen states elected to provide 

Social Security and Medicare coverage for services performed by students in certain 

schools and three have virtually no Section 218 coverage. 

We have determined compliance risks are greatest when the exclusion does not apply (such 

as during the summer when student workers are not enrolled and regularly attending 

classes) or there is no state-wide student exclusion. 

4 
91 


Insert 33479A.061
92 


Insert 33479A.062

Many state and local government employers and 

employees are confused by the redernl Insurance 

Contribution Act (FICA) laJ< and public re1ireme1ll 

S}>tem obligations.Thisempbymenttax,which is the basis for 

Social Securil)' and Medicare, is straightforward in the private 

sector. Applying FICA to state and local government empiO)'· 

men I, however, can be exceedingly difficult. In addition, the 

GO\emmemal Accounting Standards Board {GASB) does not 

test for FICA compliance, whicll can lead to a false sense of 

security when a state or local government receives an audit 

compliance certificate based on GASB audit standards. 

The laws and rules that affect public empiO)ers' federal 

FICA tax obligations regarding Social Security and Medicare 

coverage provisions include numerous exemptions and 

exceptions to the laws that apply to the private sector.funher 

exacerbating the situation are the semantics associated with 

the laws, which can create confusion that 

and commerce as a long-run safeguard agai!$ the occur· 

renee or old-age dependenC)( Con(l)CSS, however, faced ca ~ 

stitutiona.l questions as to whether it could force state and 

local gO\-emments to indude their employees in the Social 

Security system. so state and local govemment entities were 

not compelled 10 take pan. In fact.atthattime, public employ· 

ers were actually forbidden to do so 

Beginning in 1951.Siates were allowed to enter into volun· 

tary agr~ments (authorized by Section 218 or the Social 

Security Act and thus called Section 218 agreemems) with the 

federal government to provide Social S<lcurity coverage to 

their public employees. Each state enacted its own legislation 

to provide the authorization fOf the state and its political subdivisions to volumarily enter into i11dividual Section 218 

agreements with the federal government that provided coverage to different classes and positions of empiO)ees. These 

original Section 218 agreements have a 

provision that allows an entily to with· resulrs in inadvertent noncompliance: 

• "\llluntary" Social Security cO\·ernge 

through a Section 218 agreement was 

once the only way state and local 

governments could elect Social 

Security coverage fOf their employ-

~.SinceApr 20.1983 co,<e age 

under a Section 218 agrooment cannot be terminated unless the go'<ernmental entity is legally dissolved. 

This employment tax. which IS draw from the agrooment,but since 1983, 

the baSis for Soc1al Security and that provision has been 0\'<midden by 

Medicare. IS straightforward in federal law. 

the p1ivate sector. Apply.ng 

FICA to state and local govem· 

With the enactment of the Medicare 

portion or FICA in 1965. all Section 218 

agreements were automatically CO\'Cred 

ment employment. however. with Medicare. In 1985.Congressenacted 

what is popularly termed mandatory 

Medicare. Under this law,anyone hired on can be exceed1ngly dtfficutt. 

• 'Mandatory"Sociat S<lcurity coverage 

is noc really mandatory lor all state 

and local government empiO)"eeS. If a public empiO)er 

has a qualilying FICA replacement retirement S}-stem for 

its employees, it is not required to pay the Old-Age, 

Survivor. Disability portion or Social Sccurit~ 

• 'Mandatory" Medicare CQ\-ernge is alo;o not really manda· 

tory for all stale and local government employees. II is 

actually illegal 10 pay Medicare lax for Medicarl><!xempt 

empiO)ees. The Medican><>nly portion. however, is 

required for an)une hired by a public employer after 

March 31,1986. 

If )UU are not confused )ei,)OU soon will be. 

HOW WE GOT HERE 

Congress enacted the Social Security Act in 1935 to establish an insurance progrnm for •persons \YOIIting in indUSIJ)' 

or after April I, 1986. is subject to the 

Medicare portion of the FICA tax. regard· 

less of whether or not the entity CQ\!ers its 

employees by a public retirement system. Those employ-ees 

cO\-ered only by Medicare {and not Social Securil)') are said 

to be Medicare Qualified Government EmplO)'ment {MQCE). 

The employer is required to file \\l2 and !}l) forms for each 

MQCE empiO)-ee. 

In 1990, Congress amended the Internal Revenue Code 

{IRC) and the Social S<lcurity Act, making Social Security and 

Medicare co'-erage mandatory for most state and local government employees who were not covered by a qualif}ing 

FICA replacement public retirement syste1n or a Section 218 

agreement This law became knQ\vn as mandatory Social 

Security, which is different from mandatory Medicare. 

