Social Security Administration
Management Oversight Needed to Ensure Accurate Treatment of State and Local Government Employees Gao ID: GAO-10-938 September 29, 2010In 2007, 73 percent of state and local government employees were covered by Social Security. Unlike the private sector where most employees are covered by Social Security, federal law generally permits each public employer to decide which employees to cover. The Social Security Administration (SSA) is responsible for facilitating Social Security coverage for these employers through agreements with states. SSA is also responsible for maintaining accurate earnings records, while IRS is responsible for ensuring Social Security taxes are paid. Because of the need to ensure Social Security coverage is administered accurately, GAO was asked to review (1) how SSA works with states to approve Social Security coverage and ensure accurate coverage of public employees, and (2) how IRS identifies incorrect Social Security taxes for public employees. GAO reviewed procedures of federal agencies and selected states; surveyed all state administrators; and reviewed IRS case files.
Although SSA approves Social Security coverage on behalf of state and local government employers, it faces challenges in ensuring accurate reporting of Social Security earnings. SSA works with states to establish and amend Social Security coverage agreements, but public employers do not always know that SSA's approval is required. For example, a small fire district in one state reported Social Security wages for more than a decade without approved coverage to do so, not realizing a coverage agreement between SSA and the state was required. While state administrators are responsible for managing the approved coverage agreements for public employers, SSA's guidance does not specify how states should go about fulfilling this responsibility, leading to variation in the extent to which states meet their responsibility. SSA lacks basic data on which public employers have approved coverage and relies on public employers to comply with coverage agreements voluntarily. SSA officials told us that the agency does not use existing information, such as lessons learned from prior coverage errors, to assess the risks that these errors pose to the accuracy of public employer wage reporting. IRS conducts compliance checks and examinations of public employers; however, examining Social Security coverage for employees is challenging due to limited data and the difficulties of determining whether employees are covered. To obtain needed data, one IRS field office sent its examiners to the SSA regional office to make copies of Social Security coverage agreements. Some other IRS field offices do not have copies of all their respective agreements. IRS tracks the results of its examinations to identify the number of public employers that need tax adjustments; however, IRS does not track whether the tax adjustments relate to Social Security coverage agreement errors even though this information is available during examinations. SSA could benefit from such information so that it could help public employers identify and correct errors. As a result, IRS's and SSA's ability to fully understand problems related to Social Security coverage is limited. GAO recommends that SSA work with IRS, state administrators, and public employers to improve management oversight and monitoring of public employer reporting of Social Security wages and that SSA clarify its guidance on state administrator responsibilities. GAO also recommends that IRS track errors found through compliance efforts and share results with SSA to the extent permitted by law. SSA and IRS reviewed the report and agreed with the recommendations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Daniel Bertoni Team: Government Accountability Office: Education, Workforce, and Income Security Phone: (202) 512-5988GAO-10-938, Social Security Administration: Managment Oversight Needed to Ensure Accurate Treatment of State and Local Government Employees
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
September 2010:
Social Security Administration:
Management Oversight Needed to Ensure Accurate Treatment of State and
Local Government Employees:
GAO-10-938:
GAO Highlights:
Highlights of GAO-10-938, a report to congressional requesters.
Why GAO Did This Study:
In 2007, 73 percent of state and local government employees were
covered by Social Security. Unlike the private sector where most
employees are covered by Social Security, federal law generally
permits each public employer to decide which employees to cover. The
Social Security Administration (SSA) is responsible for facilitating
Social Security coverage for these employers through agreements with
states. SSA is also responsible for maintaining accurate earnings
records, while IRS is responsible for ensuring Social Security taxes
are paid. Because of the need to ensure Social Security coverage is
administered accurately, GAO was asked to review (1) how SSA works
with states to approve Social Security coverage and ensure accurate
coverage of public employees, and (2) how IRS identifies incorrect
Social Security taxes for public employees. GAO reviewed procedures of
federal agencies and selected states; surveyed all state
administrators; and reviewed IRS case files.
What GAO Found:
Although SSA approves Social Security coverage on behalf of state and
local government employers, it faces challenges in ensuring accurate
reporting of Social Security earnings. SSA works with states to
establish and amend Social Security coverage agreements, but public
employers do not always know that SSA‘s approval is required. For
example, a small fire district in one state reported Social Security
wages for more than a decade without approved coverage to do so, not
realizing a coverage agreement between SSA and the state was required.
While state administrators are responsible for managing the approved
coverage agreements for public employers, SSA‘s guidance does not
specify how states should go about fulfilling this responsibility,
leading to variation in the extent to which states meet their
responsibility. SSA lacks basic data on which public employers have
approved coverage and relies on public employers to comply with
coverage agreements voluntarily. SSA officials told us that the agency
does not use existing information, such as lessons learned from prior
coverage errors, to assess the risks that these errors pose to the
accuracy of public employer wage reporting.
Figure: Key Players in the Administration of Coverage Agreements:
[Refer to PDF for image: illustration]
Public Employers (e.g., local governments):
Request employee coverage; comply with provisions of the coverage
changes; withhold Social Security taxes.
State Administrator:
Act as bridge between state, local, and federal agencies; prepare
changes to coverage agreement; and maintain files of relevant
documents.
Social Security Admin. (SSA):
Maintain and interpret coverage agreements; record earnings; approve
changes to agreements.
Internal Revenue Service (IRS):
Enforce reporting and collection of taxes; publish tax guidance.
Source: GAO analysis of agency documents.
[End of figure]
IRS conducts compliance checks and examinations of public employers;
however, examining Social Security coverage for employees is
challenging due to limited data and the difficulties of determining
whether employees are covered. To obtain needed data, one IRS field
office sent its examiners to the SSA regional office to make copies of
Social Security coverage agreements. Some other IRS field offices do
not have copies of all their respective agreements. IRS tracks the
results of its examinations to identify the number of public employers
that need tax adjustments; however, IRS does not track whether the tax
adjustments relate to Social Security coverage agreement errors even
though this information is available during examinations. SSA could
benefit from such information so that it could help public employers
identify and correct errors. As a result, IRS‘s and SSA‘s ability to
fully understand problems related to Social Security coverage is
limited.
What GAO Recommends:
GAO recommends that SSA work with IRS, state administrators, and
public employers to improve management oversight and monitoring of
public employer reporting of Social Security wages and that SSA
clarify its guidance on state administrator responsibilities. GAO also
recommends that IRS track errors found through compliance efforts and
share results with SSA to the extent permitted by law. SSA and IRS
reviewed the report and agreed with the recommendations.
View GAO-10-938 or key components. For more information, contact
Daniel Bertoni at (202) 512-7215 or bertonid@gao.gov.
[End of section]
Contents:
Letter:
Background:
SSA Has a Process to Approve Coverage, but Faces Challenges in
Ensuring Accurate Coverage:
IRS's Compliance Efforts Are Limited by a Lack of Social Security
Coverage Information:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Social Security-Covered and Estimated Noncovered Earnings
from State and Local Government Employment in 2007:
Appendix III: Number and Year of Last Modification Approved by SSA, as
of January 1, 2010:
Appendix IV: SSA's Guidance Related to the Responsibilities of State
Social Security Administrators:
Appendix V: List of Committees Formed by SSA at Its April 2010
Conference:
Appendix VI: Comments from the Social Security Administration:
Appendix VII: Comments from the Internal Revenue Service:
Appendix VIII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Selected Legislative Changes Impacting Social Security
Benefits for Public Employees:
Table 2: Number of State Databases That Include Certain Types of
Information:
Table 3: Fiscal Year 2007 to 2009 Compliance Checks Completed and
Discrepancy Letters Issued for Employment Tax Issues:
Table 4: Fiscal Year 2007 to 2009 Examinations Completed and Number
with Tax Adjustments for Employment Tax Issues:
Figures:
Figure 1: Percentage of State and Local Government Employees Covered
in 2007 for Social Security by State:
Figure 2: Shared Responsibilities for Administering Section 218
Agreements:
Figure 3: Modification Approval Process:
Figure 4: SSA Guidance Undertaken by State Administrators to a Very
Great or Great Extent to Manage Coverage Agreements:
Figure 5: Types of Outreach Activities Conducted by State
Administrators at Least Annually to Assist Public Employers:
Figure 6: Wage-Reporting and Tax Payment Process of SSA and IRS:
Figure 7: Determining Social Security or Medicare Coverage of State
and Local Government Employees:
Abbreviations:
FICA: Federal Insurance Contributions Act:
FSLG: Federal, State and Local Governments Office:
IRS: Internal Revenue Service:
MOU: Memorandum of Understanding:
NCSSSA: National Conference of State Social Security Administrators:
SSA: Social Security Administration:
TIGTA: Treasury Inspector General for Tax Administration:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
September 29, 2010:
The Honorable John Lewis:
Chairman:
The Honorable Charles Boustany, Jr.
Ranking Member:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
The Honorable Earl Pomeroy:
Acting Chairman:
The Honorable Sam Johnson:
Ranking Member:
Subcommittee on Social Security:
Committee on Ways and Means:
House of Representatives:
The Honorable John S. Tanner:
House of Representatives:
Before certain amendments to the Social Security Act were made in
1950, public employees were not covered by Social Security. After
1950, public employers increasingly provided Social Security coverage
for their employees, and by 2007, about 73 percent of public employees
were covered. Currently, state and local governments, in conjunction
with the Social Security Administration (SSA), generally decide
whether or not to provide Social Security coverage to their employees
who are members of a public retirement system.[Footnote 1] Every state
has an agreement, called a section 218 agreement, with SSA that
details which public employees are covered by Social Security.
According to SSA and state officials, these agreements ensure that
granting Social Security coverage complies with state and federal law,
since certain states have laws that prohibit Social Security coverage
for certain employees. Great variation exists between states and local
governments in terms of which positions are covered by Social Security
and which are not. For example, although in the same state, police in
one city may be covered, while police in another city may not be
covered. SSA is responsible for maintaining accurate records of Social
Security-covered wages, and relies on the state administrators and the
Internal Revenue Service (IRS) to help in this responsibility. IRS
audits in 2007 found that potentially hundreds of school districts in
the state of Missouri had not accurately reported the coverage status
of certain part-time teachers and other school staff, resulting in
confusion over the Social Security coverage status of these employees,
and uncertainty for affected employees.
Because of the need to ensure that Social Security coverage is
administered consistent with the requirements of the Social Security
Act, we reviewed SSA's procedures for overseeing public employer wage
reporting. Specifically, this report addresses (1) how SSA works with
states to approve Social Security coverage and ensure accurate
coverage of public employees, and (2) how IRS identifies incorrect
Social Security taxes for public employees.
To answer these questions, we used a variety of methods to review the
procedures of SSA, states, and IRS. To address how SSA works with
states to approve Social Security coverage and ensure accurate
coverage of public employees, we reviewed relevant federal laws and
regulations and conducted interviews with SSA officials in
headquarters and all 10 regional offices. We also reviewed the
Memorandum of Understanding between SSA and IRS, as well as data from
SSA, such as the percent of covered state and local government
employees. We administered a Web-based survey and received responses
from all state Social Security administrators of the 50 states, Puerto
Rico, and Virgin Islands between January and February 2010;
interviewed state officials in selected states regarding coverage
agreements; and reviewed relevant documents, such as policies and
procedures of state administrators.[Footnote 2] To address how IRS
identifies incorrect Social Security taxes for public employees, we
reviewed relevant federal laws and regulations, agency policies, and
documents on Social Security and Medicare taxes for public employers.
We also conducted interviews with IRS officials in the Federal, State
and Local Governments office (FSLG) within the Tax Exempt and
Government Entities Division. We also obtained IRS data on
examinations and compliance checks completed between fiscal years 2007
and 2009. Finally, we reviewed a judgmental sample of FSLG audit files
for 10 examinations and 20 compliance checks completed in fiscal year
2009. We did not review state laws or verify information pertaining to
state laws that were given to us in the course of our work.
We conducted this performance audit from July 2009 through September
2010 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. See
appendix I for additional information about our methodology.
Background:
When the Social Security Act was passed in 1935, state and local
government employees were excluded from Social Security. As a result,
some state and local government workers who were not covered by a
retirement system were left without benefits when they retired. To
help these employees, in 1950, Congress added section 218 to the
Social Security Act allowing states to enter into voluntary agreements
to provide Social Security coverage to certain state and local
government employees.[Footnote 3] Section 218 authorizes the 50
states, Puerto Rico, and the Virgin Islands to enter into these
agreements.[Footnote 4] Although under section 218 of the Act, the
District of Columbia, Guam, the Commonwealth of the Northern Mariana
Islands, and American Samoa are excluded from the definition of
"state," employees within these territories can have Social Security
coverage under other provisions of the Act. Within a year of this
amendment, about 30 states had executed section 218 agreements with
the Social Security Administration.
Subsequently, additional amendments to the Social Security Act changed
Social Security and Medicare coverage for state and local government
workers. Starting in 1991, the Social Security Act required all state
and local government employees to be covered by Social Security if
they were not covered by a qualifying state or local retirement
system. Table 1 describes some of these amendments relating to the
coverage of state and local government workers.
More recently, Social Security has projected future financial
shortfalls in its programs. According to Social Security's Board of
Trustees, the program's annual surpluses of tax income over
expenditures are expected to turn to cash flow deficits this year
before turning positive again in 2012.[Footnote 5] In addition, all of
the accumulated Treasury obligations held by the trust funds are
expected to be exhausted by 2037. Once exhausted, annual program
revenue will be sufficient to pay only about 78 percent of scheduled
benefits in 2037 (and gradually declining to 75 percent by 2084),
according to the Social Security trustees' 2010 intermediate
assumptions.
