This guest post was authored by Oliver Yee
In today’s challenging economic environment, public agency employers are looking to employ retirees for overflow work, special projects and other extra help assignments. There are, however, important implications that agencies should be aware of when hiring retirees, particularly retirees who are members of the California Public Employees’ Retirement System (“PERS”). A frequently asked question has arisen alongside this practice of hiring PERS retirees: are public agencies required to withhold taxes for Medicare and/or Social Security for PERS retirees?
Withholding of Medicare Tax
Generally, all state and local government employees hired in the last 25 or so years are required to pay Medicare taxes. (See 26 U.S.C. § 3101 [placing the tax on the wages earned with respect to employment on “every individual”]; see also 29 U.S.C. § 3121(u) [expressly stating that all local government employees are subject to Medicare/Hospital tax]). There is no exemption for employees who are members of a qualified retirement plan such as PERS. Accordingly, rehired PERS retirees are considered regular employees of the public agency for the purposes of Medicare contributions and the public agency is required to withhold their Medicare taxes. This rule also applies to ’37 Act agencies (i.e. agencies that are under pension systems established under the County Employees Retirement Law of 1937) that hire PERS retirees, and to ’37 Act and PERS agencies that hire retirees who retired from ’37 Act agencies.
Withholding of Social Security Tax
Many public agencies terminated their participation in Social Security on or before April 20, 1983. On April 20, 1983, a public agency’s right to terminate participation in Social Security was rescinded by Congress. For those public agencies that continue to participate in Social Security, the question of whether or not Social Security taxes for PERS retirees should be withheld can be complex. The Internal Revenue Service (IRS) provides guidance on this issue. The general rule is that a public agency retiree who is rehired by his/her employer or another employer that participates in the same retirement system (e.g. PERS) as the former employer is considered a “rehired annuitant” and is excluded from mandatory social security coverage (i.e. social security taxes are not withheld). (See IRS Publication 963 – Federal-State Reference Guide at 6-9.)
There is an exception to the above referenced general rule. Social Security taxes for a rehired annuitant (i.e. public agency retiree who is rehired by his/her employer or another employer that participates in the same retirement system as the former employer) are withheld if the retiree’s new position is covered for Social Security under a “Section 218 Agreement.” A Section 218 Agreement is a voluntary agreement between states and the Social Security Administration to provide Social Security and Medicare Hospital Insurance (HI) or Medicare HI-only coverage for state and local government employees. These agreements are called “Section 218 Agreements” because they are authorized by Section 218 of the Social Security Act. Public agencies (i.e. political subdivisions of the state) may enter into a Section 218 Agreement with the Social Security Administration to extend Social Security coverage to their employees. Under the Social Security Act, certain positions are mandatorily excluded from Social Security coverage. Therefore, if a public agency hires a rehired annuitant, the agency must determine whether the position which the rehired annuitant now occupies is covered by a Section 218 Agreement. If yes, then Social Security taxes are withheld. For Section 218 coverage questions, consult the Social Security Administrator for Region VII which covers California. (See http://www.ncsssa.org/ssaregoffice.html)
The following examples help illustrate the above concepts related to withholding of Social Security taxes.
A groundskeeper retires from City A where he was a member of PERS. Two years later, he is hired by City B as a custodian. City B participates in PERS. However, the custodian position is not covered under PERS for City B. The custodian position is not covered by a Section 218 Agreement. Must City B withhold Social Security tax? No. The retiree is a rehired annuitant. Although the custodian position is not covered under PERS, City B still “participates” in PERS. Therefore, because the retiree is a rehired annuitant (City B participates in the same retirement system as City A), and the custodian position is not covered by a Section 218 Agreement, the City should not withhold Social Security tax from the earnings of this retiree.
An administrative analyst retires from City X where she was a member of PERS. Two years later, she is hired by City Y as a front desk clerk. City Y participates in PERS. However, the front desk clerk position is not covered under it. The front desk clerk position is covered by a Section 218 Agreement. Must City Y withhold the retiree’s Social Security tax? Yes. Although the retiree is a rehired annuitant, because the custodian position is covered by a Section 218 Agreement, the City must withhold the retiree’s Social Security tax.
An engineer retires from District X where he was a member of PERS. Two years later, he is hired by District Y as an office clerk. District X participates in PERS. District Y is a 1937 Act agency and does not participate in PERS. District Y does not have a Section 218 Agreement that covers the office clerk position. Must District Y withhold the retiree’s Social Security tax? Yes. The retiree is not a rehired annuitant because District X does not participate in the same retirement system as District Y. In addition, the position the retiree now occupies is not covered by a Section 218 Agreement.
In summary, generally a public agency is required to withhold Medicare taxes for PERS retirees it employs. A public agency should not withhold Social Security taxes where: (1) the retiree is a rehired annuitant (i.e. a public agency retiree who is rehired by his/her employer or another employer that participates in the same retirement system as the former employer), and (2) the position the retiree now occupies is not covered by a Section 218 Agreement.