Medicare is mandatory regardless of the e.xistence of a retirement sys~em . but Social Security is mandatory only in /Joe 

obsenre of a retirement system or Section 218 agreement 
93 


Insert 33479A.063

STATE SOCIAL SECURITY ADMINISTRATOR 

States are reQuired by federal regulation to appoint an offi. 

cia I as the state Social Security administrator. The state admin· 

istrator is the person responsible for administering the 

Section 218 agreements for each state. Until 1987. the state 

administrator was also responsible for collecting the Social 

Security and Medicare contributions (now referred to as the 

FICA taxes) from state and local government employers and 

to deposit the funds with the United StatesTreasury.When the 

Internal Revenue Service (IRS) assumed this function in 1987. 

many states interpreted this change as eliminating any further 

responsibilities. but that is incorrect; the majority of functions 

and responsibilities of the state administmtor remain.' In fact, 

the responsibilities have become even more complicated 

since 1987. with the advent of the mandatory Social Security 

and Medicare pnwisions. 

The state administrator is often thought of as a bridge 

between the federal agencies and local entities. Many small 

local entities do n01 have the expertise to effectively communicate and respond to the relevant issues, as this area of taxa· 

tion is extremely complex and changing a single fact can alter 

a particular outcome. See Exhibit t for examples of typical 

fact patterns that result in vastly different conclusions about 

an entity's probable tax compliance when seemingly minor 

additional factors are added to the scenario. 

DETERMINING COMPLIANCE 

Employee or Contractor? In determining FICA compli· 

a nee, the first question to ask is if the worker is a.n employee 

or an independent contractor. No FICA taxes are withheld for 

independent contractors; instead, the payment is recorded 

and filed on IRS Form 1099-MISC. 

Is There a Section 218 Agreement In Place? This question can most readily be answered by the state Social Security 

administrator. whose office is responsible for administering 

the particular state's master agreement and each individual 

entity's agreement. Each entity's Section 218 agreement can 

differ, even within the same jurisdiction. 

Coverage under Section 218 agreements can be extended 

only to grouP6 of employees known as coverage groups. Once 

a position is covered under a Section 218 agreement, any 

employee filling that position is permanently covered for 

Social Security and Medicare. Each entity decides. within fed· 

eral and state laws-which groUP6 to include under its Section 

218 agreement. Federal law excludes certa.in services or posi· 

tions from coverage and requires coverage of others. For 

example, individuals whose compeotsation is solely fee based 

are excluded from mandatory coverage under federal law but 

can be included as optional covernge under an entity~ 

Section 218 agreement. 

Does the Entity Have a Qualifying Public Retirement 

System! State and local government empiO)ees must be cov· 

ered by either a qualifying public retirement system or Social 

Security, by either a Section 218 agreement or the mandatory 

provisions of the federnl law. (O•ere is, however, new legisla· 

tion regarding contracts involving goods and services.) 

Regardless of whether or not employees are covered by a 

retirement system, the employer is subject to tl>e Medicare 

portion of the FICA tax for employees hired on or after April 

I, 1986. Similarly, it is equally improper to witl>hold and pay 

Medicare on an employee who is covered by a retirement system and was hired before April I, 1986, if that employee is not 

CO\ered under a Section 218 agreement - unless the refer· 

endum' procedures are followed. 

Finally, not all retirement systems qualify under the 

Omnibus Budget Reconciliation Act (OBRA) of 1990. If the 

position is not covered under a Section 218 agreement, an 

employer can pnwide an lterna ~e retirement system, so 

long as it meets IRC requirements. According to Treasuoy 

Regulation 26 C.f.R.31.3121(b)(7}2.a pension. annuity, retire-
94 


Insert 33479A.064

Exhibit I: Complexity Chart- Representative Examples of State and Local Government FICA Issues• 

Primary Fact Situation 

Employer is not withholding 

M~re on all ~es 

Political entity has stopped pa)ing 

Soda! Security and " pa)ing into 

a qualifying publk retirem...t plan. 

Political entity has a Section 218 

apment and os not paying RCA 

Political entity has contJnuously 

been payng Social Sec\lrity and 

a~o into a public retirement system 

for all employees. 

Additional Relevant Facts 

(Nuance/Possible Issue) 

II all emplo)'ees are covered under 

a Section 218 ~~ent 

II all employees are covered under 

a public retirement system and 

Medicare IS being withheld Ol1ly 

from employees h1red on or after 

~nll,l986. 

If political entity is c~ 

lor Soda! Security under 

a Section 218 ~~ent 

If political entity " covered 

lor Social Security by mandatory 

Soda! ~urity_.E!"'!'isio<" 

II entity did not opt out of the 

agreement before Apri120. 1983. 

~ is permanently locked into the 

agreement and must pay FICA 

on all c011ered ~ 

If entity opted out of ~s Section 218 

agreement before April 20. 1983. 

and rts emplo)'ees are c~ by a 

putic retirement s)"tem and are paying 

Medicare. as applicable. 

OffiCials erroneously think the e<1tity 

must pay into a pubic pet>Sion system 

and ino Social Security. believing the 

requirement IS "mandato<y" for al 

putic employers since july 1991. 