Many options have been proposed to help assure the financial stability
of Social Security, among them requiring all newly hired public
employees to participate in the program. Although this approach could
improve Social Security's finances at least temporarily and would
simplify Social Security as it pertains to public employees, we have
previously reported that such a change could also result in increased
costs for the affected governments and their employees.[Footnote 6]
Table 1: Selected Legislative Changes Impacting Social Security
Benefits for Public Employees:
Law: Social Security Act Amendments of 1950[A];
Description of relevant portion of legislation: Section 218 was added,
which gave states the option of providing Social Security coverage to
certain state and local government employees.
Law: Social Security Amendments of 1954[B];
Description of relevant portion of legislation: At state option, state
and local government employees covered under a retirement system were
allowed coverage under Social Security, if a vote is held.
Law: Social Security Amendments of 1983[C];
Description of relevant portion of legislation: A provision was
repealed that had allowed states to terminate the agreement with
respect to any coverage group. In effect, states could no longer
terminate coverage for covered employees.[D]
Law: Consolidated Omnibus Budget Reconciliation Act of 1985[E];
Description of relevant portion of legislation: Employees hired after
March 31, 1986, are mandatorily covered by Medicare Hospital Insurance
only, unless specifically excluded by law. For state and local
government employees hired before April 1, 1986, Medicare coverage may
be elected under an agreement between SSA and states.
Law: Omnibus Budget Reconciliation Act of 1986[F];
Description of relevant portion of legislation: Public employers were
required to pay their Social Security payments directly to the IRS
rather than to the State Social Security Administrator.
Law: Omnibus Budget Reconciliation Act of 1990[G];
Description of relevant portion of legislation: Starting on July 2,
1991, state and local government employees who were not members of a
qualifying state or local retirement system were generally required to
have Social Security coverage.[H]
Source: GAO analysis.
[A] Pub. L. No. 81-734, § 106 (1950).
[B] Pub. L. No. 83-761, § 101(h)(2) (1954).
[C] Pub. L. No. 98-21, § 103 (1983).
[D] The state of California challenged the law, arguing it had a
contractual right to terminate its agreement and that Congress had
violated the takings clause of the Fifth Amendment by denying the
state its contractual right without just compensation. The Supreme
Court rejected California's argument that the contract had established
a property right within the meaning of the Fifth Amendment. Bowen v.
Pub. Agencies Opposed to Soc. Sec. Entrapments, 477 U.S. 41 (1986).
[E] Pub. L. No. 99-272, § 13205 (1986).
[F] Pub. L. No. 99-509, § 9002 (1986).
[G] Pub. L. No. 101-508, § 11332 (1990).
[H] IRS rules generally treat an employee as a member of a retirement
system if he or she participates in a system that provides retirement
benefits, and has an accrued benefit or receives an allocation under
the system that is comparable to the benefits he or she would have or
receive under Social Security. 26 C.F.R. § 31.3121(b)(7)-2(b).
[End of table]
Social Security Coverage Agreements with States:
The extent to which public employees are covered by Social Security
varies greatly from state to state. For example, according to SSA
data, in Vermont, 98 percent of public employees are covered, but in
Ohio, only about 3 percent are covered. Figure 1 shows the variation
in Social Security coverage of public employees among states, and
appendix II provides the amount of covered and noncovered earnings by
employees in each state. Within states, there is also variation in
Social Security coverage among public employees working for the same
employer. Some public employers provide a retirement system for some
of their employees who meet certain criteria. If employees do not meet
these criteria and are ineligible for the retirement system such as a
pension system, they are covered by Social Security. In other
instances, public employers may choose to provide only Medicare
coverage rather than both Social Security and Medicare.
Figure 1: Percentage of State and Local Government Employees Covered
in 2007 for Social Security by State:
[Refer to PDF for image: illustrated U.S. map]
Percentage of State and Local Government Employees covered for Social
Security in 2007: 0-50%:
California:
Colorado:
Louisiana:
Massachusetts:
Nevada:
Ohio:
Texas:
Percentage of State and Local Government Employees covered for Social
Security in 2007: 51-75%:
Alaska:
Connecticut:
Georgia:
Hawaii:
Illinois:
Kentucky:
Maine:
Missouri:
Percentage of State and Local Government Employees covered for Social
Security in 2007: 76-90%:
Arkansas:
Florida:
Michigan:
Montana:
New Hampshire:
New Mexico:
North Dakota:
Puerto Rico:
Rhode Island:
Washington:
Wisconsin:
Wyoming:
Percentage of State and Local Government Employees covered for Social
Security in 2007: 91-100%:
Alabama:
Arizona:
Delaware:
Idaho:
Indiana:
Iowa:
Kansas:
Maryland:
Minnesota:
Mississippi:
Nebraska:
New Jersey:
New York:
North Carolina:
Oklahoma:
Oregon:
Pennsylvania:
South Carolina:
South Dakota:
Tennessee:
Utah:
Vermont:
Virginia:
West Virginia:
Source: GAO analysis of SSA data; National Atlas of the United States
(map).
Note: SSA data did not provide the percentage of covered public
employees specifically in the Virgin Islands.
[End of figure]
All states have a section 218 agreement with the SSA that allows them
to extend Social Security and/or Medicare coverage to designated
public employees. With an agreement in force, SSA and the state can
coordinate and ensure that granting coverage to public employees
complies with applicable state and federal laws, since according to
SSA and state officials, state laws can restrict certain employees who
are members of other retirement plans from receiving Social Security
coverage. SSA requires states to designate a state employee as a state
Social Security administrator and establishes the basic roles and
responsibilities for these administrators. For example, the guidance
outlines that state administrators should serve as a bridge between
state and local public employers and federal agencies, as well as
administer and maintain the Social Security coverage agreement.
If public employers within the states wish to extend Social Security
coverage to their employees, their state administrator files a draft
amendment to the coverage agreement--known as a modification--with
their SSA regional office. After the state process is completed and
the SSA Regional Office approves the modification, the public employer
should begin withholding Social Security and Medicare taxes for the
employee positions that are covered and send information on earnings
to SSA. SSA is required by law to maintain accurate earnings records
for all workers. SSA uses an employee's earnings record to calculate
the amount of Social Security benefits--retirement, disability, or
survivor benefits--for an individual or their dependents. Covered
earnings, which are posted to the earning record, are subject to
Social Security and Medicare taxes paid by employers and employees.
IRS is responsible for assuring state and local government employers
are properly paying Social Security and Medicare taxes (also known as
FICA taxes).[Footnote 7] Figure 2 shows the major responsibilities for
these government partners.
Figure 2: Shared Responsibilities for Administering Section 218
Agreements:
[Refer to PDF for image: illustration]
Public Employers (e.g., local governments):
Request employee coverage; comply with provisions of the coverage
changes; withhold Social Security taxes.
State Administrator:
Act as bridge between state, local, and federal agencies; prepare
changes to coverage agreement; and maintain files of relevant
documents.
Social Security Admin. (SSA):
Maintain and interpret coverage agreements; record earnings; approve
changes to agreements.
Internal Revenue Service (IRS):
Enforce reporting and collection of taxes; publish tax guidance.
Source: GAO analysis of agency documents.
[End of figure]
[Text box: How Errors Can Happen: A Synopsis of the Social Security
Coverage Errors in Missouri:
In 2007, IRS conducted audits in the state of Missouri that identified
vulnerabilities to providing Social Security coverage to public
employees. In 2003, a retired Missouri teacher, who was not covered
for Social Security as a teacher, returned to work as a bus driver.
The employee raised questions at a local SSA field office about why
she was not covered for Social Security as a bus driver, and this
inquiry eventually led to a broad review of the coverage in Missouri's
school districts, including a few IRS audits in 2007 to 2008.
Missouri's school districts have two separate retirement systems--one
pension plan that includes full-time teachers and another that
includes full-time nonteachers. According to federal and state
officials, each of these pension plans operates under different rules,
namely the full-time teachers do not generally have Social Security
coverage while full-time nonteachers do. State and federal officials
found that, over decades, several changes in state law altered the
membership rules of these two pensions, especially the eligibility for
part-time employees. The effects of these changes on Social Security
coverage were not well understood and contributed to widespread
coverage errors in hundreds of districts, according to state and
federal documents. For example, some teachers were incorrectly paying
Social Security taxes when they were not eligible to receive Social
Security coverage. Others were not paying Social Security taxes
although they were covered by Social Security. To resolve the coverage
errors and determine which positions in school districts had approved
coverage, a task force of SSA, IRS, and state officials met several
times from December 2008 to February 2009 and issued a report in March
2009. From 2009 to 2010, SSA and state officials on the task force
took steps in Missouri, including educational outreach to school
districts, to help these public employers understand the correct
Social Security coverage of their employees and to report covered
wages accurately starting July 2010. While it is still unknown how
many employees were affected, the task force estimated that
potentially hundreds of school districts have employees whose earnings
records may need to be corrected so that they can receive the benefits
to which they are entitled. Since IRS did not collect any back taxes
from audited school districts, SSA and IRS officials told us that the
U.S. Treasury and Social Security Trust Funds would effectively bear
the cost of any long-standing coverage errors and FICA taxes that
school districts and employees did not pay. To date, eight Missouri
school districts have already gone through the process with SSA and
the state for correcting their coverage under the state's agreement.
End of text box]
SSA Has a Process to Approve Coverage, but Faces Challenges in
Ensuring Accurate Coverage:
SSA Works with States to Approve Social Security Coverage, but It Is
Unclear If Public Employers Always Know When to Seek Approval:
SSA has an established process for working with states to approve
coverage. This approval process is intended to ensure that public
employers follow applicable state and federal laws regarding Social
Security coverage, as some state laws exclude certain types of
employees from receiving Social Security coverage, according to SSA
and state officials. For example, current New Hampshire law prohibits
Social Security coverage for police and fire fighters, who belong to a
distinct, more generous pension plan than other public employees in
New Hampshire, according to state officials. To obtain Social Security
coverage, public employers first contact their state Social Security
administrator who files an amendment--known as a modification--to the
state's coverage agreement with SSA.[Footnote 8] Because all states
already have an approved agreement with SSA, any changes to include
additional public employers are modifications to the agreement. If the
coverage is proposed for employees who are members of a retirement
system, then a favorable vote of eligible employees is required. The
SSA regional office reviews the modification to ensure that it
complies with all relevant laws and procedures. If it is determined
these public employees are authorized for coverage, the regional
office approves the modification and transmits it back to the state.
After coverage has been approved, the public employer begins
withholding Social Security and Medicare taxes for the employees in
covered positions. Under certain circumstances, SSA may approve
retroactive coverage, which is effective prior to the date that SSA
approves the modification. Figure 3 shows the modification approval
process.
Figure 3: Modification Approval Process:
[Refer to PDF for image: illustration]
Public Employers (e.g., local government):
Public employer requests coverage for employees from the state.
If employers are members of a retirement system, Social Security
coverage must be approved by a vote of eligible employees. The State
Administrator conducts the vote.
State Government:
State administrator reviews request and determines if public
employer‘s employees are authorized for Social Security coverage and
if approving the modification to the coverage agreement would meet
state law.
If request is approved, state administrator prepares and submits
modification to SSA[A].
Social Security Admin. Regional Offices (SSA):
SSA reviews modification and determines if public entity‘s employees
are authorized for Social Security coverage in accordance with federal
and state law.
State Government:
If approved, state official signs the modification.
Social Security Admin. Regional Offices (SSA):
If approved, the SSA Regional Commissioner signs the modification.
SSA files original modification and sends a copy to SSA headquarters
and IRS.
State Government:
State files the original modification.
Internal Revenue Service (IRS):
IRS maintains a copy of the modification to update its data base of
public employers.
Source: GAO analysis of agency documents.
[A] A state administrator may send a signed modification to SSA for
review.
[End of figure]
States may file modifications to their coverage agreement on behalf of
public employers under a variety of circumstances. For example, SSA
guidance specifies that a state is to amend its agreement to (1)
extend coverage to new groups of employees, (2) identify new public
employers joining a public retirement system, (3) correct errors in
coverage, (4) implement changes in federal or state law, and (5) in
very limited circumstances, make certain exclusions to previously
covered services or positions. According to our survey of state Social
Security administrators,[Footnote 9] we found that administrators in
36 states had approved a modification in the last 5 years. Of these 36
states, the most commonly cited reasons for approving a modification
were to include additional coverage groups (23 states), followed by
correcting coverage errors (20 states), and notifying SSA of new
public employers joining a retirement system that SSA has already
approved for coverage on a statewide basis (19 states).[Footnote 10]
States do not always notify SSA of changes to covered public
employers, which can lead to errors in the accuracy of SSA records.
Under SSA guidance, state administrators are to provide notice and
evidence to SSA when a public employer legally ceases to exist, or
dissolves.[Footnote 11] Our survey of state administrators showed that
SSA does not consistently receive information from states about
dissolutions. Only 9 states reported collecting information on all
dissolutions among their public employers, while 16 states reported
collecting little or none of this information. For example, in one
state we visited, over 100 school employees were granted retroactive
coverage a decade after their school district had been formed. The new
school district was formed by consolidating two school districts that
had dissolved, but an amendment to the state's coverage agreement had
not been approved at the time of the consolidation to reflect the
change. Also, when existing employers legally consolidate, another
modification may be necessary to provide coverage for the new
consolidated employer. While 11 states responded that they collect
information on all consolidations that occur among their public
employers, 14 states responded that they collect little to none of
this information. Another 7 states reported that they did not know how
much information they collect on dissolutions or consolidations. If
states do not collect information on dissolutions or consolidations,
they do not know about these changes to public employers and are
unable to work with SSA to approve coverage and prevent errors.
