State Social Security Administrators Seek Relief for Public Sector

1. Resolves significant issues relevant to a broad class of taxpayers, i.e., the nation's more than 90,000 state and local government (public) employers and their 19.5 million employees.

2. Reduces controversy and lessens the burden on taxpayers or the Service.

3. Involves existing regulations or other guidance that is outdated, unnecessary, ineffective, insufficient, or unnecessarily burdensome and that should be modified, streamlined, expanded, replaced, or withdrawn.

4. Guidance promotes sound tax administration.

5. The Service can administer the recommended guidance on a uniform basis.

6. Guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance.

1. Suggest a reinterpretation of the Treasury Regulations associated with Internal Revenue Code §6103 (l).

2. Recommend revision of, and clarifications to, Treasury Regulations associated with qualifying FICA public pension replacement plans pursuant to OBRA 1990.

1. NCSSA recommends that the Treasury Department adopt a reinterpretation of the Treasury Regulations associated with Internal Revenue Code §6103 (l). Such a reinterpretation will facilitate state and local governments' voluntary compliance with U.S. Code sections (both the U.S. Social Security Act and IRC).

This proposed change is recommended because the current interpretation of IRC §6103 [42 U.S.C. §6103] places IRS' Tax Exempt and Government Entities (TE/GE), Exempt Organization's (EO) Federal, State, Local/Employment Tax (FSL/ET) Specialists at a disadvantage and wastes the Service's time and other resources. FSL/ET agents cannot discuss specific public employer tax information with State Administrators.

Without this direct communication between the State Administrator and the FSL/ET agents, the Service cannot correctly interpret coverage and, thereby, properly assess and resolve tax issues. This information is held solely by State Administrators who maintain their state's Section 218 Agreements, including relevant supporting documentation, and know which public employees/positions are covered by qualifying FICA replacement public pension plans.

Results from a survey that NCSSSA conducted during March 2019 of all State Administrators showed overwhelming support for reinterpretation of the Treasury Regulation associated with IRC § 6103 (85.7 percent of all respondents agreed that this reinterpretation is needed).

This recommendation by NCSSSA was provided previously to Congress⁷, the Treasury Department, and the Service. The previous communications with the Treasury Department and/or the Service include details on how and why this recommendation will improve voluntary compliance by state and local governments with federal tax laws while also reducing the burden on taxpayers due to reduced expenses by federal, state, and local government officials. The September 9, 2016, letter also included suggested language for the recommended reinterpretation of the applicable Treasury Regulation. A copy of that letter is included as Attachment A).⁸

This recommended project is further supported by several Advisory Committee on Tax Exempt and Government Entities (ACT) reports to the Internal Revenue Service Commissioner. A number of the ACT reports documented this and other ways the Service can reduce the financial and other burdens on all levels of government, including the Service, by facilitating voluntary tax compliance by state and local governments.⁹ For example, as noted in the 2010 ACT Report of Recommendations to the Commissioner state and local governments do not have an incentive to avoid paying necessary and appropriate taxes for their employees.¹⁰ Also, the 2011 ACT Report noted that the Government Accountability Office (GAO) 2010 Report of Recommendations to Congress “. . . discussed at length the interrelated nature of responsibilities that the IRS shares with both the U.S. Social Security Administration (SSA) and State Social Security Administrators (State Administrators) associated with Social Security and Medicare coverage and employment taxes for state and local government employers and employees. It also encouraged the IRS and SSA to work closely with NCSSSA and the State Administrators.”¹¹ NCSSSA thinks it is logical to assume that it was merely inadvertent oversight that the Treasury Regulations were not updated when the FICA tax obligations were transferred from the states to the Service. Passage of IRC §6103 pre-dated the U.S. Code changes that transferred FICA collection responsibilities from the State Administrators to the Service effective January 1, 1987. That statutory change did NOT eliminate the necessary and appropriate oversight and administrative duties that still exist for State Administrators pursuant to 42 USC 418 and federal regulations and policies. i.e., 20 C.F.R. 404.1204 and SSA's Program Operations Manual System (POMS) State and Local (SL) Section 10001.130, State Social Security Administrator Responsibilities.

This recommendation was included as part of the testimony NCSSSA provided to Congress during the June 29, 2017, hearing before the U.S. Committee on Ways and Means, Joint Subcommittees on Social Security and Oversight (cited in footnote 7 in this letter). NCSSSA's written testimony noted the following areas for improvement in administration and management of Section 218 and mandatory Social Security/Medicare coverage: (A) restore the strong working relationship between the states, SSA, and the Service; (B) recommends that the U.S. Treasury Department adopt a reinterpretation to the Treasury Regulations associated with Internal Revenue Code §6103 (l); (C) NCSSSA and our member states need Congressional, SSA, and the Treasury Department/Service assistance to get their help in ensuring state support for the State Administrator positions nationwide; (D) revision of, and clarifications to, Treasury Regulations associated with FICA public pension replacement plans; and (E) the SSA, Service, and NCSSSA should recommit to the principles and purposes espoused in September 2011 when they established the Section 218 Council.

2. Recommend revision of, and clarifications to, Treasury Regulations associated with FICA public pension replacement plans pursuant to OBRA 1990.

The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) included requiring Social Security coverage for state and local government employees who are not already covered by Social Security under a voluntary Social Security coverage agreement (i.e., Section 218 Agreement) or a public pension plan that provides comparable benefits to those afforded by Social Security. Although there are other nuances, OBRA 1990 and the Treasury Department/Service regulations implementing that law basically identified two major types of public pension plans that are considered to be “qualifying FICA replacement plans”: defined benefit plans (Revenue Procedure 91-40) and defined contribution plans [Treasury Regulation Section 31.3121(b)(7)-2(e)(2)(iii)(A)].

Since OBRA 1990 was enacted and the Treasury Department/Service adopted regulations implementing the state and local government employees' Social Security coverage provisions, administrators of public pension plans have created additional types of pension plans beyond defined benefit and defined contribution, such as hybrid plans, cash balance plans, Section 457(b) plans, and so forth. There is no guidance for determining qualifying FICA replacement plan status of the newer and evolving types of plans.

NCSSSA also recommends that the Treasury Department/Service reconsider how Defined Contribution plans are evaluated for qualifying FICA replacement plan status pursuant to OBRA 1990. The reason for this recommendation is current Treasury Regulations only require a 7.5 percent contribution from a state or local government employer, employee, or both in order to constitute a qualifying FICA replacement plan for OBRA 1990 compliance purposes. That contribution level is inconsistent with the Social Security (Old Age-Survivor-Disability Insurance) contribution level so its comparability as a reasonable qualifying FICA replacement standard seems questionable.

NCSSSA recommends that the Treasury Department/Service prioritize new or revised guidance for the non-traditional pension plan types and re-evaluation of Defined Contribution FICA replacement public pension plans.

See Attachment B for further details on this recommendation. As with our first recommended project number 1 this recommendation was included as part of the testimony NCSSSA provided to Congress during the June 29, 2017, hearing before the U.S. Committee on Ways and Means, Joint Subcommittees on Social Security and Oversight. See NCSSSA's recommendation number one for further details on that hearing.