No SeC110n 218 a~nt exisu. 

Putic entity ~ntaliy elected to be 

double cO<oef'ed by entenng 1nto a 

Section 218 apment while continuing 

to J?.,'Y into a _poblic ~n~on plan. 

Probably 

Non-Compliant 

• 

• 

• 

• 

Probably 

Comeliant 

• 

• 

• 

• • AI. kost 500~ SWlO'los WsttrAott:dto-StO:condtocd ~ FX:A. Sood ~ tYKIMcdit.r:~C ~.OIIdpuf;ikptnsictn ~em~ 

mentor similar fund or S)'Siem "is not a retirement system 

with respect to an employee unless it provides a 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 (OASOI} program of Social Security." A 

defined contribution retirement system meets the test provid· 

ed by this regulation if allocations to the employee's account 

are 7.5 percent of compensation and do not indude any credited interest in the calculation. Matching contributions by the 

employer may be taken into account for this purpose. Thus, a 

defined contribution plan that has a contribution rate from 

the employer, employee, or both that is 7.5 percent of com· 

pensation can take the place of the OASDI portion of Social 

Security under OBRA 1990 (unless of course. the position is 
95 


Insert 33479A.065

covered under a Seetion 218 agreement). Mandatory 

Medicare still must be paid. 

What About Rehired Annuitants? State and local 

empiO)'eeS who are part of a retirement system, were hired 

before April I, 1986. and have been continuously employed 

are exempt from mandatory Medicare. In fact. it is equally 

incorrect to pay and cover those employees with Medicare. 

However. in the pt1blic sector. many employees who have 

retired and who receive a pension from their retirement 

systems are rehired under the retirement system (e.g .. 

retired teachers arc rehired as substitute tead>ers). TI>ese 

empiCT)oees are called rehired annuitants: they are receiving 

their annuity, or pension.butthey have been rehired- even 

if only part·time. 

For employees hired before April I, 1986, a Seetion 218 

agreement can be executed to provide Medicare-<>nly cover· 

age for employees who are members of a qualifying retirement system and who are not already covered under a 

Seetion 218 agreement. Under the majority vote referendum 

procedures, if a majority of employees vote forMedicarecov· 

erage and the entity agrees to match and withhold the 

Medicare portion of FICA, it is lawful to extend Medieare-<>nly 

CO<"lrage to these othe>wise excluded employees. 

Tile referendum process is also available to those employees who want Social Security coverage in addition to their 

public retirement system. The majority vote referendum 

process requires a majority of employees eligible to vote in 

The state adm1mstrator >S often 

thought of as a bndge between 

This is a common area of confusion 

within the public soctor. One of the 

requiremenlS for the exemption is con· 

tinuous employment. and the act of retiring and receiving a pension breaks the 

continuity of employment. Therefore. 

any further employment alter retirement 

is subject to the Medicare portion of the 

FICA tax. Further, if the retirement 

system does not cover these annuitantsthey are subject to full FICA. 

the referendum, rather than those actual· 

ly voting, to approve the referendum. If 

the referendum passes. then all pensioo 

eligible employees within that entity 

would have FICA co,"!rage. All states are 

the federal agenoes and local authorized by federal law to use this refentitles. Many small local enti- erendum process. and 21 states can use 

ties do not have the expertise another process called the divided retirement system referendum, which in 

essence allows each empiCT)oee to elect 

Social Security and/or Medicare cover· 

age in addition to the retirement system. 

The procedures are the same except that 

there are no secret ballots, as the individ· 

ual choosing CO<"lrage muSI be identi· 

fied.The election by the individual to be 

CO<"lred by flCA CO<'ers the position, not 

OBTAINING SOCIAL 

SECURITY COVERAGE 

to effectively communicate and 

respond to the relevant ISsues. 

as this area of taxation is 

extremely complex and changIng a single fact can alter a particular outcome. 

Although initially the only way for a 

slate or local gO<"!mment employer to 

have Social Security coverage for its empiO)<ees was to enter 

into a Section 218 agreement, this is inadvisable today 

bocause of the pennanence of theagreement.lnstead,current 

law allo"' for Social Security CO\'erage of slate and local 

empiCT)'Ces under the mandatory provisions discussed above. 

An entity without a Section 218 agreement is free to choose 

between pension co.<erage and Social Security coverage and 

can move from one to the other. without penalty. bY merely 

withholding (or stopping its withholding) and matching the 

FICA tax - and, of course. filing appropriate W-2 and 9-11 

forms. Remember. hO\ve,"!r, that all employees. regardless of 

the type of coverage. hired after March 31, 1986. are required 

to pay the Medicare portion of FICA. 

the indi,odual.so all future holders of that 

position will be covered by FICA. 