Depending on the circumstances in a particular state, several SSA and
state officials told us that states lacking recent modifications may
signal that the state or its public employers do not understand the
established process for obtaining Social Security coverage approval,
or may not be actively overseeing coverage agreements. Our analysis of
January 2010 SSA data showed that several states had no modifications
approved since the 1990s, while over 20 states received approval as
recently as last year. (See appendix III for the number and year of
the last modification that SSA approved as of January 1, 2010.) In New
York, where SSA last approved a modification in 1994, SSA records show
that a prior state administrator mistakenly thought that modifications
were no longer necessary and did not submit any, despite state actions
to consolidate public employers. Similarly, in Missouri, whose last
modification had been approved in 1997, several SSA and state
officials told us that the state administrator had been inactive until
becoming involved to address the widespread coverage errors in many
school districts (see text box on page 9). According to officials who
resolved the coverage errors in Missouri, the state and school
districts did not understand or communicate certain aspects of their
coverage agreement. For example, the terms of existing modifications
continued to apply to covered positions, even though subsequent state
laws expanded the membership of retirement systems for the school
districts. Instead of continuing to provide coverage based on the
modifications, school districts based their coverage on the subsequent
laws, and as a result, the state experienced coverage errors that were
found decades after the laws passed.
States Vary in Their Efforts to Implement SSA Guidelines:
All states have a state Social Security administrator who is
responsible for managing Social Security coverage for both state and
local public employers, but state administrators vary in their efforts
to implement SSA guidelines. SSA has established the basic roles and
responsibilities for these administrators by providing guidance on
administering the provisions of the state Social Security agreement
(see appendix IV). However, SSA's guidance is broad and does not
specify how a state administrator should fulfill these
responsibilities. As a result, state administrators vary in the extent
to which they meet their responsibilities. For example, while SSA's
guidance notes that state administrators are to administer and
maintain the coverage agreement, the guidance does not provide detail
on the types of activities that are necessary for meeting this
responsibility--such as the frequency with which modifications should
be reviewed to determine whether changes to public employers have
occurred. For example, as noted above, both New York and Missouri were
unclear on their administrative responsibility, resulting in both
states being at risk for coverage errors. Additionally, SSA's guidance
notes that state administrators should advise public employers on
Social Security, Medicare, and tax withholding issues; and according
to our survey, only 14 states reported doing this to a very great or
great extent. Likewise, only 18 states reported following SSA's
guidance on providing information to public employers on policies,
procedures, and standards to a very great or great extent (see figure
4).
Figure 4: SSA Guidance Undertaken by State Administrators to a Very
Great or Great Extent to Manage Coverage Agreements:
[Refer to PDF for image: horizontal bar graph]
Selected responsibilities in SSA guidance: Maintain physical custody
of Social Security coverage agreements[A];
Number of state administrators: 50.
Selected responsibilities in SSA guidance: Serve as a bridge between
state and local government employers and federal agencies (such as SSA
regional offices);
Number of state administrators: 22.
Selected responsibilities in SSA guidance: Provide information to
public employers in accordance with the state‘s enabling legislation,
policies, procedures, and standards;
Number of state administrators: 18.
Selected responsibilities in SSA guidance: Resolve coverage and
taxation questions associated with a Social Security coverage
agreement and changes to the coverage agreement with SSA and IRS;
Number of state administrators: 17.
Selected responsibilities in SSA guidance: Advise public employers on
Social Security, Medicare, and tax withholding issues;
Number of state administrators: 14.
Selected responsibilities in SSA guidance: Provide SSA with notice and
evidence of the legal dissolution of covered state and local public
employers;
Number of state administrators: 9.
Source: GAO analysis of survey results.
[A] Number of state administrators who responded yes to our survey
question asking whether they maintain physical custody of the section
218 agreement.
[End of figure]
In the absence of more detailed SSA or other guidance on how states
should manage Social Security coverage for state and local public
employers, the National Conference of State Social Security
Administrators (NCSSSA)[Footnote 12] in 2003 developed a list of
recommended practices for use by state administrators. These
recommended practices help state administrators to carry out SSA's
guidance. For example, one NCSSSA practice recommends that state
administrators maintain an electronic database so that they can meet
the SSA guidance on maintaining physical custody of Social Security
coverage agreements. While 37 states reported maintaining an
electronic database of state and local public employers with Social
Security coverage, we found that only 28 of these states' databases
include more detailed coverage information such as the date of each
employer's modifications (see table 2). Moreover, 14 states could not
provide the total number of public employers with approved coverage
for their employees in their state. We also found differences in the
extent to which states review these databases to check for accuracy
and completeness. Of the 37 states with an electronic database, 5
states reported not updating their information and 1 state did not
know how often they updated their database information. Further, only
7 states reported taking all of the following steps to ensure the
information was reliable: conducting routine monitoring of the data,
using edit checks to identify out-of-range entries, and verifying the
data for accuracy.
Table 2: Number of State Databases That Include Certain Types of
Information:
Type of information included in state databases: List of all
noncovered public employers;
Number of state databases that contain this information: 6.
Type of information included in state databases: List of all covered
public employers[A];
Number of state databases that contain this information: 32.
Type of information included in state databases: More detailed data on
all covered public employers (e.g., date of modification, groups
covered, etc.);
Number of state databases that contain this information: 28.
Source: GAO analysis of survey results.
[A] For the purposes of our survey and this report, we defined
"covered public employer" as a state or local government employer that
is subject to a coverage agreement for at least some of the employer's
positions.
[End of table]
SSA's guidance also sets forth that state administrators are to
provide certain information or advice to public employers, but falls
short in denoting specific ways such outreach activities can be
carried out, such as the format for distributing information and time
frames for carrying out such activities. For example, one state
administrator told us that he regularly attended local public employer
association conferences so that he could identify new public employers
and provide advice to them. However, officials in another state told
us that they did not have any formal outreach practices and updated
their information on new public employers when they read about them in
the newspaper. As a result, the state administrator could not ensure
that its list of public employers was current. While SSA's guidance is
limited, NCSSSA has developed recommended practices for conducting
outreach efforts to public employers, such as presenting at local
association meetings, providing information via a Web site or
newsletters, or pursuing other means of outreach. Such efforts can
help states educate and respond to questions about coverage
agreements. According to our survey, nine states reported regularly
(i.e., at least annually) distributing a newsletter or providing
training, while just over one-quarter of states contact public
employers included in coverage agreements to update their information
(see figure 5). In contrast, 21 states reported that they do not
conduct any of these outreach activities. Ten of these states have
nearly universal Social Security coverage for their public employees
and four states had less than half of their public employees covered
by Social Security.
Figure 5: Types of Outreach Activities Conducted by State
Administrators at Least Annually to Assist Public Employers:
[Refer to PDF for image: horizontal bar graph]
Selected outreach activity: Contact public employers under the Social
Security coverage agreement to update their contact information;
Number of state administrators: 14.
Selected outreach activity: Update an information Web site on the
state home page that includes contact information for the state
administrator;
Number of state administrators: 13.
Selected outreach activity: Conduct presentations on coverage
agreement issues at professional society or association meetings;
Number of state administrators: 9.
Selected outreach activity: Distribute a newsletter that includes
information on coverage agreement issues;
Number of state administrators: 9.
Selected outreach activity: Provide training on coverage agreement
issues;
Number of state administrators: 9.
Selected outreach activity: Address state legislative or state
executive bodies;
Number of state administrators: 3.
Selected outreach activity: None of the above;
Number of state administrators: 21.
Source: GAO analysis of survey results.
[End of figure]
The variation in how states implement the activities outlined in SSA
guidance can also be explained in part by the training, experience,
and staffing of state administrators. Some state administrators
reported they were initially unfamiliar with coverage agreements and
noted there was little or no transfer of knowledge to help them learn
about coverage issues. Twenty-seven administrators reported receiving
little or no training from their predecessor. Of those administrators
who had not received training, 93 percent had never worked on Social
Security coverage issues at all prior to becoming the administrator.
Administrators cited several reasons for the lack of training or
knowledge-sharing by predecessors, including classification of these
positions (e.g., political appointees), turnover among staff, and lack
of funding.
To address this training gap, NCSSSA developed a training module which
they recently began providing to state administrators. As of July
2010, 11 state administrators have received this training, according
to NCSSSA officials we interviewed. Additionally, in our survey, the
availability of staff with expertise in coverage agreements was
identified as a great or very great challenge by 19 states.
Differences in the amount of time dedicated to the position of state
administrator also varied among states. Most state administrators view
the role as an ancillary responsibility, and not as their primary
duty. Over half of those working as state administrators reported
spending 10 percent or less of their time on state administrator
responsibilities.
SSA Has Limited Management Oversight of Public Employee Wage Reporting:
SSA relies primarily on public employers to correctly interpret their
coverage and accurately report covered wages of public employees,
according to SSA officials. However, some public employers do not
understand that a modification to the state's agreement with SSA is
required before amending coverage under section 218 and reporting
Social Security wages. For example, a small fire district in one state
reported Social Security wages for more than a decade without approved
coverage to do so, not realizing coverage under an agreement between
SSA and the state was required. Several SSA officials told us that
they also rely on IRS to review the compliance of public employers.
The Social Security Act requires SSA to ensure that all workers have
accurate earnings records. SSA requires employers--public and private--
to use SSA's process of wage reporting (see figure 6) to report Social
Security covered wages. In 2007, private and public employers reported
nearly $5 trillion in covered wages, with public employers
representing $528 billion of that amount. (See appendix II on covered
and estimated noncovered wages for state and local government
employment in 2007.) The Form W-2 is the annual report of a worker's
wages, including wages covered for Social Security and for Medicare.
SSA posts the wages to the employee's earnings record on its Master
Earnings File and provides IRS with the W-2 information so IRS can
monitor accurate payment of Social Security taxes. SSA and IRS
annually match the amounts on Form W-2 with wages that employers
report to IRS on a quarterly basis.[Footnote 13] When the amounts
match, no further steps are taken. When the amounts do not match, SSA
and IRS have processes to reconcile the amounts, including letters to
contact the employer.[Footnote 14]
Figure 6: Wage-Reporting and Tax Payment Process of SSA and IRS:
[Refer to PDF for image: illustration]
Public Employer:
Form W-2 (Wage reports): to Social Security Admin. (SSA);
Form 941 (Quarterly tax returns): to Internal Revenue Service (IRS).
SSA and IRS compare wage amounts:
Amounts match: No further steps taken;
Amounts don't match: Notice sent to reconcile amounts.
SSA: Covered wages posted to employee‘s earnings record in SSA Master
Earnings File.
IRS: Taxes collected for U.S. Treasury.
Source: GAO analysis of SSA and IRS documents.
[End of figure]
SSA does not have a process to ensure that public employers only
report wages for covered employees and that such wages are associated
with valid coverage under the state's coverage agreement. As long as
the wage amounts on the Forms W-2 and 941 match, SSA does not follow
up to ensure that reported wages actually reflect public employees who
are covered by their state's agreement. SSA officials told us the
agency does not compare the reported wages with coverage modifications
applicable to the employer. While wage reports identify employees by
their name and Social Security number, procedures and data do not
exist to verify that employees are in positions that are covered by
their state's agreement. SSA regional officials told us they answer
questions by public employers about whether employees are covered
based on their interpretation of coverage agreements. However, SSA
officials are not able to check if the public employers correctly
report covered earnings.
While SSA does not currently monitor the accuracy of public employee
coverage, prior to 1987, SSA conducted regular oversight activities to
ensure more accurate reporting. Prior to 1987, state administrators
gathered Social Security payments in lieu of FICA taxes from public
employers with approved coverage. States were therefore accountable
for payments from public employers and employees in their state. SSA
was responsible for ensuring that state and local government employers
made the correct payments for the Social Security Trust Funds. Given
its responsibility, SSA conducted compliance reviews and collected
data on public employers, such as lists of which public employers were
part of the coverage agreement. In 1987, a legislative change took
effect requiring the IRS to collect Social Security taxes from public
employers and employees directly.[Footnote 15] As a result, public
employers were required to withhold Social Security taxes from their
employees and pay taxes to the Treasury using the same procedures as
private sector employers. SSA and the states reduced staffing,
management attention, and oversight of coverage agreements. SSA also
reduced its oversight of public employers, including discontinuing
compliance reviews and ending certain data collection. In 1996, SSA's
Inspector General found that many public employers were at risk of not
complying with their states' coverage agreements, partly due to SSA's
reduced focus on administration after this statutory change.[Footnote
16] The Inspector General recommended that SSA pursue regular
compliance reviews; develop a Memorandum of Understanding (MOU) with
IRS; and study the possibility of universal coverage of public
employers to eliminate the inherent complexity of their coverage. In
2002, SSA and IRS signed an MOU regarding the compliance of state and
local government employers that specified each agency's role,
including IRS's responsibility to conduct compliance reviews of public
employers. Among other things, the MOU established a joint SSA-IRS
committee to share information on policies, procedures, and compliance
issues.
SSA continues to lack basic data on the public employers for which it
has approved coverage, preventing the agency from monitoring potential
errors. According to Standards for Internal Control in the Federal
Government, data are important for an agency to manage its operations
and measure its activities.[Footnote 17] However, SSA does not track
the number of public employers that are under a state's approved
coverage agreement or various activities that could expose public
employers to greater risk of committing coverage errors. From data
given to us by all 10 SSA regions, we estimated that since 1951 when
coverage agreements began, SSA has approved as many as 28,798
modifications extending Social Security coverage for public employers.
