MSU Extension Center for Local Government Finance & Policy

Some would argue it is because Michigan police officer and firefighter positions are generally not covered by Social Security that their pension benefits will never be dramatically reduced. This does not hold true around the country for other public employees not covered by social security.

Kentucky is moving its teachers to hybrid plans and Kentucky teachers do not participate in Social Security.[1] Legislators in Colorado are in the midst of passing legislation that will move teachers to 401(k) style plans and potentially reduce retiree benefits; Colorado teachers do not participate in Social Security.[2] The majority of Alaska’s public employees are not covered by Social Security; even so, since 2006, all public employees are placed in a defined contribution plan.[3] And, in Michigan, despite officers not participating in Social Security, the Michigan State Police had its benefit structure changed placing new hires in a hybrid system.

Local governments in Michigan, as well as in many other states, are faced with large unfunded pension and other post-employment benefit (OPEB) liabilities. Legislators in Michigan have passed laws in the past few years to move away from pension systems instead opting for hybrid systems and defined contribution systems. There is a great deal of discussion regarding the advantages of these changes to retiree benefit systems.

However, a related topic not often discussed is the lack of Social Security coverage for police officers and firefighters and the negative impact the lack of coverage can have on public safety officers when pension retiree benefits are reduced. In general, there’s a lack of understanding of how public safety officers can gain coverage in Michigan. In addition, many local units many not be aware of how, why, or when their employees gained coverage or the process to open coverage to additional employees. Knowing more about this process is important because opening social security coverage up to public safety positions would not just benefit employees; it would also benefit employers because it spreads the risk to the federal government in addition to state and local government.

The relationship between police officers and firefighters and Social Security is complicated, as is determining which positions should and should not be covered. Most Michigan public safety officer positons aren’t covered. Instead, those positions are covered by retirement systems. This article focuses on positions that are covered by social security and how that status can be achieved in Michigan.

There are some key pieces of information needed in order to better understand this complexity:

• Is the police officer or firefighter position covered by a retirement system?
• Did the position gain Social Security coverage via a Section 218 agreement?
• If a Section 218 agreement was used, then what year was the local unit’s Section 218 Agreement request approved?
• If applicable, what year did the position come under a retirement system?
• What kind of retirement system and level of benefits were offered?

Bottom line: regarding social security coverage status, a police officer or firefighter position will fall into one of three categories:

• Section 218 Agreement coverage (as part of an absolute coverage group or a retirement system coverage group);
• Mandatory coverage (meaning position is not covered by a Social Security equivalent retirement system or a Section 218 agreement); or
• Not covered (instead, position is covered by a Social Security equivalent retirement system).

Section 218 Agreement Social Security Coverage

What is a Section 218 Agreement?

A Section 218 Agreement[4] does not cover an individual employee, it covers the position itself. Consequently, “if the position is covered under the agreement then any employee filling that positon is subject to FICA taxes.”[5] Section 218 Agreements can be modified.[6] In general, Section 218 Agreement coverage, also called “voluntary coverage,” covers police officer and firefighter positions in two ways: 1) as part of an absolute coverage group; or 2) as a part of a retirement system coverage group.”[7]

What is a “qualifying public retirement system”?

Before explaining the two ways to extend Social Security coverage using a Section 218 Agreement, the term “retirement system” must be defined. For Social Security coverage purposes, whether a position is covered by a “qualifying” retirement system is vital, especially with regard to police officers and firefighters.

A qualifying public retirement system is also called a “Social Security equivalent retirement system” or a “FICA replacement plan.” This brief will generally refer to these qualifying public retirement systems simply as “retirement systems” or “qualifying retirement systems.”

Typically, a qualifying retirement system will fall into one of two categories— the defined contribution plan (DC) or the defined benefit plan (DB).

A DC plan with a contribution percentage of at least 7.5 percent of the employee’s payroll will qualify as a FICA replacement plan. The 7.5 percent can be made up of employee-only, employer-only, or employer-employee contributions, and matching contributions will also go towards the 7.5 percent.[8]

A DB plan with “comparable” benefits to Social Security will qualify as a FICA replacement plan. “Generally, a plan meets the requirement if the benefit under the system is at least 1.5 percent of average compensation during an employee’s last three years of employment, multiplied by the employee’s number of years of service.”[9]

Absolute Coverage Group Section 218 Coverage

An absolute coverage group[10] is a group of public sector employees that are not covered by a qualifying retirement system who gain Social Security coverage under a Section 218 Agreement. To extend Section 218 coverage to public employees not covered by a retirement system, the consent of the employees is not required and a vote does not need to take place.