All referenda are conducted under the direction of the 

State Social Security administrator under the provisions of 

federal and Slate Ia'" Because each states enabling legislation 

is unique and provides for difference procedures. the state 

statutes and the federal law regarding the procedural process 

muSI be consulted. 

OTHER PROVISIONS:WEP AND GPO 

The windfall elimination provision (WEP) affects an 

employee's Social Seeurity benefit when a person \VOII<s for 

an employer that has a public retirement system rather than 

any form of Social Security 00\'erage. For example, EmpiO)<ee 

A works in the private soctor for at least ten years and is then 
96 


Insert 33479A.066

employed by ~ loc011 government that provides a ft'tirement 

system rather than FICA coverage. In considering Employee 

lis entire WO<k ft'Cord. he would qualify for Social Security 

benefits because he has at leas~ 40 crtd1ts Emp~ lis 

Social Secunty benefit IS ol!set. howe\oer. by the lonmula 

known as the "'ndfall ebmlllallon pro11SIOO. The formula " 

COC11j)lex. and for thos artiCle. the ilnponanl poont is th.lt 

empq..es need to be aware thai if t~ WO<k •n uOC0\....00 

empqment (ie .. theu wages are noc subject to the full FICA 

tax), any Soc:iol Security retirement benefit might be rtductd 

under this provision ol the law.' 

The \YEP provision does not apply to survivor benefits. 

Other exceptions 10 \YEP are: 

• led<>ral "'OII<ers first hired after December 31, 1983 

• rtt1rees wf1o were 62 years of age or diSabled before 1966 

• retuees wf1o began recet\'lfl8 a monthly publiC reuremenc 

benefit before 1986. but continued co wo11t be)ood 1986 

• retirees "ho ha,,. 30 or more~ ol substan1101 tarn•"8' 

under Soc1al Sec:unl)' 

The 8<)\oetnment pcnsl0<1 offset (CPO) pf(WISion is similar 

to IV£P11>i' pf(WisiO<l olfsets a retirement benefit claimed 

on the ~>'Ofl< reco«1 of a spouse or ex-spouse when the 

emp~ IS CO\,.ft'd by a public retirement S)>lem 11>is 

offsel lonmula rtduces the benefit by IWO<hhds olthe amount 

ol the publiC ret""""'"' benefit. In some cases, the olfsel 

-.;a elimillale a Social Seauil)' benefit entuel)< The CPO 

1>10\ision does noc apply to a retiree "11o recet\'15 • publiC 

retirement benefit based oo wort thai was also CO\,.rtd by 

a Sec1100 218 agreement for the preceedingli\,. years. 

CONCLUSION 

This area of tnxalion and public retirement system requitements lor state and local ~'enlments can be complex and 

confusing. Dunngtraining S<!$Slons.the authors often tellaud• 

ence members that "d )'011 are noc confused by the end olthc 

pn?Sentation. )'011 ,...,,. noc been paying anention "l.lkl'wise. 

this 011ido os meant only to b<oacb the subj<a. Readers ore 

encouf'iiG<d to ~the additional resouoas p.o. lded (~ the 

"Add•tional Reoou~"box) 10 further explore the SUbJect I 

Additional Re<ources 

• IRS f'lbic:atJon 96~ Fodt 'lli·SI4lt R.(etence ~ 

·-·~"&t'p.b<hlm 

• Cdotado Pltic ~· Socwl s.anr 

hrrjxlip<n<do sutuousl 

NauonaJ~riS...teSocwiSecl.l11y~ton: 

http'li'.w.w.ncsssaort 

•IRS Fedenl, Sl.'lce.•nd Loc.JI ~ (FSI.G) oll"~e 

hllfi/IYN!wor!.pl (dock 00 "Goo.<nrnent Enbbes').To kfep 

abre"" <I dMiopmonu. )W""" oA>scnbe 10 the FSI.G 

N-.rer by .e.ct.nallfrom the ''lOpoa" «<110n o1 ti'IS 

WebJRS~Pin(P<Allicpenoonsystem~~ 

hrrjxllwwwnpep 

• Sooal Secl.l11y s..., ond locol ~ 

http/i'ow.w5sap/•l&</ 

• State of Kentud<y htlp'llu..a.~Utel<y.w 

2.A Sealon 218 ICft'lf!Ml'lll If ma0t ~1M Social S«unl) 

.AdmiMtnlboo Mid • ._,, $oti.M Stoalnty adiaUi!tAtor <--.a. bdlalloftht .. )topo'tdfo~b·FJ'~Pot .... localp· 

f!NMM~..SW...lii~CGMSpolllltlld.lltJI ... -C...,.-•-111 __ .. __ ~~~~plibk.....,.t~Qtl~JIOPfO"oidttdlaqroait, .. f1C.A .......,_,....od ... SoooiSf<unl)'-boti-· 

~ .. t.>lfc:hoft,.bt~ted t~>·the--SoOaiS«u.nry 

acknllllSU'MDt (or by lbf ~ ~~Jnl)' Admmistraioft,.illlw tftlll)' illn 

lnctnt:~~~ iMIN!flftiUf.l)'). Manda~oey Sod3l S«unf)' co.~ mtdtl b 

a ~It or l«aa.,.oetfltnenl tmpl~'\.<e ~hen ht or tile be<lomel a memo 

l>t'f d a qu.~~bMnat>ublic rtll(tii'IC'fll srst~n. 

