For an employee to be excluded from mandatory social security coverage, the employing entity must maintain a retirement system as defined by Internal Revenue Code section 3121(b)(7)(F). The employee must also be a qualified participant in that system, as defined in Internal Revenue Code Section 3121.
An entity may maintain a retirement system in which not every employee is a qualified participant. For both defined contribution plans and for defined benefit plans, the determination of whether an individual is a qualified participant is made as services are performed; however, there are different tests to determine participation.
Who is a qualified participant in a defined contribution retirement system?
An employee is a qualified participant in a defined contribution retirement system with respect to services performed on a given day if, on that day, the employee has satisfied all conditions (other than vesting) for receiving an allocation to his or her account (exclusive of earnings) that meet the minimum retirement benefit requirement. The benefit must be calculated with respect to compensation during a period ending on that day and beginning on or after the beginning of the plan year of the retirement system. This is the case regardless of whether the allocations were made or accrued before the effective date of Internal Revenue code section 3121.
Here is an example: A political subdivision maintains an elective defined contribution plan as defined by IRS regulations. The plan operates on a calendar year. It has two open seasons – in December and June – when employees can change their contribution elections. In December, an employee elects not to contribute to the plan. In June, the employee elects (beginning July 1) to contribute a uniform percentage of compensation for each pay period to the plan for the remainder of the plan year.
Who is a not a Qualified Participant?
The employee is not a qualified participant in the plan during the period January-June because no allocations are made to the employee’s account during that time. If the level of contributions during the period of July-December meets the minimum retirement benefit requirement with respect to compensation during that period the employee is treated as a qualified participant during July-December only.
An employee is a qualified participant in a defined benefit retirement system with respect to services performed on a given day if:
- on that day, the employee is (or ever has been) an actual participant in the retirement system and
- on that day, the employee actually has a total accrued benefit that meets the minimum retirement benefit requirement.
An employee may not be treated as an actual participant under certain conditions (other than vesting) that have not been satisfied. The conditions might include a requirement that the participant attain a minimum age, perform a minimum period of service, make an election in order to participate, or be present at the end of the plan year in order to be credited with an accrual.
Example of Qualified Participant
An example would be a political subdivision that maintains a defined benefit plan that is a retirement system under IRS regulations. Under the terms of the plan, service during a plan year is not credited for accrual purposes unless a participant has at least 1,000 hours of service during the year. For purposes of determining whether social security coverage applies, benefits that accrue only upon satisfaction of this 1000 hours requirement may not be taken into account in determining whether an employee is a qualified participant in the plan before the 1000 hour requirement is satisfied.
Rules for part-time, seasonal and temporary employees
Special rules apply to part-time, seasonal and temporary employees for purposes of determining whether they are qualified participants in a public retirement system. To be exempt from mandatory social security coverage, these employees must not only be qualified participants; but they must be fully vested in their benefits. This means the benefits cannot be forfeited. If a part-time, seasonal or temporary employee is not a qualified participant in a public retirement system with benefits fully vested from the first day of employment, that employee is subject to mandatory social security and Medicare tax until the employee becomes fully vested.
The special vesting requirement is considered to be met if a part-time, seasonal or temporary employee in a defined benefit plan has the right to at least 7.5 percent of the compensation the employee earned while covered under the retirement system plus interest when the employee leaves employment.
For purposes of applying the qualified participant test, part time employees are those who normally work 20 hours or less per week. If mandatory coverage applies, part time positions cannot be excluded; but part time positions may be excluded from coverage under a Section 218 Agreement, at the option of the State.
A special rule provided that teachers employed by a post-secondary educational institution such as a community or junior college, post secondary vocational school, college, university or graduate schools are not considered part-time if the teacher normally teaches half or more of the number of classroom hours normally considered to be full-time employment.
For example: A community college treats a teacher as a full-time employee if the teacher is assigned to work 15 classroom hours per week. A new teacher is assigned to work eight classroom hours per week. Because the assigned classroom hours of the new teacher are at least one-half of the school’s definition of full-time teacher, the teacher is not a part-time employee for our discussion today.
Qualified Participant Test
For purposes of applying the qualified participant test, a seasonal employee is any employee who normally works on a full-time basis less than 5 months in a year. For example, individuals who are hired by a political subdivision during the tax return season in order to process incoming returns and work full-time over a three-month period are seasonal employees.
For purposes of applying the qualified participant test, a temporary employee is one who performs services under a contractual agreement that is expected to last two years or less. Under this rule, a teacher under an annual contract may or may not be a temporary employee. Possible contract extensions must be considered in determining the duration of a contractual arrangement if there is a significant likelihood that the employee’s contract will be extended.
Contract extensions are considered likely to occur if, on average, 80 percent of similarly situated employees have had bona fide offers to renew their contracts in the immediately preceding two academic or calendar years. Contract extensions are also considered significantly likely to occur if the employee has a history of contract extensions in the current position. These special rules are covered in Regulation 31.3121(b)(7)-2(e)(2)(iii)(C).
We have covered part-time, seasonal, and temporary employees as it pertains to this qualified participant test. But what about an individual who works in more than one position?
If an employee is not covered by a Section 218 Agreement, but is a member of a retirement system with respect to one full-time position, the employee is generally treated as a member of a retirement system with respect to any other position with the same employer.
Let’s look at an example. An individual is employed full-time by a county and is a qualified participant in its retirement plan. In addition to this full-time employment, the individual is employed part-time in another position with the same county. The part-time position is not covered by the county retirement plan. Nevertheless, if the individual is a qualified participant in the retirement plan because of the full-time position, the part-time position is excluded from mandatory coverage.
This rule does not apply to employment by two different employers. For example, an individual is employed full-time by a state and is a member of its retirement plan, and is also employed part-time by a city located in the state, but does not participate in the city’s retirement system. The services of the individual for the city are not excluded from mandatory social security coverage, because the determination of whether services constitute employment for such purposes is made separately with respect to each political subdivision for which services are performed. These rules can be found in Regulation 31.3121(b)(7)-2(c)(2)