(See appendix III for information on the number and year of the last
modification approved by SSA for each state as of January 1, 2010.)
However, 6 of 10 SSA regional offices no longer collect any
information on which public employers have approved coverage, and SSA
officials told us they have not required regional offices to update
their data, partly due to resource constraints. SSA has also not
provided the regional offices with guidelines for what should be
collected and how. As a result, six regions currently collect no data
at all, while the four regions still collecting data varied in the
data formats and level of detail of the information collected. For
example, based on data we reviewed from regional officials, one region
had a database with details on public employers and their coverage,
while another region had a list with little information other than the
names of public employers and the date that SSA approved coverage.
Without comprehensive and uniform data, SSA may miss opportunities to
prevent or more quickly correct errors related to public employee
wages. For example, if all regions tracked information such as recent
approved modifications, SSA could better identify which states had
less activity, and could follow up to ensure that those states and
public employers were aware of the circumstances that would warrant
filing a modification. In addition, SSA is unable to fully support IRS
in its efforts to ensure compliance. For example, SSA does not
validate IRS's database of public employers--including covered
employers--which may not always contain correct data. Moreover, the
lack of current or consistently tracked data can limit the efficiency
with which regions research or answer questions about a particular
employer. For example, one SSA regional office official said that in
order to identify a modification with information relevant to a
particular employer, it takes up to an hour to manually search paper
files for any modification made after 1987.
Officials in nearly all 10 SSA regions told us their oversight efforts
to ensure accurate reporting of public employers generally involve
reacting to errors or questions brought to their attention. When a
concern is identified, SSA regional officials respond to address the
coverage of a particular employer based on specific facts and
circumstances. For example, IRS conducted an audit of a public port
and worked with SSA to determine whether the employer had covered
employees, according to SSA officials and documents. SSA determined
that the employer's predecessor had a modification for coverage, but
the new employer did not have coverage for its full-time employees.
SSA assisted the state and the employer to file a modification that
would retroactively grant coverage to these employees. Had SSA
actively worked with the state and used data to observe trends with
modifications, the state and SSA may have prevented this error or
caught it sooner.
SSA has also been asked to resolve errors involving public employers
that are subject to a modification, but these employers and their
employees have not paid Social Security taxes. If SSA was notified of
the error and evidence of employees' earnings was produced by
employers or employees, SSA officials told us that the agency would
correct their earnings records. IRS is authorized to collect back-
taxes subject to its statute of limitations, which is generally 3
years.[Footnote 18] Unfortunately, some of the coverage errors in
Missouri school districts involved public employers and employees who
stopped paying Social Security taxes in the 1980s. Thus, the U.S.
Treasury and Social Security Trust Funds effectively bear the cost of
any taxes employers or employees did not pay beyond the 3-year statute
of limitations, according to SSA and IRS officials. Similarly, if an
error goes undetected or uncorrected, then public employees may not
have Social Security earnings posted to their record. This could
result in employees who should be covered by Social Security not
becoming eligible or not receiving the appropriate amount of Social
Security benefits in the event of retirement, disability, or
survivorship.
SSA officials told us that the agency does not use existing
information to assess the extent to which coverage errors are
occurring and the risk that these errors pose to the accuracy of
public employer wage reporting. According to Standards for Internal
Control in the Federal Government, risk assessment is the
identification and analysis of relevant risks associated with
achieving the agency's objectives.[Footnote 19] SSA has many internal
and external sources of information it could use to assess the risks
of inaccurate coverage of public employees. However, SSA headquarter
officials told us that SSA may not be aware of all errors or related
factors that regional offices address, unless they are elevated to
headquarters for assistance. SSA officials in headquarters and
regional offices generally told us that SSA in recent years has not
routinely shared experiences across regions, including lessons learned
from coverage errors and factors that contribute to them. For example,
one SSA regional office helped resolve a coverage problem that
involved a consolidation of a state's capital city and the county in
which it was located. Because the public safety officers of the city
were not covered while the public safety officers of the county were
covered, the consolidation had the potential to change the Social
Security coverage of some public safety positions. Under current
budgetary pressures, some states are considering or pursuing similar
consolidations to reduce costs; however, SSA headquarters did not
share lessons learned from this example with other regions so that
they could be better prepared to address similar issues in the future.
SSA headquarters also does not routinely review internal legal
opinions--known as coverage determinations--or modifications that SSA
regional offices have approved to correct coverage errors. SSA
officials told us that they have not analyzed such information in a
systematic approach to identify any patterns or common issues. Also,
SSA officials in 8 of 10 regions told us that IRS does not typically
share the results of its enforcement activities, and IRS officials
agreed. As a result, SSA is not always aware of the coverage errors
that IRS finds during examinations and compliance checks.
SSA hosted a conference in April 2010 with IRS and state
administrators to explore options for improving how coverage
agreements are administered. Based on this conference, SSA identified
possible proposals to reduce the complexity of public employees'
coverage, including the potential for universal coverage. It also
formed 11 committees consisting of SSA and state or IRS officials.
Each week, at least one committee is supposed to meet, and quarterly
conference calls are planned for all participants to discuss their
progress starting in September 2010. According to SSA, two committees
are of the highest priority: the committee to improve training of
federal, state, and local governments, as well as the committee on
policies and procedures. A list of the 11 committees and their
objectives is in appendix V.
IRS's Compliance Efforts Are Limited by a Lack of Social Security
Coverage Information:
IRS Is Responsible For Ensuring Public Employers Pay Social Security
Taxes but Determining Coverage Is Challenging:
Since 1987, IRS has been the primary agency responsible for ensuring
that public employers are accurately paying Social Security and
Medicare taxes, and its level of enforcement has increased over the
years. According to IRS officials, IRS performed limited enforcement
work during the first 10 years after they became responsible for
receiving public employer Social Security taxes. In 1997, IRS started
a state and local government compliance initiative to provide outreach
to public employers. In fiscal year 2000, IRS created the Federal,
State and Local Governments office (FSLG) to facilitate more accurate
reporting and collection of Social Security and Medicare taxes by
public employers, among other activities. Initially, FSLG allocated
most of its time to educational activities, but in fiscal year 2004
began to focus more on enforcement activities.
IRS's enforcement program consists of compliance checks and
examinations. IRS reviews selected employers each year, based partly
on its workload and staff availability. A compliance check is a method
of reaching out to public employers, and is intended to be
educational. Compliance checks review public employer tax returns and
are typically less detailed than an examination. Generally, compliance
checks are performed on smaller public employers, partly to allocate
IRS enforcement resources. By conducting compliance checks on smaller
employers, IRS can review and educate a greater number of public
employers, while still allocating staff time and resources to conduct
more time-consuming examinations on larger, more complex public
employers. For compliance checks, IRS completes a checklist of
selected employment tax areas. Our review of the checklist found that
it includes four questions about Social Security coverage agreements:
(1) Does the taxpayer have an agreement? (2) Does the taxpayer have a
copy of the agreement? (3) What are the number, date, and description
of the modification to the agreement? (4) What categories of workers
are excluded from Social Security coverage? If issues are found during
the compliance check, IRS provides the employer with a discrepancy
letter identifying problems to be resolved. We reviewed a
nongeneralizable sample of 20 compliance checks completed in fiscal
year 2009 that IRS identified as having issues related to Social
Security coverage agreements. In 11 of these cases, the public
employer was not covered under the state's Social Security coverage
agreement. In 6 of the other cases in which the state or local
government employer was actually covered under the state's coverage
agreement, IRS found that the employer did not have a copy of its
modification and in one of these cases, the employer did not know one
was in effect. In another case, a school district that was covered
under its state agreement dissolved, and then combined with another
school district that also was subject to a modification. The school
district being reviewed was not certain if the coverage agreement was
still in effect and planned to contact the state Social Security
administrator to determine if a new modification was necessary.
IRS also has the authority to conduct examinations of public
employers' records to determine the correct tax liability. Unlike
compliance checks, examinations are in-depth, formal audits that may
result in a tax assessment. Examinations review many areas, including
proper Social Security withholding, fringe benefits, and public
retirement systems. For each examination, the IRS examiner is supposed
to obtain information about the applicable Social Security coverage
agreement and determine the employees that are covered. In making its
coverage determination, IRS examiners have to review employer records
and may informally contact the state administrators and SSA. Figure 7
shows the basic procedures IRS uses to determine if public employees
are covered by Social Security or Medicare. Generally, examinations
are performed on larger public employers, and took an average of
almost 9 months in fiscal year 2009 to complete. If errors are found,
IRS can either make a tax assessment for the amount owed by the
employer or, among other things, refund an overpayment.[Footnote 20]
Generally, IRS does not provide information about its enforcement
activities to SSA or state administrators. IRS is subject to statutory
provisions that generally prevent it from disclosing taxpayer
information unless there is an exception authorizing disclosure in the
law.[Footnote 21] One such exception is for purposes of administering
certain portions of the Social Security Act, in which case the
information can be disclosed to SSA upon a written request.[Footnote
22] The MOU between IRS and SSA states that it serves as such a
request, but IRS still does not generally tell SSA about its
examinations and compliance checks because, according to IRS
officials, many of its examiners are not aware of the MOU. According
to IRS officials, state administrators do not have an exception to the
disclosure requirements so the agency is prevented from providing
information to them.
Figure 7: Determining Social Security or Medicare Coverage of State
and Local Government Employees:
[Refer to PDF for image: illustration]
1. Is the position or service covered for Social Security and Medicare
under a Social Security coverage agreement?
If yes: Withhold Social Security and Medicare, unless an exclusion
applies;
If no: go to step 2.
2. Is employee a qualified member of a public retirement system?
If no: Withhold mandatory Social Security and Medicare, unless an
exclusion applies;
If yes: go to step 3.
3. Is employee covered by a Social Security coverage agreement
providing Medicare-only coverage for employees hired prior to April 1,
1986?
If yes: Withhold Medicare for those employees, unless an exclusion
applies;
If no: go to step 4.
4. Does Medicare Continuing Employment Exception apply?
If yes: Withhold neither Social Security nor Medicare;
If no: Withhold Medicare only, unless an exclusion applies.
Source: IRS Publication 963, Federal-State Reference Guide.
Note: The Medicare Continuing Employment Exception provides that state
and local government employees hired prior to April 1, 1986, are
exempt from mandatory Medicare taxes, if they meet certain
requirements.
[End of figure]
IRS Has Limited Information about Public Employers' Social Security
Coverage but Is Working to Obtain Additional Information:
IRS receives limited information about public employers' Social
Security coverage. Employers are generally required to submit
quarterly tax returns to IRS providing information on wages and Social
Security and Medicare taxes paid.[Footnote 23] According to an IRS
official, IRS started to receive copies of coverage modifications from
SSA around fiscal year 2000, but IRS generally does not distribute
copies of the modifications to all field offices. To obtain a complete
set of modifications, IRS officials in one field office told us they
went to the SSA regional office and duplicated them. Although some IRS
offices lack a complete set of modifications, the agency maintains a
database of public employers and over half of these employers are
designated as being covered under a Social Security coverage agreement.
To increase its knowledge about state and local government employers'
Social Security coverage, in 2009, IRS developed an assessment
document designed to identify states with potential coverage problems.
The assessment document is filled out by IRS officials and the state
administrator and is intended to capture general information such as
the name of the state administrator and staff, and the applicable SSA
and IRS officials responsible for that state. The assessment also
requests the number of modifications and if the state maintains a list
of employers covered under its coverage agreement. Ultimately, IRS
plans to use the information obtained to identify states needing
outreach and education. By October 2009, IRS had developed a draft
document and later obtained and incorporated input from SSA and NCSSSA
officials. IRS pilot tested it in January 2010 and, according to an
IRS official, started using the document in all states in July 2010.
IRS officials noted that they intend to use the document as the basis
for continued communication, outreach, and enforcement.
In addition, from 2008 to 2010, an advisory committee to IRS developed
a detailed self-evaluation document for public employers to assess
their own compliance. The self-evaluation document expands on the IRS
checklist used in compliance checks to include understandable
information on employment tax requirements, including Social Security
and Medicare taxes. IRS plans to refine and post the document on its
Web site by the end of 2010 in an attempt to enhance voluntary
compliance by public employers.
IRS Is Evaluating Its Case Selection Process and Results of Its
Compliance Checks and Examinations:
In 2006, the Treasury Inspector General for Tax Administration (TIGTA)
issued a report that reviewed IRS's FSLG workload selection process
and identified issues related to tracking the effectiveness of the
indicators used to select cases for review and to analyzing the
results of compliance checks.[Footnote 24] IRS utilizes 14 indicators
to select cases for review from over 103,000 state and local
government employers. One indicator is used to identify issues related
to Social Security coverage by computing the ratio of Social Security
wages to total wages paid.[Footnote 25] Under this computation, a
lower ratio of Social Security wages to total wages increases the
chances that an employer is selected for review. However, a low ratio
may not always indicate noncompliance with the state's Social Security
coverage agreement. For example, a Social Security coverage agreement
may not include some employees and would result in a lower ratio of
Social Security wages to total wages paid. TIGTA found that IRS was
not systematically analyzing the effectiveness of its selection
process. The TIGTA report said that, with this information, IRS could
identify more productive indicators and provide baseline measures of
the levels of noncompliance identified. IRS officials told us that
they are currently conducting a special analysis of the indicators
used for its examinations and compliance checks conducted in 2006,
2007, and 2008, and hope to complete this analysis by 2011.
