Is Your Social Security Replacement Plan Up to Snuff?

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By Jeff Chang

As we previously explained, most public agencies are not automatically subject to Social Security. They have a choice between voluntarily participating in Social Security pursuant to a section 218 agreement, or they can exempt some or all of their payroll by providing what is known as a “Social Security Replacement Plan” (SSRP).

In California, the principal SSRP for many public employees is CalPERS.  Generally, CalPERS provides for immediate enrollment upon hire of:

  • Employees who are already CalPERS members, unless specifically excluded by law or contract;
  • Employees hired to work on a full-time basis for more than six months; and
  • Employees working “regular, part-time service,” who work at least an average of 20 hours a week for one year or longer.

This leaves part-time, temporary, and seasonal (PTS) workers outside of immediate CalPERS coverage, and subject to ongoing monitoring of their hours to see if they become either “full-time” or work at least 1,000 hours in a fiscal year and thereby qualify for CalPERS membership.  Some agencies participating in CalPERS also have contract provisions that exclude specific categories or groups of employees (e.g., hourly-paid employees), provided that the exclusion is approved by CalPERS.

To avoid having to make Social Security contributions for its PTS (any other “excluded” employees), most public agencies maintain either a 457(b) plan or a 401(a) plan as an SSRP for these employees.  In order for one of these plans to be an SSRP, it generally must:

  • Provide for immediate participation.
  • Provide for 100% immediate vesting.
  • Require that the employer and/or the employee, on a combined basis, contribute at least 7.5% (up to the applicable Social Security wage base) to the plan. Employer matching contribution may be counted for this purpose.
  • Not contain a special condition (such as completion of 1,000 hours of service or employment on the last day of the plan year) for the employee to earn or accrue his/her contribution.
  • Meet a “reasonable rate of interest” requirement, which means it must either credit accounts with a reasonable rate of earnings, or make sure accounts are credited with actual earnings based on trust fund investments made in accordance with general fiduciary standards.

In general, if the foregoing requirements are not met during each and every payroll period of the year, an affected employee would not be covered by an SSRP and must instead receive (and make) contributions to Social Security. Furthermore, if your agency happens to make both contributions to an SSRP (whether its CalPERS or a defined contribution plan) and to Social Security at the same time, you could run afoul of the Section 218 “gotcha” we previously discussed. Finally, you may want your SSRP to provide that any PTS employees who do become CalPERS eligible will no longer be eligible for your defined contribution SSRP. Otherwise, your agency may end up contributing to two SSRPs for such employees.

Proper coverage under your SSRP is detailed and can be very fact and employee specific. Don’t ignore your SSRP, or assume that it is functioning as intended. Take time to make sure you understand how it is set up and whether it is doing the job for you and your employees.

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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