Prior to 2015, this was the only way a Michigan police officer or firefighter position could be covered by both a qualifying retirement system as well as Social Security and still be compliant with federal and state law. If a public safety position gained coverage via a Section 218 agreement as part of an absolute coverage group and later came under a qualifying retirement system, those positions would not lose coverage.

Important caveat—if a police officer or firefighter position was mandatorily[11] covered and then later the position comes under a qualifying retirement system, the position loses coverage. Regarding this aspect of Social Security, retaining coverage turns on how the police officer or firefighter position gained coverage.

An example is provided to give context to the above type of social security coverage. Shelby Township police officer and firefighter positions gained Social Security coverage via a Section 218 Agreement as part of an absolute coverage group. In 1954, Shelby Township applied for Social Security coverage for all public employees not covered by a retirement system. At that time, Shelby Township police officers and firefighters were not covered by a retirement system. Per the Social Security Administration, “if police officer and/or firefighter positions were not covered by a retirement system at the time an entity obtained Social Security coverage under the State’s Section 218 Agreement for all positions not covered by a retirement system, the police officer and firefighter positions are covered.”[12] Therefore, when Shelby Township’s Section 218 request was approved to get all public employees not covered by a retirement system on Social Security, this included police and firefighter positions as well.

In 1967, Shelby Township established an Act 345 police officer and firefighter pension system. Shelby’s Act 345 pension system meets the requirements of a qualifying retirement system. However, because Shelby police and firefighter positions gained Social Security coverage via a Section 218 Agreement, Social Security coverage continued. Currently, Shelby police officer and firefighter positions are covered by Social Security and a qualifying retirement system.

Retirement System Coverage Group Section 218 Coverage

A retirement system coverage group[13] is a “group of employees whose positions are covered under a retirement system by referendum under the provision of Section 218(d).”[14] Positions in this type of coverage group were already covered by qualifying retirement systems prior to requesting Social Security coverage.

In order to gain coverage under a Section 218 agreement as a retirement system coverage group, a majority vote referendum[15] (“referendum”) must be held and a majority of eligible voters must vote in favor of Social Security coverage. Referendums are held for positions seeking coverage but are already covered by a qualifying retirement system. Eligible voters are those who are currently serving in the positions covered under the retirement system and are also eligible for Section 218 coverage. Note: The referendum process is not used for Section 218 absolute coverage groups.

It was not until 2015 that Michigan police officer or firefighter positons already covered by a retirement system were legally able to gain Social Security coverage. Therefore, it was not until 2015 that these positions would have needed to use the referendum process to gain Social Security coverage and thereby gain coverage as a retirement system coverage group. Since 2015, only four local units submitted requests to extend Section 218 Agreement coverage to public sector positions or to modify existing Agreements and none of those requests included police officer or firefighter positions.[16] Consequently, there are no public safety positions in Michigan that gained Social Security coverage through the referendum process.[17]

Referendums Involving Retirement Systems with both public safety and non-public safety positions

When a qualifying retirement system includes public safety positions as well as non-public safety positions, the referendum process is basically the same.[18] Only eligible voters can participate in a referendum. As previously stated, an eligible voter is an employee in a position that is covered by a retirement system and is also eligible to receive Section 218 Agreement coverage. If a position is prohibited from gaining coverage, the employees in those positons cannot vote in the referendum. This makes sense because a referendum is basically a question that asks whether employees serving in retirement system covered positions also want Social Security coverage.

It is important to remember in these circumstances that social security coverage and eligibility are based on the position—not the retirement system or the individual.

If a majority vote in favor of coverage, then only the eligible positions gain Social Security coverage. Prior to 2015, police officer and firefighter positions already covered by a qualifying retirement system were not eligible for coverage; therefore, prior to 2015, police officers and firefighters in mixed retirement systems would not be eligible to vote in a referendum.

If previously excluded positions become eligible at a later date, and employees in those positions want Social Security coverage, then a new referendum must be held. The previous referendum does not apply. Since 2015, public safety positions covered by retirement systems are eligible for to gain Social Security coverage. Thus, the referendum process can now be used to provide coverage for those positions.

Mandatory Social Security

If a police officer or firefighter position is 1) not covered by a retirement system and 2) not covered by a Section 218 Agreement, then the position must be covered by mandatory Social Security.