In 2006, TIGTA also found that IRS was not analyzing the results of
completed compliance checks to identify common issues found during
reviews, and our recent work found that IRS still does not routinely
conduct such analysis. For compliance checks, IRS tracks the number of
employers that were issued a discrepancy letter, but not the number
that had issues related to Social Security coverage. In fiscal years
2007 to 2009, IRS issued discrepancy letters to over 79 percent of the
public employers that had a compliance check. However, IRS does not
know what percent of the employers did not comply with their state's
Social Security coverage agreement. In 2009, IRS performed a special
analysis of its 2008 compliance checks to determine the issues found
during the year. IRS found that 4.1 percent of all of its closed
compliance checks had Social Security coverage issues. In 2006, TIGTA
concluded that by analyzing the results of its compliance checks, IRS
could identify common issues and focus its work for future compliance
checks. IRS is currently conducting a special analysis of the results
of its compliance checks, as well as its examinations conducted in
2006, 2007, and 2008. It plans to use this information and information
from other special projects to identify the most common areas of
noncompliance. IRS will then provide focused outreach to state and
local government employers to address these areas. This outreach could
include publishing articles in the IRS newsletter or other industry
journals. IRS officials told us that they anticipate completing this
analysis by 2011.
Table 3 provides information on the number of compliance checks
completed and discrepancy letters issued in fiscal years 2007 to 2009.
Table 3: Fiscal Year 2007 to 2009 Compliance Checks Completed and
Discrepancy Letters Issued for Employment Tax Issues:
Fiscal year: 2007 compliance checks;
Closed cases for employers covered under Social Security coverage
agreements[A]: 563;
Cases with discrepancy letters for all employment tax issues[B]: 499;
Percentage: 88.6%.
Fiscal year: 2008 compliance checks;
Closed cases for employers covered under Social Security coverage
agreements[A]: 409;
Cases with discrepancy letters for all employment tax issues[B]: 364;
Percentage: 89.0%.
Fiscal year: 2009 compliance checks;
Closed cases for employers covered under Social Security coverage
agreements[A]: 355;
Cases with discrepancy letters for all employment tax issues[B]: 281;
Percentage: 79.2%.
Source: FSLG data.
[A] These data do not include the number of examinations on public
employers who are not covered under a coverage agreement.
[B] Employment tax issues include many issues, one of which is Social
Security coverage.
[End of table]
For examinations, FSLG tracks the number of cases that resulted in an
adjustment to the employers' taxes, but does not know if such tax
adjustments are due to errors with Social Security coverage
agreements. FSLG officials told us they do not yet know the prevalence
of coverage problems and have not done enough audits to fully
understand the extent of the problems. We requested the closed
examinations for fiscal year 2009 that had issues related to Social
Security coverage agreements. FSLG officials stated that due to
constraints in their information system, they could not identify all
of these cases and, at best, could provide a list of examinations that
might indicate Social Security coverage agreement issues using the
amount of wage adjustments. We selected and reviewed a sample of 10
closed examinations provided by IRS that had large wage changes. In 5
of these examinations, the public employer did not have an error
related to its coverage agreement. In 3 of the other 5 cases in which
errors were found with coverage agreements, the public employer
misclassified the employees for whom it was not paying Social Security
taxes. For example, some Social Security coverage agreements exclude
certain categories of employees, such as student workers. In one of
these cases, IRS conducted an examination of a public employer with
student workers and determined that some of the employees classified
as students were not actually taking classes at the time. As a result,
IRS found that the employer was responsible for paying Social Security
and Medicare taxes for these employees. The following table provides
information on the number of completed examinations and the number of
cases with errors in fiscal years 2007 through 2009.
Table 4: Fiscal Year 2007 to 2009 Examinations Completed and Number
with Tax Adjustments for Employment Tax Issues:
Fiscal year: 2007 examinations;
Closed cases for employers covered under Social Security coverage
agreements[A]: 269;
Number of cases with tax adjustments for all employment tax issues[B]:
245;
Percentage: 91.1%.
Fiscal year: 2008 examinations;
Closed cases for employers covered under Social Security coverage
agreements[A]: 391;
Number of cases with tax adjustments for all employment tax issues[B]:
349;
Percentage: 89.3%.
Fiscal year: 2009 examinations;
Closed cases for employers covered under Social Security coverage
agreements[A]: 259;
Number of cases with tax adjustments for all employment tax issues[B]:
233;
Percentage: 90.0%.
Source: FSLG data.
[A] These data do not include the number of examinations on public
employers who are not covered under a coverage agreement.
[B] Employment tax issues include many issues, one of which is Social
Security coverage.
[End of table]
In fiscal years 2007 to 2009, over 89 percent of employers examined
had tax adjustments, but the reasons for those tax adjustments are not
tracked. In 2009, IRS issued a report on community colleges that
provides an indication of how well some state and local government
employers were following their state's coverage agreements. The
primary objective of the report was to measure the compliance level of
community colleges and identify specific issues of noncompliance. IRS
selected a random sample of 88 community colleges for examination.
Although the community college special project results cannot be
applied to all public employers, IRS found that 10 percent of the 88
employers reviewed incorrectly excluded workers who should have been
covered by their state's Social Security coverage agreements.
Conclusions:
SSA and IRS do not currently have the information needed and
procedures in place to effectively and efficiently provide oversight
of Social Security coverage for public employees. When IRS began
collecting and overseeing the accuracy of the taxes collected in 1987,
SSA ceased key monitoring activities that could help ensure states and
public employers are following the states' agreements for Social
Security coverage. Ensuring the accuracy of the Social Security
records for public employees is still a requirement for SSA, and
should be a priority for the managers of SSA and IRS. At present, SSA
and IRS managers do not know the extent to which wages are reported
accurately or to which Social Security taxes are paid in accordance
with program rules. States can also play a vital role in the oversight
structure of Social Security coverage for public employees, but lack
clear guidelines with specific responsibilities to ensure state
participation. Absent additional management attention and a system to
monitor the accuracy of public employer wage reporting, Social
Security benefits and tax payments may be inaccurately reported.
Without a coordinated monitoring process between SSA and IRS to make
sure that public employers are complying with state coverage
agreements, opportunities to identify and correct errors will be lost.
Given the projected fiscal challenges of the Social Security program
in the coming decades, every attempt should be made to assure coverage
is correctly applied so that employers and employees are reporting
earnings and paying taxes when required to do so.
Recommendations for Executive Action:
To improve SSA's management oversight of retirement benefits for
public employees, we recommend that the Commissioner of Social
Security, in consultation with IRS, state administrators, and public
employers, develop procedures for monitoring the accuracy of Social
Security earnings records. This could include (1) improving data
collected on public employers, (2) identifying risk factors using
existing SSA information and IRS audit findings, and (3) targeting
public employers with those risk factors for follow-up reviews on an
ongoing basis.
To improve the states' administration of public employer wage
reporting, we recommend that the Commissioner of Social Security, in
consultation with the National Conference of State Social Security
Administrators, modify SSA's policy guidance to clarify state
responsibilities governing their oversight of public employers and set
clear expectations for the steps state administrators should take in
implementing these responsibilities.
To improve the process for identifying and correcting errors, we
recommend that the Commissioner of Internal Revenue track errors found
through its compliance efforts on Social Security and Medicare taxes
and share results with SSA, to the extent permitted by federal law.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Social Security
Administration and the Internal Revenue Service. In its written
response, reproduced in appendix VI, SSA stated that our report fairly
represented the key players involved in the administration of Social
Security coverage agreements and provided a balanced representation of
the issues. SSA generally agreed with all of our recommendations, but
suggested that we reword our first recommendation to clarify the
duties of the respective agencies. SSA also stated that IRS should
collect data on employees covered under Section 218 agreements. We
changed the language in the recommendation to clarify that SSA should
monitor the accuracy of Social Security earnings records and
highlighted that existing Social Security information as well as IRS
audit findings may be useful in developing risk factors. While we
believe that any monitoring effort should be coordinated with IRS and
other stakeholders, our recommendation is intended for SSA to take the
leadership role in such an effort. As we note in the conclusion above,
SSA holds the primary responsibility of ensuring accurate Social
Security records for public employees. SSA also provided technical
comments that were incorporated into this report as appropriate.
In its written response, reproduced in appendix VII, IRS stated that
our report made an important contribution to the concept of ensuring
compliance with coverage agreements. IRS agreed with our
recommendation that it should track errors found through its
compliance efforts on Social Security and Medicare taxes and stated
that it has begun identifying and tracking such errors. IRS also
stated that it will ensure that information applicable to these errors
is shared with SSA to the extent allowable by the Internal Revenue
Code.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to relevant congressional committees. In addition, this report will be
available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-7215 or bertonid@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff members who made key
contributions to this report are listed in appendix VIII.
Signed by:
Daniel Bertoni:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Scope and Methodology:
SSA Process for Ensuring Accurate Coverage:
To obtain information on how the Social Security Administration (SSA)
ensures accurate coverage of public employees, we interviewed SSA
officials in Headquarters and in all 10 Regional Offices. We asked
officials about the roles and interactions of SSA, state
administrators, public employers, and the Internal Revenue Service
(IRS). We asked about SSA's data, educational outreach, and oversight,
as well as how coverage errors are detected and corrected. We reviewed
relevant federal laws and regulations. We also reviewed documentation
from SSA, such as policies and procedures, training, Inspector General
reports, the Memorandum of Understanding (MOU) between SSA and IRS,
and meeting minutes since fiscal year 2004 of the joint SSA-IRS
committee. To understand the coverage agreement process, we reviewed
selected original agreements, modifications (i.e., amendments) that
provide coverage to public employees, internal legal opinions known as
coverage determinations, and documents on specific coverage errors
such as the report of the Federal Section 218 Task Force for Missouri
School Districts.
To provide background information on the number of covered state and
local government employees and the amount of covered earnings, we
requested data from SSA on covered state and local government
employment from 2007--the most recent year for which data were
available. Specifically, we requested the number and percent of state
and local government workers with and without Social Security coverage
in each state. We also requested the amount of earnings (i.e., wages)
of state and local government workers that were covered and not
covered in each state. SSA's Office of Research, Evaluation and
Statistics used its 1 percent sample of Social Security numbers, which
is generalizable to the universe of workers. The sample contains
earnings data that employers report to SSA on Form W-2. The data do
not specify the source of coverage, such as coverage agreements under
section 218 or the provisions under section 210 of the Social Security
Act.[Footnote 26] For the purposes of our tables, the data assume that
state and local government workers do not have other, nonpublic
employment. To assess the reliability of the data, we reviewed
relevant documents and interviewed knowledgeable SSA officials. On the
basis of this information, we determined that the data for 2007 were
sufficiently reliable for the purposes of our review.
To provide information on how many modifications to the coverage
agreement SSA has approved by state, we requested the number and year
of the most recently approved modification for each state.[Footnote
27] From SSA, we requested that the 10 regional offices provide the
number and date of the amendment (i.e., modification) most recently
approved by SSA as of January 1, 2010. From states, we requested the
same information through our Web-based survey. We then compared the
results and performed follow-up work, where needed. We also reviewed
relevant documents and interviewed knowledgeable SSA and state
officials about the process to approve modifications for coverage.
Based on these steps, we determined that the data we specially
requested on the number and year of the last approved modification
were sufficiently reliable for the purposes of our review.
State Roles in Social Security Coverage Process:
To understand the role of states in ensuring accurate coverage, we
visited four states--California, Colorado, New Hampshire, and Rhode
Island. We selected these states to provide a variety of experiences,
based on the percent of covered employees, geographic dispersion, and
indicators or referrals from SSA or the National Conference of State
Social Security Administrators (NCSSSA) of how active the state
administrator is. During our site visits, we interviewed the state
officials who administer the state's coverage agreement with SSA. We
asked about the role of the state administrator, the practices to
administer the coverage agreement, as well as staffing and funding to
do so. We also asked about interactions with SSA and IRS. We reviewed
documents from states, such as policies and procedures, and select
parts of the coverage agreement. We did not review state laws or
verify information pertaining to state laws that were given to us in
the course of our work. We also conducted interviews and obtained
documents from officials of the NCSSSA.
To obtain further information on states administering Social Security
coverage agreements, we conducted a Web-based survey that was sent to
state administrators in all 50 states, Puerto Rico, and the Virgin
Islands.[Footnote 28] The survey was conducted between January and
February 2010 and had a response rate of 100 percent. The survey
included questions about the characteristics of states' coverage
agreements, the extent to which state administrators conduct
activities to manage these agreements, as well as the challenges state
administrators face in administering these agreements.
Because this was not a sample survey, there are no sampling errors.
However, the practical difficulties of conducting any survey may
introduce nonsampling errors, such as variations in how respondents
interpret questions and their willingness to offer accurate responses.
We took a number of steps to minimize nonsampling errors. For example,
a social science survey specialist designed the questionnaire in
collaboration with GAO staff with subject matter expertise. As part of
survey development, we received feedback from NCSSSA. The
questionnaire also underwent a peer review by a second GAO survey
specialist. We also pretested the questionnaire with appropriate
officials in four states--Colorado, Florida, Indiana, and Nevada--to
ensure that the questions and information provided to respondents were
appropriate, concise, and clearly stated. We selected pretest states
based on variation in the percentage of covered public employees,
geographic dispersion, and the level of state administrator
involvement identified by NCSSSA officials. The pretesting took place
during November and December 2009 by telephone. Since these were Web-
based surveys, respondents entered their answers directly into
electronic questionnaires. This eliminated the need to have data keyed
into databases, thus removing an additional source of error. Finally,
to further minimize errors, computer programs used to analyze the
survey data were independently verified by a second GAO data analyst
to ensure the accuracy of this work.
