If You Don’t Have a Section 218 Agreement, Watch Out for the Social Security “Gotcha”

By Jeff Chang

A section 218 agreement is an agreement between a state (or its local governments and instrumentalities) and the Social Security Administration providing for participation in Social Security and/or Medicare for designated groups of employees. Participation in a state’s section 218 agreement generally is not required. However, once a state, local government or instrumentality signs on to the section 218 agreement, that commitment becomes irrevocable.

There are thousands of local government entities (cities, counties, special districts, school districts, JPAs) in California. Of these, only about 500 are parties to the State’s section 218 agreement with the SSA. That means there are thousands that do not have a section 218 agreement.

In 1991, Social Security became mandatory for state and local government employees, unless they are members of a qualifying public retirement system (sometimes referred to as a “Social Security Replacement Plan” or a “Replacement Plan”) or covered under a section 218 agreement. In other words, an employee of a local government that doesn’t have a section 218 agreement must be covered by Social Security, unless the employee participates in a Replacement Plan.

Here’s the “gotcha:” If an employee of a local government that does not have a section 218 agreement is participating in a Replacement Plan, that employee cannot also participate in Social Security. This is potentially a really big problem, because there are dozens, if not hundreds, of local governments and instrumentalities in California alone that do not have a section 218 agreement, but participate in Social Security on a “voluntary” basis. Of course, they can do that as long as they do not also provide any of their FICA-covered employees with Replacement Plan benefits. The problem is that most of them “unknowingly” provide Replacement Plan-type benefits. If this occurs, it can happen on an employee-by-employee and on a payroll-by-payroll basis. As a result, the affected employees cannot also have employer or employee Social Security payroll contributions made on their behalf. Furthermore, those payroll periods cannot be counted toward the employees’ ultimate Social Security benefits.

A Replacement Plan can be either:

  • A defined benefit pension plan providing a benefit of at least 1.5 percent of average compensation during an employee’s last 3 years of employment multiplied by the employee’s number of years of service (this definition includes CalPERS, all ’37 Act plans and most standalone defined benefit plans of local governments) or
  • An employer-sponsored 401(a), 457(b) or 403(b), providing an allocation to the employee’s account of at least 7.5 percent of the employee’s compensation during any period under consideration. The 7.5 percent allocation can consist of employer contributions, both employer and employee contributions, or employee-only contributions. Therefore, a 457(b) into which an employee contributes 8 percent of pay would be a Replacement Plan for that employee.

This has suddenly become so important because California’s Social Security Administrator has recently begun to ask all state and local government entities whether they have a section 218 agreement, whether they participate in Social Security and whether they provide a Replacement Plan. We think they may be shocked to learn how many public entities have been caught up by their own “generosity.” Stay tuned.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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