3. f'ot dc!laik.see Soeal SeN'~ Mm•nlsnatioo\ \lkb ~~eat 

httpjh~~tp. ... 

HAR'IANN tiOTZA • 1110 Sooal Soa.r<y -...a lor the ...... 

ol Coloro6:>. g., a ...., <<><Nor ol the GfOO\'' ~ en 

~.,.,Ilene("'~- hold<. Pl\0" 

N- pOOle offa,n mn 1llt ~ ol Coloro6:>. OEAN ~ CONO£~ 0 

I Thts IK1 hilS lf«ffdy ~n documented b)' an ~e t.h¥ ~ "" lht' tht [)repAy State ~tr.\tor n Colorado. He IS ako Cdotado's 

Sla~t-ol Mr!l!IOUri ~llw iiJI~IW Fof« RtPOnlot8dttcfiPhOII ollhe rq.lfeSel'ltatNe on the~ AI:Hcocy Panel and ~ ~ 

::C':.'::" d.,";,;::.;:::;-;:,:"~,.,"::~~,!~::':..,. of111t No!IQ<10) ""*""'" oiSUte Soaal SeorAy A<i"rw'ostroton 

-·-""""'·MM<b 31.2009,bl!jrJ/oo.mop~l® <Ander hold< • mostel's cle,-.e !rom the UM<n<ty ol Denvel; 

~pOl ~oi!Aw. 

Repri nted with permission of the Government Finance Officers 

Association, publisher of Government Finance Review, 203 N. 

LaSalle St., Suite 2700, Chicago, IL 60601- 1210 . 
97 


Insert 33479A.067

NCSSSA 

O.to Septombe< 9, 2016 

Mr. Ga.y Grippo 

0eptJty Assistant Secretary 

Government Financial Policy 

U.S. Depanmant of the Treasury 

AND 

Ms. A. Melissa Moye 

Senior Polley Advisor 

Government Financial Polley 

U.S. Oepattment of the Treasury 

Oflic<t of State & Local Finance 

1500 Pennsytvania Avenue 

Washington, DC 20220 

RE: RecorMlended Treasury RegulatiOn Chlngo 

Dew Mr. Grippo and Ms. Moye: 

National Conference of 

State Social Security Administrators 

Letter Transmitted via tmt!J ootv 

This is In follow-up to the May 23. 2016, meeting that thO !Qiional Conference ol State SOCial Securily 

Admlnlstrato<o (NCSSSA) leadership team members (l.o .. Jomes Sawyer, Meghann Spring, T J Reardon. ond I) 

he4dwithyou. 

During thll meeting we agreed to send you recommendltlons as to how and why a change to the Treasury 

Regulations associated wilh Internal Revenue Code §6103 Cln facilitate state and localgovemments' 

compNanco wilh U.S. C~ sections (both the U.S. Soelal Security Al:tand U.S. Internal Revenue Code). As e 

result the work of the Internal Revenue Service (IRS) In enforcing federal employment tax laws will become more 

elfidtntand costo<!tfecllve. Thal in turn. will improvt lht tax gop related to employment taxes and the Soelal 

Securlty and Medicare Trust Funds. The attached doeument outlines the rationale for the proposed regulatory 

cl1ange. 

Because It is logical to assume that~ was merely inadvertent oversight that the Treasury Regulations -e not 

updated on Januaty t. 1987. When the Fedenlllnwrance Contribution Act (FICA) tax ollligatlons were 

transr.trad from the states to the lntemal Revenue Service (IRS), lhio cl1ange should be far less conltov.,.;.a 

t1w> other requests to access IRS tax records. 

NCSSSA end I are ready to pr<Mde any additional informotion related to our ptoposed change to tho Treasury 

Rogulltlons to facilitate proper FICA tax complanoo and owrslght by the IRS. I can be contacted by phone 

(303--318-8061) 01 emal (maryann.~ CO US). 

Thriyou. 

Sincerely, 

Maryann Molza, PhD 

President, NCSSSA. 2015·2016 

Attachment 

c:c. NCSSSA Executive Commil!ee Members 

NCSSSA 

NCSSSA L

Committee 

egislative COinmittee ~ 

Chairs 
98 


Insert 33479A.068
99 


Insert 33479A.069

DISCLOSURE: Recommended Treasury Regulation Change 

By National Conference of State Social Security Administrators (NCSSSA) 

September9, 2016 

Introduction 

Naming State Social Security Administrators (State Administrators) as a group to be allowed to 

receive information from the U.S. Internal Revenue Service (IRS) will improve voluntary compliance 

by state and local government entities, reduce improper Social Security or Medicare coverage and 

laxation, and also reduce the tax gap. 