While we did not validate specific information that administrators
reported through our survey, we reviewed their responses and took
steps to determine that they were complete, reasonable, and
sufficiently reliable for the purposes of this report. For example,
during pretesting, we took steps to ensure definitions and terms used
in the survey were clear and familiar to the respondents, categories
provided in closed-ended questions were complete and exclusive, and
the ordering of survey sections and the questions within each section
were appropriate. In our review of the data, we also identified and
logically fixed skip pattern errors' questions that respondents should
have skipped but did not. On the basis of our checks, we believe our
survey data are sufficient for the purposes of this report.
IRS Identification of Incorrect Social Security Taxes:
To understand how IRS identifies incorrect Social Security taxes for
public employees, we held interviews with IRS managers in the Federal,
State and Local Governments office (FSLG), which is responsible for
the tax compliance of federal, state, and local government employers,
including their Social Security coverage. We asked FSLG officials
about how IRS selects state and local government employers to review,
performs examinations and compliance checks, corrects any errors in
coverage and taxes, and interacts with SSA and states. We reviewed
relevant federal laws and regulations. In addition, we reviewed
relevant documents, including policies and procedures, training
materials, criteria to select employers for review, the MOU between
SSA and IRS, reports from special projects, and publicly available
forms and publications.
We obtained IRS data on enforcement activities it conducted between
fiscal years 2007 and 2009, including examinations and compliance
checks completed in each state, and the results of these enforcement
activities. For examinations, IRS provided information about whether
the examination resulted in a tax adjustment. For compliance checks,
IRS provided information about number of cases that resulted in a
discrepancy letter. We reviewed documents and contacted knowledgeable
IRS officials about the data. For the purposes of our review, we
determined these data were sufficiently reliable.
To understand how IRS identifies Social Security errors for public
employees, we reviewed a judgmental sample of FSLG audit files for 10
examinations and 20 compliance checks of state and local government
employers that were completed in fiscal year 2009. Because IRS does
not track this information, we asked FSLG to provide lists of
examinations and compliance checks with an indication of noncompliance
for Social Security coverage. IRS officials told us that the
indications of noncompliance, particularly for examinations, are
imperfect. For example, IRS examiners may not consistently use the
codes to denote noncompliance related to Social Security coverage
agreements. Because examinations are in-depth reviews that may result
in changes to reported earnings and taxes, we selected 10 of 34
examinations with larger increases and decreases of Social Security or
Medicare earnings. For compliance checks, IRS identified 20 closed
compliance checks that found issues with approved Social Security
coverage. We selected all of these cases for our review. We reviewed
the files to gather information on how IRS detected errors, what the
errors were, and how they were resolved. The review of these files is
for illustrative purposes and is not generalizable to all state and
local government employers.
We conducted this performance audit from July 2009 to September 2010
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Social Security-Covered and Estimated Noncovered Earnings
from State and Local Government Employment in 2007:
(Dollars in millions, rounded to nearest million).
Total;
Social Security-covered earnings: $527,552;
Percent of state and local government earnings covered for social
security: 71;
Estimated noncovered earnings: $213,534;
Percent of state and local government earnings not covered for social
security: 29;
Estimated total of covered and noncovered earnings[A]: $741,085.
Alabama;
Social Security-covered earnings: $10,489;
Percent of state and local government earnings covered for social
security: 97;
Estimated noncovered earnings: $372;
Percent of state and local government earnings not covered for social
security: 3;
Estimated total of covered and noncovered earnings[A]: $10,860.
Alaska;
Social Security-covered earnings: $757;
Percent of state and local government earnings covered for social
security: 42;
Estimated noncovered earnings: $1,038;
Percent of state and local government earnings not covered for social
security: 58;
Estimated total of covered and noncovered earnings[A]: $1,795.
Arizona;
Social Security-covered earnings: $12,460;
Percent of state and local government earnings covered for social
security: 92;
Estimated noncovered earnings: $1,042;
Percent of state and local government earnings not covered for social
security: 8;
Estimated total of covered and noncovered earnings[A]: $13,503.
Arkansas;
Social Security-covered earnings: $4,533;
Percent of state and local government earnings covered for social
security: 94;
Estimated noncovered earnings: $264;
Percent of state and local government earnings not covered for social
security: 6;
Estimated total of covered and noncovered earnings[A]: $4,797.
California;
Social Security-covered earnings: $40,281;
Percent of state and local government earnings covered for social
security: 40;
Estimated noncovered earnings: $60,506;
Percent of state and local government earnings not covered for social
security: 60;
Estimated total of covered and noncovered earnings[A]: $100,787.
Colorado;
Social Security-covered earnings: $3,625;
Percent of state and local government earnings covered for social
security: 30;
Estimated noncovered earnings: $8,631;
Percent of state and local government earnings not covered for social
security: 70;
Estimated total of covered and noncovered earnings[A]: $12,256.
Connecticut;
Social Security-covered earnings: $5,998;
Percent of state and local government earnings covered for social
security: 55;
Estimated noncovered earnings: $4,948;
Percent of state and local government earnings not covered for social
security: 45;
Estimated total of covered and noncovered earnings[A]: $10,946.
Delaware;
Social Security-covered earnings: $2,083;
Percent of state and local government earnings covered for social
security: 92;
Estimated noncovered earnings: $190;
Percent of state and local government earnings not covered for social
security: 8;
Estimated total of covered and noncovered earnings[A]: $2,274.
District of Columbia;
Social Security-covered earnings: $1,929;
Percent of state and local government earnings covered for social
security: 64;
Estimated noncovered earnings: $1,075;
Percent of state and local government earnings not covered for social
security: 36;
Estimated total of covered and noncovered earnings[A]: $3,003.
Florida;
Social Security-covered earnings: $36,344;
Percent of state and local government earnings covered for social
security: 95;
Estimated noncovered earnings: $2,062;
Percent of state and local government earnings not covered for social
security: 5;
Estimated total of covered and noncovered earnings[A]: $38,407.
Georgia;
Social Security-covered earnings: $14,971;
Percent of state and local government earnings covered for social
security: 75;
Estimated noncovered earnings: $4,900;
Percent of state and local government earnings not covered for social
security: 25;
Estimated total of covered and noncovered earnings[A]: $19,870.
Hawaii;
Social Security-covered earnings: $3,129;
Percent of state and local government earnings covered for social
security: 83;
Estimated noncovered earnings: $627;
Percent of state and local government earnings not covered for social
security: 17;
Estimated total of covered and noncovered earnings[A]: $3,755.
Idaho;
Social Security-covered earnings: $3,266;
Percent of state and local government earnings covered for social
security: 98;
Estimated noncovered earnings: $75;
Percent of state and local government earnings not covered for social
security: 2;
Estimated total of covered and noncovered earnings[A]: $3,341.
Illinois;
Social Security-covered earnings: $11,498;
Percent of state and local government earnings covered for social
security: 36;
Estimated noncovered earnings: $20,322;
Percent of state and local government earnings not covered for social
security: 64;
Estimated total of covered and noncovered earnings[A]: $31,819.
Indiana;
Social Security-covered earnings: $11,415;
Percent of state and local government earnings covered for social
security: 92;
Estimated noncovered earnings: $972;
Percent of state and local government earnings not covered for social
security: 8;
Estimated total of covered and noncovered earnings[A]: $12,387.
Iowa;
Social Security-covered earnings: $6,903;
Percent of state and local government earnings covered for social
security: 96;
Estimated noncovered earnings: $323;
Percent of state and local government earnings not covered for social
security: 4;
Estimated total of covered and noncovered earnings[A]: $7,226.
Kansas;
Social Security-covered earnings: $6,826;
Percent of state and local government earnings covered for social
security: 96;
Estimated noncovered earnings: $262;
Percent of state and local government earnings not covered for social
security: 4;
Estimated total of covered and noncovered earnings[A]: $7,088.
Kentucky;
Social Security-covered earnings: $6,024;
Percent of state and local government earnings covered for social
security: 67;
Estimated noncovered earnings: $2,936;
Percent of state and local government earnings not covered for social
security: 33;
Estimated total of covered and noncovered earnings[A]: $8,960.
Louisiana;
Social Security-covered earnings: $1,358;
Percent of state and local government earnings covered for social
security: 17;
Estimated noncovered earnings: $6,617;
Percent of state and local government earnings not covered for social
security: 83;
Estimated total of covered and noncovered earnings[A]: $7,974.
Maine;
Social Security-covered earnings: $971;
Percent of state and local government earnings covered for social
security: 36;
Estimated noncovered earnings: $1,716;
Percent of state and local government earnings not covered for social
security: 64;
Estimated total of covered and noncovered earnings[A]: $2,687.
Maryland;
Social Security-covered earnings: $14,596;
Percent of state and local government earnings covered for social
security: 93;
Estimated noncovered earnings: $1,112;
Percent of state and local government earnings not covered for social
security: 7;
Estimated total of covered and noncovered earnings[A]: $15,708.
Massachusetts;
Social Security-covered earnings: $553;
Percent of state and local government earnings covered for social
security: 3;
Estimated noncovered earnings: $15,414;
Percent of state and local government earnings not covered for social
security: 97;
Estimated total of covered and noncovered earnings[A]: $15,968.
Michigan;
Social Security-covered earnings: $22,157;
Percent of state and local government earnings covered for social
security: 95;
Estimated noncovered earnings: $1,246;
Percent of state and local government earnings not covered for social
security: 5;
Estimated total of covered and noncovered earnings[A]: $23,404.
Minnesota;
Social Security-covered earnings: $11,793;
Percent of state and local government earnings covered for social
security: 93;
Estimated noncovered earnings: $892;
Percent of state and local government earnings not covered for social
security: 7;
Estimated total of covered and noncovered earnings[A]: $12,685.
Mississippi;
Social Security-covered earnings: $6,042;
Percent of state and local government earnings covered for social
security: 97;
Estimated noncovered earnings: $161;
Percent of state and local government earnings not covered for social
security: 3;
Estimated total of covered and noncovered earnings[A]: $6,203.
Missouri;
Social Security-covered earnings: $7,733;
Percent of state and local government earnings covered for social
security: 65;
Estimated noncovered earnings: $4,087;
Percent of state and local government earnings not covered for social
security: 35;
Estimated total of covered and noncovered earnings[A]: $11,820.
Montana;
Social Security-covered earnings: $1,813;
Percent of state and local government earnings covered for social
security: 95;
Estimated noncovered earnings: $92;
Percent of state and local government earnings not covered for social
security: 5;
Estimated total of covered and noncovered earnings[A]: $1,904.
Nebraska;
Social Security-covered earnings: $3,673;
Percent of state and local government earnings covered for social
security: 91;
Estimated noncovered earnings: $351;
Percent of state and local government earnings not covered for social
security: 9;
Estimated total of covered and noncovered earnings[A]: $4,024.
Nevada;
Social Security-covered earnings: $252;
Percent of state and local government earnings covered for social
security: 4;
Estimated noncovered earnings: $5,640;
Percent of state and local government earnings not covered for social
security: 96;
Estimated total of covered and noncovered earnings[A]: $5,891.
New Hampshire;
Social Security-covered earnings: $2,317;
Percent of state and local government earnings covered for social
security: 84;
Estimated noncovered earnings: $453;
Percent of state and local government earnings not covered for social
security: 16;
Estimated total of covered and noncovered earnings[A]: $2,769.
New Jersey;
Social Security-covered earnings: $25,237;
Percent of state and local government earnings covered for social
security: 91;
Estimated noncovered earnings: $2,483;
Percent of state and local government earnings not covered for social
security: 9;
Estimated total of covered and noncovered earnings[A]: $27,720.
New Mexico;
Social Security-covered earnings: $5,322;
Percent of state and local government earnings covered for social
security: 93;
Estimated noncovered earnings: $409;
Percent of state and local government earnings not covered for social
security: 7;
Estimated total of covered and noncovered earnings[A]: $5,731.
New York;
Social Security-covered earnings: $65,384;
Percent of state and local government earnings covered for social
security: 99;
Estimated noncovered earnings: $898;
Percent of state and local government earnings not covered for social
security: 1;
Estimated total of covered and noncovered earnings[A]: $66,282.
North Carolina;
Social Security-covered earnings: $19,799;
Percent of state and local government earnings covered for social
security: 98;
Estimated noncovered earnings: $449;
Percent of state and local government earnings not covered for social
security: 2;
Estimated total of covered and noncovered earnings[A]: $20,248.
North Dakota;
Social Security-covered earnings: $1,393;
Percent of state and local government earnings covered for social
security: 95;
Estimated noncovered earnings: $76;
Percent of state and local government earnings not covered for social
security: 5;
Estimated total of covered and noncovered earnings[A]: $1,469.
Ohio;
Social Security-covered earnings: $160;
Percent of state and local government earnings covered for social
security: 1;
Estimated noncovered earnings: $25,332;
Percent of state and local government earnings not covered for social
security: 99;
Estimated total of covered and noncovered earnings[A]: $25,492.
Oklahoma;
Social Security-covered earnings: $7,012;
Percent of state and local government earnings covered for social
security: 92;
Estimated noncovered earnings: $651;
Percent of state and local government earnings not covered for social
security: 8;
Estimated total of covered and noncovered earnings[A]: $7,663.
Oregon;
Social Security-covered earnings: $8,280;
Percent of state and local government earnings covered for social
security: 97;
Estimated noncovered earnings: $224;
Percent of state and local government earnings not covered for social
security: 3;
Estimated total of covered and noncovered earnings[A]: $8,505.