In 1991, the U.S. Congress “required Social Security participation for all public employees not covered by a comparable state or local government pension plan.”[19] This requirement included making Social Security coverage (and Medicare) mandatory for police officers and firefighters not covered by a qualifying public retirement system. As previously mentioned, it is important to remember “if an employee is mandatorily covered for Social Security, then becomes a member of a qualifying public retirement system, mandatory coverage ends; Social Security coverage would [continue to] apply only if the position becomes covered by a Section 218 Agreement.”[20]

The idea behind making Social Security mandatory for those public employees not covered by a Social Security equivalent retirement system was to make sure that all public servants had some sort of old age insurance to fall back on.

It is not enough, however, for the position to be covered by a retirement system. In order to be excluded from mandatory Social Security, the employee must be a qualified participant[21] of the retirement system. For more detailed explanations of the tests used to determine who is a qualified participant of a defined contribution retirement system or a defined benefit retirement system, see the IRS Federal-State Reference Guide.[22]

No Social Security Coverage—Positions covered by qualified retirement system

Most Michigan police officer and firefighter positions are not covered by Social Security. Instead, the positions are covered by a Social Security equivalent retirement system. Because the positions are covered by retirement systems, the positions are excluded from mandatory Social Security. These positions are also not covered by a Section 218 agreement. While it is now permitted for employees in police and firefighter positions already covered by a retirement system to hold a referendum and attempt to gain Social Security coverage, none have done so.

Michigan State University Extension Center for Local Government Finance and Policy will release a more detailed policy brief that discusses the pros and cons regarding public safety positions and Social Security coverage. Also, the brief will explore the intricate relationship between the federal Social Security Act, Michigan’s enabling legislation, and the policy issues regarding police officers, firefighters, and Social Security coverage in Michigan.

Definitions and terminology from IRS Federal-State Reference Guide[23] Glossary

A Section 218 Agreement is a voluntary agreement between a state and the Commissioner of Social Security that allows states to voluntarily provide Social Security coverage for services of state and local government employees. The Agreement does not cover individual employees, rather it covers the position itself. Consequently, if the position is covered under the agreement, then any employee filling that position is subject to FICA taxes.

Section 218 agreements can be modified. A modification is an amendment to an original Section 218 agreement to extend coverage to additional groups of employees[24] or to implement changes in federal and state laws. Each modification, like the original agreement, is a legally binding document.

An absolute coverage group, also called a “non-retirement system coverage group,” is a group of public sector employees that are not covered by a qualifying retirement system who gain Social Security coverage under a Section 218 Agreement.

A retirement system coverage group is a group of employees whose positions are covered under a retirement system by referendum under the provision of Section 218(d).

A majority vote referendum is “referendum in which if a majority of the eligible members of the retirement system (not a majority of those voting, unless all those voting are actually all of the eligible members of the retirement system) vote in favor of coverage, the State may then submit a modification to its Agreement to extend coverage to that group.”[25]

In the context of this brief, an eligible voter is an employee in a position that is covered by a qualified retirement system, the employee is personally eligible for membership in the retirement system,[26] and the position is also lawfully able to receive Section 218 Agreement Social Security coverage.

Mandatory Social Security is required Social Security coverage for state and local government employees who are not members of a public retirement system and who are not covered by a Section 218 agreement.

An alternate name for a public retirement system, FICA replacement plan refers to a pension, annuity retirement, or similar fund or system established by a state or political subdivision for the purposes of providing retirement benefits to employees. For mandatory coverage purposes, the employee may be a member of any type of retirement system as long as the plan provides the minimum level of benefits required for a public retirement system.

A defined contribution plan (DC) that satisfies the definition of a retirement system and qualify as a FICA replacement plan must provide for an allocation to the employee’s account of at least 7.5 percent of the employee’s compensation during any period under consideration. Contributions from both the employer and the employee may be used to make up the 7.5 percent. Matching contributions by the employer may be taken into account for this purpose. A plan with only employee contributions would also satisfy the minimum benefit requirement, provided the contributions constitute at least 7.5 percent of compensation. However, the 7.5 percent cannot include any earnings on the account.

A defined benefit plan (DB) that qualifies as an alternative to Social Security provides for a retirement benefit to the employee that is comparable to the benefit provided by the Social Security part of FICA. Generally, a plan meets the requirement if the benefit under the system is at least 1.5 percent of average compensation during an employee’s last three years of employment, multiplied by the employee’s number of years of service.