The Nalional Conference of Stale Social Security Administrators (NCSSSA) proposes an amendment 

to the Treasury Regulation by adding a new provision to the regulations that Interpret and apply 

Internal Revenue Code (IRC) §6103. This change will clarify the unique s~uat on associated with 

state and local governments' Federal Insurance Contribution Act (FICA) and public pension system 

requirements that exist under both federal and state laws due to the Amendment X of the U.S. 

Constitution and §218 of the U.S. Social Security Act (codified as 42 U.S. C. 418). This change will 

permit the disclosure of tax information to state officials who are commonly referred to as State 

Administrators who are designated pursuant to 20 C.F.R. §404. 1204. Prior to 1987, State 

Administrators were responsible for collecting and reporting Social Security contributions from state 

and local government employers and transmitting the funds to the U.S. Treasury. Since 1987, when 

the IRS assumed that responsibilny, State Administrators no longer receive feedback on non· 

complaint public employers. The lack of communication between the IRS and State Administrators 

results in both erroneous Social Security and Medicare coverage and benefits as well as incorrect 

FICA tax assessments by the IRS. These errors have been documented in numerous places, 

Including by the Government Accountability Office (GAO).' 

The GAO issued a report (GA0-10·938) in September 2010 in Which " addressed (1) how the Social 

Security Administration (SSA) works with states to approve Social Security coverage to ensure 

accurate coverage of public employees, and (2) how IRS identiftes incorrect Social Security taxes for 

public employees. The report fmds that the lack of shared information sharing among the SSA, IRS, 

and State Administrators is problematic to proper Social Security coverage and tax administration for 

this commun"y. 

This constraint can readily be overcome by amending Treasury Regulations under 26 U.S.C. 

§6103(d) by adding the following language to the Treasury Regulation: 

"The state administrator, and his/ her designee, shall be considered a taxing auth~ 

eligible to receive tax information. • 

Likewise, regulations pursuant to 26 USC 3121 (FICA tax) should make" clear !hat the State 

Administrator, and his/her desigrtee, shall be considered a taxing authority. 

IRC §6103 (I) already allows disclosure to others for various purposes including to the Railroad 

Retirement Board and Information pertaining to the District of Columbia Retirement Protection Act of 

1 See: M. Grochowski, et al., REPORT - Fede<BI Soc/ion 218 Task Force For Missouri School Dislricls, March 

31, 2009, http://oa .. mo.oov/acxd(Q331Q9Federaf!askEors;eReQ9!1 Qdf . See. also: U.S. Govemment 

Aocountabiley Office. "Report to Congressional Requesters. Social Securily Administration: Management 

Oversight Needed to Ensure Accurate Treatment of State and local Government Employees: September 

2010, GA0-1().938. 

Page 1 ors 
100 


Insert 33479A.070

1997. All of which indicate an intent by Congress to allow disclosure when such information is 

necessary to the function of various programs. 

Thus, the NCSSSA proposes that the Treasury Regulations applicable to IRC §6103 be amended to 

include authorization for the Secretary to disclose tax infonmation obtained from state or local 

government with the official designated pursu~ to 20 C.F.R. §404.1204 (i.e .. the State Administrator) 

in furtherance of their duties. This change would not impair the abil~ of the State Administrators to 

continue sharing lnfonmation ~the IRS, which has been common practice since federal law 

changed in 1987. 

Justification for Treasury Regulation Change 

This proposal to amend Treasury Regulation under 26 U.S.C. §6103 is justified for many reasons 

including: 

NOTE: Items numbered for ease of reference, not necessarily to indicate relative importance. 

1. IRC §6103 already allows for disclosure oftax infonmation to certain stale offiCials involved in 

state tax administration. 

2. This proposal seeks to have the IRS share resu~s of state and local government compliance 

checks and examinations, so that issues (and, if evident, patterns) can be addressed in 

education I outreach sessions with state and local governments by State Administrators. 

3. As occurred when IRS Pub. 963 was created In 1995, the tax gap can be reduced by 

enhancing comm...,ication between the IRS and State AdministratO<S ($12 Billion increased 

revenue from 1997 through 2000from outreach activities by IRS, SSA, and Stale 

Administrators).' State Administrators can educate their state and local employers about 

compliance problems and provide guidance on how problems can be voluntarily corrected. 

4. Much of the non-compliance with FICA tax laws by state and local governments are due to 

misunderstanding, rather than intentional malfeasance. 

5. IRS resources, in tum, can be freed up to focus on examinations and pursuing tax fraud and 

other intentional violations. 