Pennsylvania;
Social Security-covered earnings: $24,040;
Percent of state and local government earnings covered for social
security: 93;
Estimated noncovered earnings: $1,757;
Percent of state and local government earnings not covered for social
security: 7;
Estimated total of covered and noncovered earnings[A]: $25,797.
Puerto Rico;
Social Security-covered earnings: $4,676;
Percent of state and local government earnings covered for social
security: 83;
Estimated noncovered earnings: $960;
Percent of state and local government earnings not covered for social
security: 17;
Estimated total of covered and noncovered earnings[A]: $5,636.
Rhode Island;
Social Security-covered earnings: $1,938;
Percent of state and local government earnings covered for social
security: 77;
Estimated noncovered earnings: $563;
Percent of state and local government earnings not covered for social
security: 23;
Estimated total of covered and noncovered earnings[A]: $2,501.
South Carolina;
Social Security-covered earnings: $9,872;
Percent of state and local government earnings covered for social
security: 98;
Estimated noncovered earnings: $151;
Percent of state and local government earnings not covered for social
security: 2;
Estimated total of covered and noncovered earnings[A]: $10,023.
South Dakota;
Social Security-covered earnings: $1,566;
Percent of state and local government earnings covered for social
security: 98;
Estimated noncovered earnings: $35;
Percent of state and local government earnings not covered for social
security: 2;
Estimated total of covered and noncovered earnings[A]: $1,601.
Tennessee;
Social Security-covered earnings: $11,984;
Percent of state and local government earnings covered for social
security: 91;
Estimated noncovered earnings: $1,122;
Percent of state and local government earnings not covered for social
security: 9;
Estimated total of covered and noncovered earnings[A]: $13,106.
Texas;
Social Security-covered earnings: $23,966;
Percent of state and local government earnings covered for social
security: 47;
Estimated noncovered earnings: $26,755;
Percent of state and local government earnings not covered for social
security: 53;
Estimated total of covered and noncovered earnings[A]: $50,721.
Utah;
Social Security-covered earnings: v4,687;
Percent of state and local government earnings covered for social
security: 94;
Estimated noncovered earnings: $316;
Percent of state and local government earnings not covered for social
security: 6;
Estimated total of covered and noncovered earnings[A]: $5,003.
Vermont;
Social Security-covered earnings: $1,440;
Percent of state and local government earnings covered for social
security: 99;
Estimated noncovered earnings: $13;
Percent of state and local government earnings not covered for social
security: 1;
Estimated total of covered and noncovered earnings[A]: $1,453.
Virginia;
Social Security-covered earnings: $19,742;
Percent of state and local government earnings covered for social
security: 98;
Estimated noncovered earnings: $430;
Percent of state and local government earnings not covered for social
security: 2;
Estimated total of covered and noncovered earnings[A]: $20,173.
Washington;
Social Security-covered earnings: $16,734;
Percent of state and local government earnings covered for social
security: 91;
Estimated noncovered earnings: $1,582;
Percent of state and local government earnings not covered for social
security: 9;
Estimated total of covered and noncovered earnings[A]: $18,316.
West Virginia;
Social Security-covered earnings: $3,759;
Percent of state and local government earnings covered for social
security: 95;
Estimated noncovered earnings: $205;
Percent of state and local government earnings not covered for social
security: 5;
Estimated total of covered and noncovered earnings[A]: $3,965.
Wisconsin;
Social Security-covered earnings: $12,754;
Percent of state and local government earnings covered for social
security: 96;
Estimated noncovered earnings: $549;
Percent of state and local government earnings not covered for social
security: 4;
Estimated total of covered and noncovered earnings[A]: $13,302.
Wyoming;
Social Security-covered earnings: $2,003;
Percent of state and local government earnings covered for social
security: 97;
Estimated noncovered earnings: $72;
Percent of state and local government earnings not covered for social
security: 3;
Estimated total of covered and noncovered earnings[A]: $2,075.
Other[B];
Social Security-covered earnings: $15;
Percent of state and local government earnings covered for social
security: 8;
Estimated noncovered earnings: $176;
Percent of state and local government earnings not covered for social
security: 92;
Estimated total of covered and noncovered earnings[A]: $191.
Source: GAO analysis of data from SSA's Office of Research,
Evaluation, and Statistics, 1% Continuous Work History Sample-2007
Employee Employer File.
Notes: The data presented in the table are from earnings that were
posted to SSA administrative records as of January 2009. Any earnings
posted to SSA's Master Earnings File after this January cut-off are
not included in the counts. In some years, different state and local
governments may be late in submitting acceptable W-2 forms to SSA, and
the state and local government employees included in the late
submittal would not be included in a given state's total counts for
covered or noncovered employment.
[A] To develop this estimate, SSA hypothetically assumed a situation
of universal coverage where all state and local government employment
was covered in 2007 and taxable up to the annual Social Security
taxable maximum of $97,500 in 2007 for each employer. From the total
estimate, we subtracted currently covered earnings to obtain estimated
noncovered earnings.
[B] Other includes American Samoa, Guam, Northern Mariana Islands, and
U.S. Virgin Islands.
[End of table]
Although most Social Security coverage of state and local government
employees is obtained through coverage agreements, additional Social
Security provisions affect the coverage of other state and local
government employees. For example, section 210 of the Social Security
Act extends mandatory coverage for Social Security and Medicare to
state and local government employees who are not members of a
qualifying retirement system, subject to certain exceptions.
[End of section]
Appendix III: Number and Year of Last Modification Approved by SSA, as
of January 1, 2010:
State: Alabama;
Number of last approved modification: 717;
Year of last approved modification: 2005.
State: Alaska;
Number of last approved modification: 183;
Year of last approved modification: 2001.
State: Arizona;
Number of last approved modification: 442;
Year of last approved modification: 2009.
State: Arkansas;
Number of last approved modification: 845;
Year of last approved modification: 2009.
State: California;
Number of last approved modification: 1,543;
Year of last approved modification: 2009.
State: Colorado;
Number of last approved modification: 395;
Year of last approved modification: 2007.
State: Connecticut;
Number of last approved modification: 447;
Year of last approved modification: 2008.
State: Delaware;
Number of last approved modification: 83;
Year of last approved modification: 2006.
State: Florida;
Number of last approved modification: 609;
Year of last approved modification: 2009.
State: Georgia;
Number of last approved modification: 960;
Year of last approved modification: 2009.
State: Hawaii;
Number of last approved modification: 13;
Year of last approved modification: 2006.
State: Idaho;
Number of last approved modification: 255;
Year of last approved modification: 2009.
State: Illinois;
Number of last approved modification: 934;
Year of last approved modification: 2009.
State: Indiana;
Number of last approved modification: 558;
Year of last approved modification: 2007.
State: Iowa;
Number of last approved modification: 397;
Year of last approved modification: 2002.
State: Kansas;
Number of last approved modification: 765;
Year of last approved modification: 2005.
State: Kentucky;
Number of last approved modification: 884;
Year of last approved modification: 2009.
State: Louisiana;
Number of last approved modification: 745;
Year of last approved modification: 2009.
State: Maine;
Number of last approved modification: 317;
Year of last approved modification: 2009.
State: Maryland;
Number of last approved modification: 255;
Year of last approved modification: 2000.
State: Massachusetts;
Number of last approved modification: 11;
Year of last approved modification: 2003.
State: Michigan;
Number of last approved modification: 988;
Year of last approved modification: 2008.
State: Minnesota;
Number of last approved modification: 424;
Year of last approved modification: 2009.
State: Mississippi;
Number of last approved modification: 790;
Year of last approved modification: 2009.
State: Missouri;
Number of last approved modification: 444;
Year of last approved modification: 1997.
State: Montana;
Number of last approved modification: 393;
Year of last approved modification: 2008.
State: Nebraska;
Number of last approved modification: 408;
Year of last approved modification: 1995.
State: Nevada;
Number of last approved modification: 52;
Year of last approved modification: 1989.
State: New Hampshire;
Number of last approved modification: 325;
Year of last approved modification: 2008.
State: New Jersey;
Number of last approved modification: 735;
Year of last approved modification: 2009.
State: New Mexico;
Number of last approved modification: 267;
Year of last approved modification: 2009.
State: New York;
Number of last approved modification: 362;
Year of last approved modification: 1994.
State: North Carolina;
Number of last approved modification: 1,134;
Year of last approved modification: 2006.
State: North Dakota;
Number of last approved modification: 689;
Year of last approved modification: 2006.
State: Ohio;
Number of last approved modification: 1;
Year of last approved modification: 1972.
State: Oklahoma;
Number of last approved modification: 1,161;
Year of last approved modification: 2009.
State: Oregon;
Number of last approved modification: 647;
Year of last approved modification: 2009.
State: Pennsylvania;
Number of last approved modification: 1,796;
Year of last approved modification: 2009.
State: Puerto Rico;
Number of last approved modification: 73;
Year of last approved modification: 2003.
State: Rhode Island;
Number of last approved modification: 100;
Year of last approved modification: 2003.
State: South Carolina;
Number of last approved modification: 490;
Year of last approved modification: 2008.
State: South Dakota;
Number of last approved modification: 380;
Year of last approved modification: 2009.
State: Tennessee;
Number of last approved modification: 913;
Year of last approved modification: 2008.
State: Texas;
Number of last approved modification: 1,583;
Year of last approved modification: 2009.
State: Utah;
Number of last approved modification: 210;
Year of last approved modification: 2008.
State: Vermont;
Number of last approved modification: 346;
Year of last approved modification: 1993.
State: Virgin Islands;
Number of last approved modification: 11;
Year of last approved modification: 1996.
State: Virginia;
Number of last approved modification: 388;
Year of last approved modification: 2004.
State: Washington;
Number of last approved modification: 839;
Year of last approved modification: 2009.
State: West Virginia;
Number of last approved modification: 430;
Year of last approved modification: 2009.
State: Wisconsin;
Number of last approved modification: 778;
Year of last approved modification: 2009.
State: Wyoming;
Number of last approved modification: 283;
Year of last approved modification: 2009.
Source: SSA information and GAO's survey of state administrators.
Notes: The number of the last modification approved by SSA is not
necessarily the exact number of modifications currently in effect. We
could not state the exact number of modifications currently in effect
for several reasons. First, the numbers should ascend in sequential
order, but occasionally some modifications may skip a number. For
example, a state may withdraw a proposed coverage modification before
SSA approves or denies it, which could create a skip in the sequence.
Second, not all modifications are presently in effect. A modification
may provide coverage for a public employer, which later dissolves and
no longer exists. A modification may apply to an employer which
terminated its coverage prior to 1983--when terminating coverage
modifications was permitted.
Consistent with the numbering sequences of SSA and states, the table
excludes a state's original agreement. The original agreement is not
counted as a modification because it is not an amendment to the
agreement.
[End of table]
[End of section]
Appendix IV: SSA's Guidance Related to the Responsibilities of State
Social Security Administrators:
* Serve as a bridge between state and local public employers and
federal agencies, including SSA and IRS.
* Administer and maintain the section 218 agreement that governs
voluntary Social Security and Medicare coverage by public employers.
* Prepare modifications to the section 218 coverage agreement to
include additional coverage groups, correct errors in other
modifications, identify additional public employers that join a
covered retirement system, and obtain Medicare coverage for public
employees whose employment relationship with a public employer has
been continuous since March 31, 1986.
* Provide SSA with notice and evidence of the legal dissolution of
covered state and local public employers.
* Conduct referenda for Social Security and Medicare coverage for
services performed by employees in positions under a public retirement
system.
* Resolve coverage and tax questions associated with Section 218
agreements and modifications with SSA and IRS.
* Advise public employers on Social Security, Medicare, and tax
withholding matters.
* Provide information to public employers as appropriate in accordance
with the state's enabling legislation, policies, procedures, and
standards.
* Provide advice on Section 218 optional exclusions applicable to the
state and/or individual modifications, and advice on state and local
laws, rules, regulations and compliance concerns.
* Maintain physical custody of the state's Section 218 agreement,
modifications, dissolutions, and intrastate agreements.
Source: SSA's Program Operations Manual System SL 10001.130.
[End of section]
Appendix V: List of Committees Formed by SSA at Its April 2010
Conference:
Committee: Improving Collaboration;
Objectives: Develop and implement ways to improve interagency
relationship and collaboration.
Committee: Uniform Workflow Processes;
Objectives: Recommend uniform procedures for the regions and state
administrators.
Committee: Policy and Procedures[A];
Objectives: Research policies and recommend improvements.
Committee: Database Development;
Objectives: Develop ideas that will improve a centralized database.
Committee: State Administrator Position Support;
Objectives: Suggest and develop training materials that will help new
state administrators learn the position.
Committee: Succession Planning;
Objectives: Improve succession planning procedures.
Committee: Training and Education[A];
Objectives: Improve training in all levels of federal, state, and
local government by creating joint training sessions.
Committee: Policy Enhancement;
Objectives: Research to identify areas of policy or procedures that
may be improved.
Committee: Raising Awareness for State Elected Officials;
Objectives: Develop and explore ways to strengthen agency
relationships with state-elected officials.
Committee: Staffing Resources;
Objectives: Review staffing issues in the regions and states and
recommend solutions.
Committee: Disclosure Issues;
Objectives: Discuss disclosure limitations.
Source: SSA.
[A] SSA identified these committees as the highest priorities.
