Section 102 of Public Law 98-21 (Social Security Amendments of 1983), which became
effective January 1, 1984, changed provisions of the law concerning employment for
organizations exempt from income tax under Section 501(c)(3) of the IRC, including
nonprofit charitable, religious, and educational groups.
Section 501(c)(3) entities frequently occupy a similar role to political subdivisions,
although they are not actually political subdivisions. Therefore, it is important
to evaluate a 501(c)(3) entity to determine if it is public or private to resolve
the Social Security coverage implications:
Evaluate the entity to determine if it meets the definition for a political subdivision
(see SL 30001.311C) and
If the entity is a political subdivision of the State, ignore the entity's 501(c)(3)
status for purposes of determining Social Security coverage implications.
Many private nonprofit schools, colleges, hospitals, and libraries are 501(c)(3) organizations
but are not political subdivisions despite performing similar functions. If the entity
is not a political subdivision of the State, the State's Section 218 options are inapplicable
to the entity. Notably, some private 501(c)(3) organizations have employees who are
allowed to become members of some State or political subdivision retirement systems.
Accordingly, do not rely on employee membership in a public retirement system when
evaluating 501(c)(3) entities, as it may not be determinative. The governing standard
is whether the entity qualifies as a political subdivision. The services performed
by private 501(c)(3) employees are mandatorily covered. Such private 501(c)(3) employees
are not considered State or political subdivision employees for Social Security coverage
Conversely, some 501(c)(3) organizations are public entities, and thus subject to
coverage rules applicable to a State's political subdivisions. Political subdivisions
that are also 501(c)(3) entities can only obtain coverage (1) under the provisions
of Section 218 of the Social Security Act (Act); (2) in accordance with the mandatory
Social Security coverage provision beginning July 2, 1991; or (3) under the mandatory
Medicare-only coverage provision beginning April 1, 1986. Status as a 501(c)(3) entity
does not exempt a State's public entities from the normal rules for establishing coverage
under Section 218.
SSA may request a State attorney general opinion concerning whether an entity constitutes
a political subdivision under the laws of that State. In addition, it may be necessary
to coordinate some issues with IRS, with respect to Federal Insurance Contributions
Act (FICA) taxation.
If any nongovernmental entities were erroneously listed in a Section 218 Agreement,
the State should submit a Modification to remove them from the Agreement (see SL 40001.450E).