To determine who is a qualified participant in a FICA replacement retirement plan, and therefore excluded from mandatory Social Security coverage, the public employer must maintain a retirement system within the meaning of IRC section 3121(b)(7)(F), and the employee must also be a qualified participant in that system, as defined in IRC section 3121(b)(7)(F) and Regulation 31.3121(b)(7)-2(d). This test must be applied to each employee separately. An entity may maintain a retirement system in which not every employee is a qualified participant. For both a DC plan and for a DB plan, the determination of whether an individual is a qualified participant is made as services are performed.

Citations

[1] Cory Turner, “Why More Than a Million Teachers Can’t Use Social Security,” NPR, at https://www.npr.org/sections/ed/2018/04/20/602846417/why-more-than-a-million-teachers-cant-use-social-security.

[2] Id.

[3] Alicia H. Munnell, Jean-Pierre Aubry, and Mark Cafarelli, Defined Contribution Plans In The Public Sector: An Update, at http://crr.bc.edu/wp-content/uploads/2014/04/SLP_37-1.pdf.

[4] See Definitions below.

[5] IRS Federal-State Guide, Glossary, at https://www.irs.gov/pub/irs-pdf/p963.pdf.

[6] See Definitions Section below.

[7] “Effective for modifications filed after August 15, 1994, all States may provide coverage for police officer and firefighter positions under a retirement system by use of the majority referendum procedure. The retirement system coverage group consists of all current and future employees in positions under the retirement system in which the referendum was held, including ineligibles.” Social Security Administration, SL 30001.345 Police Officers and Firefighters at https://secure.ssa.gov/poms.nsf/lnx/1930001345. This 1994 change to the Social Security Act removed police officer and firefighter positions already covered by a retirement system off the list of mandatorily excluded positions prohibited from participating in social security. However, this change only removed the federal express prohibition. In order to extend coverage to this group, there had to also be state enabling authority. Michigan did not remove this legal prohibition until 2015.

[8] IRS Federal-State Guide p. 6-2.

[9] Id. at 6-3.

[10] See Definitions section below.

[11] Starting in 1991, police officer and firefighter positions not covered by a retirement system or social security via a 218 agreement are mandatorily covered by social security. Mandatory Social Security coverage is discussed later in this brief.

[12] “Political entity obtains Section 218 coverage for all positions not covered by a retirement system,” https://www.ssa.gov/slge/pol_fire.htm.

[13] See Definitions section below.

[14] IRS Federal-State Guide, Glossary.

[15] See definitions section below.

[16] There was one additional modification (a total of 5 modifications since 2015). The State of Michigan modified the Master Section 218 Agreement to permit the voluntary extension of social security coverage to police officers and firefighters already covered by a retirement system. This modification did not actually grant coverage to any police officers or firefighters; instead, the modification allowed local units the option to voluntarily extend coverage to those positions via the referendum process.

[17] Thus, there are no police officer or firefighter positions that gained social security coverage as a Section 218 Agreement retirement system coverage group for social security purposes.

[18] A single retirement system can contain positions that are eligible to gain social security coverage and also contain positions that are mandatorily excluded from gaining social security coverage per State and Federal law.

[19] The Cost of Universal Social Security Coverage of State and Local Worker,” NASRA, at http://www.nasra.org/Files/Topical%20Reports/Social%20Security/Segal%202011.pdf.

[20] IRS Federal-State Guide p. 5-10.

[21] See Definitions section below. Basically, a qualified participant is some who, when it is time, will be able to retire with benefits.

[22] IRS Fed-State guide at https://www.irs.gov/pub/irs-pdf/p963.pdf.

[23] IRS Fed-State guide at https://www.irs.gov/pub/irs-pdf/p963.pdf.

[24] Since 2015, there have only been 5 modifications made to Michigan’s Master Section 218 Agreement. 4 out of the 5 modifications were to extend coverage to more employees and one modification was to change Michigan state law to remove the prohibition on police officers and firefighters already covered by a retirement system from participating in social security.

[25] Social Security Administration, Glossary, at https://www.ssa.gov/section218training/glossary.htm#r.

[26] “An ineligible is an employee who performs services in a position under a retirement system but who is personally ineligible for membership in that system because of a personal disqualification, e.g., age, length of service, number of hours worked, or date of hiring. (Another employee who has no such personal disqualification from membership who occupies the same position would be eligible for membership in that retirement system.)” Id.