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April, 1997, Special Supplement

Stephen H. Cypen, Esq., Editor


The February 1997 Government Finance Review, published by GFOA, contains a comprehensive article on Social Security and Medicare as they relate to local government employers. The following summary is from that report, written by Betsy Dotson of GFOA's Federal Liaison Center.

Social Security was enacted in 1935, as a social insurance program to pay retired workers a continuing income. Survivors' and descendants' benefits were extended in 1939. In 1956 disability benefits were added and in 1965 Medicare was created to provide health coverage to the elderly.

However, public employees were not originally covered by Social Security. But, because many governments did not have their own retirement systems, Congress, in 1951, permitted public employers to participate in Section 218 agreements (named for the applicable portion of the Social Security Act). Thus, states and their political subdivisions could voluntarily enter into agreements with the Social Security Administration to cover some or all of their employees. A 1955 amendment permitted employees (except firefighters and police officers) to be covered by Social Security even where there was a government retirement system. A year later, Congress determined to allow state and local governments to maintain two coverage systems, one of which could exclude those employees not desiring Social Security coverage. (In certain states, even firefighter and police officer coverage was permitted.)

When Social Security was overhauled in 1983, Congress set April 20, 1983 as the date after which any and all public employees and their employers were prohibited from opting out of Section 218 agreements. Since that date, state and local governments must continue operating under Section 218 agreements even if a qualifying government retirement plan is available.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) required that employees hired after March 31, 1986 become subject to Medicare-only coverage, unless specifically excluded by law. By subsequent amendment, as of July 2, 1991 all state and local government employees who are not covered by a public retirement system or covered under a Section 218 agreement are mandatorily subject to Social Security, unless specifically excluded. Amendments in 1994 now permit optional Social Security coverage for firefighters and police officers in all states.

For purposes of mandatory Social Security coverage (but not for Section 218), a public retirement system must provide a meaningful benefit; that is, one comparable to the benefit provided by the Old-Age Survivor and Disability Insurance (OASDI). IRS Regulations specifically provide that Section 457 Deferred Compensation Plans qualify. To be considered a member of a qualified retirement system, one must actually participate (as opposed to just being eligible therefor).

As part of her article, Ms. Dotson created an easily-understandable flowchart to determine employee coverage for Social Security and Medicare. With her permission, that chart is reproduced below.

Copyright, 1996-2004, all rights reserved.

Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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