6. State and local government employees are often covered for Social Security and Medicare 

through §218 of the Social Security Act (42 USC 418) by a written agreement between the 

particular state and SSA. These agreements are then modified by the State Administrator to 

include a particular local government entity or 119ency or department of the state or members 

of a public pension system. The entity then pays ~s employment tax in accord with these 

agreements and the IRS is charged~ collecting those taxes, and by extension, enforce the 

§218 Agreements. The only two parties, however, to the §218 Agreements (contracts) are the 

SSA and the particular state yet, the state official responsible for enforcement as a party to the 

agreement has been excluded from Information about the agreement. While the SSA may 

assign ~ rights under the agreement to the IRS; having done so, this assignment cannot then 

foreclose the rights of the state (the other party to the agreement). 

7. Prior to 1987, the State Administrators were responsible for collecting the taxes (contributions) 

due pursuant to the §218 Agreement and there was no need to receive tax infonmation from 

the IRS. After this date, the states and fts political subdivisions paid their taxes directiy to the 

Federal Government wfth the IRS responsible for enforcement. W~h this change came the 

2 1nfotmation furnished during a presentation given by the IRS Federal-St.-te~Local Government OlrectOf at tho Nelional 

Conference of State Social Security AdmlrVs.V.tcws (NCSSSA) Annual Conference In Rapid City, South Dakota, July 2002.. 

Page 2of 5 
101 


Insert 33479A.071

need to amend the disclosure law to allow the IRS to disclose infonnation to the State 

Administrator, but such a pennission and amendment were neglected. Since 1987, when the 

IRS assumed responsibility for collecting FICA from state and local governments, the IRS (and 

Treasury Counsel that advises the IRS in the Tax Exempt and Government Ent~ies Division) 

have been inappropriately applying the restrictions contained in IRC §6103 to the State 

Administrators' offices in each state/U.S. territory. 

8. A clarification of the Treasury Regulations will enhance the ability of the IRS to more 

accurately fulfill its duties under the IRC vis-a-vis both Social Security and Medicare (FICA) 

taxes and public pension system compliance by state and local government employers and 

public pension plans. It is important to note that IRC §61 03 was enacted into law when the 

State Administrators were still the tax collection agents for Soclal Security and Medicare for all 

state and local governments within their borders. 

9. After federal laws changed and transferred the FICA tax/Social Security and Medicare 

contribution collection process from the State Administrators to IRS effective January 1, 1987, 

the IRS (and Treasury Counsel that serves as its attorneys) concluded that because the State 

Administrator was not specifically named in IRC §6103 as included in the definition of •tax 

administration." Congress did not speclfically name the State Administrator because it was not 

contemplated at the time that the IRS would eventually become the tax collection agency for 

public employers/employees' FICA taxes. A change to the Treasury Regulations is all that is 

needed to address the failure to revise the Treasury Regulations in 1987 to include State 

Administrators within the definition of an appropriate state officlals for tax administration 

purposes. A statutory change to IRC §6103 is not necessary. 

Proper administration of the IRC and Social Security Act make it imperative that the IRS and 

State Administrators communicate with each other on a government-to-government basis to 

ensure proper application of FICA and public pension plan laws within each state. 

10. Passage of IRC §6103 pre-dated the U.S. Code changes that transferred FICA collection 

responsibilities from the State Administrators to IRS. That statutory change did NOT 

eliminate the necessary and appropriate oversight and administrative duties that still exist for 

State Administrators pursuant to 42 USC 418 and federal regulations and policies, i.e., 20 

C.F.R. 404.1204 and (SSA's Procedures Operations Manual (POMS) State and local (SL) 

Section 10001.130, State Social Security Administrator Responsibilities. 

Thus, Congress never contemplated that tax collection responsibilities for state and local 

governments' FICA would transfer to the IRS effective January 1, 1987, when Congress 

enacted IRC §6103. From the adoption and creation of voluntary Social Security coverage 

agreements between the states and the Federal Government (i.e., SSA or its parent 

department/agency) which began in 1951, the states, through their State Administrators, 

collected, audited (including individual employee records), and paid into the U.S. Treasury 

Social Security (and later also Medicare} on all state and local governmental employers/ 

employees to whom Social Security and/or Medicare contributions were applicable. 

In fact, with the adoption of both mandatory Medicare (effective April1 , 1986) and mandatory 

Social Security (effective July 2, 1991), the State Administrator role became significantly more 

important as a resource to the Federal Government (both the SSA and the IRS) in order to 

properly ensure both coverage and taxation of state and local governments because of the 

diverse way each state is entitled to apply Social Security and Medicare-only coverage to their 

state and local government employees, based on the 10"' Amendment to the U.S. Constitution. 