[End of table]
[End of section]
Appendix VI: Comments from the Social Security Administration:
Social Security:
Social Security Administration:
Baltimore, MD 21235-0001:
September 17, 2010:
Mr. Daniel Bertoni:
Director, Education, Workforce, and Income Security Issues:
441 G. Street, N.W.
Washington, D. C. 20548:
Dear Mr. Bertoni:
Thank you for the opportunity to review and comment on the Government
Accountability Office (GAO) Draft Report, "Social Security
Administration: Management Oversight Needed to Ensure Accurate
Treatment of State and Local Government Employees" (GAO-10-938). Our
comments on the report are enclosed.
If you have any questions, please contact me or have your staff
contact Rebecca Tothero, Acting Director, Audit Management and Liaison
Staff at (410) 966-6975.
Sincerely,
Signed by:
James A. Winn:
Executive Counselor to the Commissioner:
Enclosure:
[End of letter]
Comments On The Government Accountability Office (GAO) Draft Report,
"Social Security Administration: Management Oversight Needed To Ensure
Accurate Treatment Of State And Local Government Employees" (GA0-10-
938):
General Comments:
We believe the report fairly represents the key players involved in
the administration of Social Security Act, Section 218 coverage
agreements, and is a balanced representation of the issues. The report
also accurately describes the present Section 218 process that we and
the Internal Revenue Service (IRS) use.
We strive to administer all programs and activities in accordance with
applicable laws and regulations. To assist state and local government
employers on Social Security coverage issues, we work with state
administrators at the local level through our ten regional employer
services liaison officers. We also have regional office state and
local coverage specialists who provide support. In addition, we
sponsor an annual meeting of the National Conference of State Social
Security Administrators (NCSSSA), and maintain a website solely for
state and local government employers.
http://www.ssa.gov/slge/index.htm.
Comments On Recommendations:
Recommendation 1:
To improve SSA's management oversight of retirement benefits for
public employees, the Commissioner of Social Security, in consultation
with IRS, state administrators, and public employers, should develop a
monitoring effort that ensures Social Security earnings are accurately
reported for public employees. This could include 1) improving data
collected on public employers, 2) identifying risk factors, and 3)
targeting public employers with those risk factors for follow-up
reviews on an ongoing basis.
Comment:
We suggest you reword this recommendation as it is unclear regarding
the duties of the respective agencies.
We will work to develop monitoring efforts with IRS, state
administrators, and public employers to ensure Social Security
earnings are accurately reported for public employers. IRS, however,
must collect data on employees covered under Section 218 agreements.
With this information from IRS, we can work together to:
* develop a monitoring effort that ensure Social Security earnings are
accurately reported for public employees;
* identify risk factors, and target public employers with those risk
factors; and;
* establish best practices for educating public employers with this
information.
Recommendation 2:
To improve the states' administration of public employer wage
reporting, the Commissioner of Social Security, in consultation with
the National Conference of State Social Security Administrators,
should modify SSA's policy guidance to clarify state responsibilities
governing their oversight of public employers and set clear
expectations for the steps state administrators should take in
implementing their responsibilities.
Comments:
We agree. Our "Policy and Procedures" committee, with input for other
committees, will focus on this task. We will collaborate with the
NCSSSA, and revise our policy guidance as you suggest. We will improve
the guidance and post it to our Program Operations Manual System
(POMS) by March 2011.
POMS is our official repository of program instructions, and it may be
accessed by our employees and by state and Federal agencies, including
IRS. When we issue the new instructions, state administrators will
have a clearer and more detailed source of information to guide them
in carrying out their roles and responsibilities under Section 218.
Recommendation 3:
To improve the process for identifying and correcting errors, the
Commissioner of the Internal Revenue Service should track errors
identified through compliance efforts and share the results with SSA
to the extent permitted by Federal law.
Comments: We agree.
[End of section]
Appendix VII: Comments from the Internal Revenue Service:
Department Of The Treasury:
Internal Revenue Service:
Deputy Commissioner:
Washington, D.C. 20224:
September 17, 2010:
Mr. Daniel Bertoni:
Director:
Education, Workplace, and Income Security Issues:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Bertoni:
I have reviewed your draft Government Accountability Office (GAO)
report titled, "Social Security Administration: Management Oversight
Needed to Ensure Accurate Treatment of State and Local Government
Employees" (GA0-10-938).
The report makes an important contribution to the concept that
ensuring compliance with Section 218 agreements ” the agreements
between various state and local governmental entities and the Social
Security Administration (SSA) under which certain public employees are
covered by Social Security ” is challenging and important. As the
report demonstrates, the interaction of federal tax, Social Security
and state statutes and Section 218 agreements needed to arrive at
correct Social Security and Medicare coverage determinations for
public employees is complex. It requires the coordination of the SSA,
State Social Security Administrators, and the Internal Revenue Service
(IRS).
The IRS created its Federal, State and Local Governments (FSLG)
function in 2000 to serve as the focal point within the IRS for
meeting the IRS's responsibility to ensure that
units of state and local government were correctly determining and
paying federal employment taxes for their employees. Since it was
created 10 years ago, FSLG has provided extensive outreach services
and training to units of state and local governments. The goal has
been to arm these entities with a robust knowledge of,the special
withholding and reporting rules that apply to their employees covered
by Section 218 agreements. Over the past five years, FSLG has also
focused on conducting examinations to evaluate employment tax and
information reporting compliance at the state and local levels.
The report notes that we have also undertaken several initiatives to
enhance our data gathering and reporting on SSA Section 218 issues.
For example, FSLG is at work now on an analysis of the results of its
Section 218 examination and compliance check activity. FSLG plans to
share its findings from this work with SSA, to the extent permitted by
law. (As you indicated, section 6103 of the Internal Revenue Code
imposes certain limits on the ability of the IRS to share tax
information with other federal agencies.)
The report also notes that FSLG is conducting reviews of state-level
Section 218 agreements using an IRS Section 218 assessment tool. These
reviews are designed to give us a complete picture of the Section 218
agreements and structures that define Social Security coverage of
state and local employees in each state. The information FSLG gains
from this assessment, combined with the information from its analysis
of examination and compliance check activity, will allow us to improve
our overall service and compliance efforts at the state and local
levels.
We work with the SSA on an ongoing basis on significant issues related
to Section 218 compliance. While we do not always share final audit
reports with SSA, we typically contact SSA when an examination will
result in changing the 218 coverage of an employee or category of
employees. In cases where the governmental unit we are examining
agrees with the IRS determination, this contact with SSA is normally
carried out informally. In cases where the governmental unit disagrees
with our determination, we obtain a formal written interpretation from
SSA. This practice honors SSA's statutory authority to interpret
coverage questions under Section 218 agreements.
This consultation is carried out, in part, pursuant to a Memorandum of
Understanding (MOU) between SSA and the IRS. FSLG provided a copy of
this MOU, and an accompanying explanatory memorandum from the Director
of FSLG, to all FSLG employees in 2007. Further, FSLG specifically
addresses Section 218 matters in the Internal Revenue Manual at
section 4.90.1.4, to which all FSLG employees have access.
We look forward to continuing our outreach, education and compliance
activities with government employers at the state and local levels. We
also look forward to continuing collaboration with SSA and the State
Social Security Administrators to identify and address Section 218
concerns, including consulting with them on ways to ensure that Social
Security earnings are accurately reported for public employees.
A response to your recommendation for the IRS is enclosed. We
appreciate your interest in our work with state and local governmental
entities on matters related to Social Security and Medicare taxes. If
you have any questions or would like to discuss this response in more
detail, please contact Sarah H. Ingram, Commissioner, Tax Exempt and
Government Entitles Division, at (202) 283-2500.
Sincerely,
Signed by:
Steven T. Miller:
Enclosure:
[End of letter]
Enclosure:
Recommendation:
To improve the process for identifying and correcting errors, we
recommend that the Commissioner of Internal Revenue track errors found
through its compliance efforts on Social Security and Medicare taxes
and share results with SSA, to the extent permitted by federal law.
Response:
We have begun identifying and tracking errors concerning Section 218
agreements discovered in our compliance processes. We will ensure that
information applicable to these errors is shared with the Social
Security Administration to the extent allowable by the disclosure
provisions of the Internal Revenue Code.
[End of section]
Appendix VIII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Daniel Bertoni (202) 512-7215 or bertonid@gao.gov:
Staff Acknowledgments:
Blake Ainsworth, Assistant Director; Richard Harada, Matthew
Saradjian, Anjali Tekchandani, Kris Trueblood, James Bennett, Susannah
Compton, Alex Galuten, Stuart Kaufman, Wayne Turowski, and Walter
Vance made significant contributions to this report.
[End of section]
Footnotes:
[1] Section 218 of the Social Security Act authorizes coverage for
groups of positions of a state or local government employer. The
groups can include those positions outside or inside the public
employer's retirement system. Thus, a public employer may have
coverage for some but not all of its employees.
[2] For purposes of this report, we use the term "states" to include
the 50 states, Puerto Rico, and the Virgin Islands.
[3] Pub. L. No. 81-734, § 106 (1950); codified at 42 U.S.C. § 418.
[4] Section 218 also allows interstate instrumentalities to enter into
these agreements. An interstate instrumentality is an independent
legal entity that is organized by two or more states to carry out one
or more functions. For purposes of a section 218 agreement, an
interstate instrumentality is governed (to the extent practicable) by
the provisions applicable to agreements with states. According to SSA,
there are approximately 60 interstate instrumentalities, such as the
Port Authority of New York and New Jersey, with a section 218
agreement.
[5] The Board of Trustees, Federal Old-Age and Survivors Insurance and
Federal Disability Insurance Trust Funds, The 2010 Annual Report of
the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Federal Disability Insurance Trust Funds (Aug. 2010).
[6] GAO, Social Security: Issues Regarding the Coverage of Public
Employees, [hyperlink, http://www.gao.gov/products/GAO-08-248T]
(Washington, D.C.: Nov. 6, 2007) and Social Security: Implications of
Extending Mandatory Coverage to State and Local Employees, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-98-196] (Washington, D.C., Aug.
18, 1998).
[7] Federal Insurance Contributions Act (FICA) is a tax on both
employers and employees to fund the Social Security and Medicare trust
funds. The Social Security tax is 6.2 percent each for employers and
employees on earnings up to a maximum amount, which typically
increases each year. In 2010, the maximum amount was $106,800. The
Medicare tax is 1.45 percent each for employers and employees on all
earnings. 26 U.S.C. §§ 3101, 3111.
[8] According to SSA officials, in some regions, the modification may
undergo an initial review at an SSA field office, known as the
Parallel Social Security Office, which is usually located in the
state's capital. SSA regional offices should send copies of approved
modifications to the Parallel Social Security Office.
[9] We sent the survey to the 52 states and territories authorized to
enter into coverage agreements with SSA: the 50 states, Puerto Rico,
and the Virgin Islands.
[10] This survey question asked state administrators to rank the top
three reasons for modifications in the last 5 years. Since respondents
could provide more than one reason, the sum of the reasons may exceed
the number of respondents (52 states and territories).
[11] A state or local government employer that legally dissolves ends
its coverage. This is the only situation that can end coverage
approved by SSA. Otherwise, consistent with a 1983 statutory change to
section 218, a public employer's coverage cannot terminate.
[12] The National Conference of State Social Security Administrators
(NCSSSA), an association of state administrators, was formed in 1952
to provide leadership to state and local public employers on Social
Security, Medicare, and employment tax issues.
[13] The quarterly tax return for employers is generally the Form 941.
[14] For more information on the annual reconciliation process, see
SSA, Office of the Inspector General, The Social Security
Administration's Wage Reconciliation Process With the Internal Revenue
Service, A-03-08-18069 (June 16, 2009).
[15] Pub. L. No. 99-509, §9002 (1986).
[16] SSA, Office of the Inspector General, Social Security Coverage of
State and Local Government Employees, A-04-95-06013 (Dec. 13, 1996).
[17] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[18] IRS generally has a 3-year statute of limitations for assessing
additional taxes.
[19] According to Standards for Internal Control in the Federal
Government, risk assessment may include qualitative and quantitative
approaches, such as ranking risks, conducting planning sessions, or
other methods.
[20] IRS generally has a 3-year statute of limitations for assessing
taxes. In addition, when a taxpayer files for a tax refund, generally
only the taxes paid in the preceding 3 years can be refunded.
[21] 26 U.S.C. § 6103.
[22] 26 U.S.C. § 6103(l)(1)(A).
[23] According to IRS officials, some public employers are not
required to submit quarterly tax returns. Some employers do not pay
wages either due to staff volunteering their time or the use of
contracted workers. Others may file a consolidated quarterly return
rather than separately for each quarter.
[24] Treasury Inspector General for Tax Administration, The Federal,
State, and Local Governments Office Can Improve the Workload Selection
Process to Increase Effectiveness, 2006-10-073 (Apr. 28, 2006).
[25] Another indicator involves Medicare wages.
[26] Although most Social Security coverage of state and local
government employees is obtained through coverage agreements under
section 218, additional Social Security provisions affect the coverage
of other state and local government employees. For example, section
210 of the Social Security Act extends mandatory coverage for Social
Security and Medicare to state and local government employees who are
not members of a qualifying retirement system, subject to certain
exceptions.
[27] Each state has only one agreement with SSA, comprised of an
original agreement along with any amendments (known as modifications).
For the purpose of this report, we generally refer to a state's
original agreement along with the modifications as a "coverage
agreement." However, for the table in appendix III on the number of
the last approved modification, we explicitly noted that we excluded
the original agreement from the data in accordance with SSA and
states' numbering sequence.
[28] We did not send a state administrator survey to the District of
Columbia, Guam, the Commonwealth of the Northern Mariana Islands, or
American Samoa because they are not authorized to enter into Social
Security coverage agreements.
[End of section]
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