Page3of5 
102 


Insert 33479A.072

11. 1RC §6103 allows for State tax officials and State and local law enforcement agencies but 

does not define Stale tax official .(26 U.S.C. 6103 (d)] 

o It does allow disclosure for taxes Imposed under chapter 21 (FICA) 

In generai.-Returns and return Information wijh respect to taxes Imposed by 

chapters 1, 2, 6, 11, 12, 21, 23, 24, 31, 32, 44, 51, and 52 and subchapter D of 

chapter 36 shall be open to inspection by, or disclosure to, any State agency. 

body, or commi»ion. or il$ legal repryentatlve. Which is charged under the 

laws of such State with respons il~y for the administrafion of State tax laws for 

the purpose of, and only to the extent necessary in, the administration of such 

laws, including any procedures with respect to locating any person who may be 

entitled to a refund. [26 U.S.C. 6103 (d)(1)) [Emphasis added) 

12. IRC §61 03 also allows for disclosure to State audit agencies [26 U.S.C. 6103(d)(2)) 

o (2) Disclosure to State d~ agencies.-

(A) In generai.-Any returns or return information obtained under paragraph (1) by any 

State agency, body, or commission may be open to inspection by, or disclosure to, 

officers and employees of the State aud~ agency for the purpose of, and only to the 

extent necessary in, making an aud~ of the State agency, body, or commission 

referred to in paragraph (1). 

(B) State audit agency.-For purposes of subparagraph (A), the term 'State d~ 

agency" means any State agency, body, or commission Which is charged under the 

laws of the State h the responsibility of auditing State revenues and programs. 

13. A review of the Code of Federal Regulations (CFR)shows regulations of various sections of 

IRC §6103 but there Is no specific regulation related to paragraph (d). 

14. State Administrators do not seek Individual taxpayer information (i.e., individual employee), 

but rather, information by type of employer (e.g., municipality, county government, etc.) and 

tax issue. 

15. The proposed revisions to the Treasury Regulations would eliminate the arbitrary restriction 

that Is currently placed on IRS agents that prohibits their communication w~h the State 

Administrator about the appropriate employer-by-employer and employee-by-employee Social 

Security, Medicare, and public pension plan coverage in each slate. The State Administrator 

has the most complete and reliable information on both the historical and current FICA and 

pubtic pension system coverage requirements for its public employees. Without that 

information the IRS can make incorrect assessments of (or fails to assess) of FICA taxes 

potentially to the detriment of the Social Security and Medicare Trust Funds and the public 

employees Who can and should be participating in the program. Because of the current 

interpretation of IRC §6103, the State Administrator is not consulted by the IRS even though 

the States are parties to the §218 Agreements e .. contracts) that provide for voluntary Social 

Security and/or Medicare coverage for state and local government employees in each state 

and the State Administrator is the chief liaison between the federal government and each state 

(or U.S. terr~ory) on all state and local government Social Security and Medicare coverage 

and public pension system requirements. 

16. It is logical to assume that it was merely inadvertent oversight that the Treasury Regulations 

were not updated on January 1, 1987, when the Federal insurance Contribufion Act (FICA) tax 

obligations were transferred from the states to the lntemal Revenue Service (IRS), this change 

should be far less controversial than other requests to access IRS tax records. 

Page 4 of 5 
103 

f 


Insert 33479A.073

17. The IRS has stated that IRS Form 8821 (Tax Information Authorization) provides the basi$ for 

the IRS to share public employeR' tax information with State AdminlstraiOI'S. Form 8821. 

however, Is clearly intended for lndMdual tax return information, not the govemmenl-togovemment information that needs to be shared between the IRS and State Administrators. 

Use of Form 8821 for this purpose has been of little value because wtlen contacted by the IRS 

most public employers are reluctant to voluntariy ask for yet another govemmen~ i.e., the 

state, to intervene because they fear further negative attention and/or expenses will be 

incurred. 

18. Further, !!.Q §218 Agreement can be established between SSA and Individual governmental 

entitles or separate agencies or departments of the state itself. & §218 Agreements are 

extensions of coverage to poliUcal subdivisions or agencies and departments of the state to 

benefit public employers and their employees that want voluntary Social Security and/or 

Medicare-only coverage. Thus, by falling to share infonmation with the states, the IRS is 

actually violating basic contract law. 

For further informalion, please contact Maryann Motta. PhD, President, National Cooference of State 

Social Security AdministraiOI'S at 303-318-8061 or maryann mo!za®statt co us. 

Thank you for considering our request 

Maryann Motza, PhD Chair, Board of Trustees, Public Employets' Retirement Association of Colorado, 2015·2017 

NCSSSA President and Legislative Commi11H Chair, 2015-2016 Colorado State Social Securi!y Adminislni!C( 

Public Employees' Social Securi!y Program labc< Rotations Administrator. Division of'--Standards and Statistics 

Colotado Department of labor and ~t 

633 17th Str08L Strite 700 

Denver. co 80202-3660 

Telephone: 13031 31HQ61 FM: IJ03! 318-8()69 

E-mait maryann motz~tate co us 

Poge5ol 5 
104 

[Public Submissions for the Record follows:] 

105 

Æ 


Insert 33479A.074