Coverage groups are defined in Section 218(b)(5). Generally speaking, a coverage group is a grouping of positions that are all engaged in either (1) nonproprietary (governmental) functions, or (2) a single proprietary function (see SL 30001.311D).

The following employee groupings would constitute a coverage group:

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  State employees performing services in connection with a nonproprietary (governmental) function;

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  State employees performing services in connection with a single proprietary function;

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  Employees of a political subdivision performing services in connection with the nonproprietary (governmental) function; and

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  Employees of a political subdivision performing services in connection with a single proprietary function.

A coverage group includes services performed in connection with either (1) nonproprietary (governmental) functions or (2) a single proprietary function. If an individual position involves the performance of services in connection with (1) multiple proprietary functions or (2) both proprietary and nonproprietary functions, then the position is only included under one coverage group, and the State’s Agreement should specify how to determine which coverage group applies.

A proprietary function is a business function. A State or political entity exercises a proprietary function when it engages in a business similar to one a private enterprise would engage in for profit. For example, the operation of parking garage by a city is a proprietary function.

Nonproprietary (governmental) functions of a State or political subdivision are the traditional functions of government, i.e., legislative, executive, and judicial functions. Governmental functions include activities such as controlling and preventing crime, regulating the conduct of citizens for the general welfare, and providing for the public safety. Likewise, the operation of schools or institutions of higher learning by State or political subdivisions is a governmental function.

The distinction between a nonproprietary and a proprietary function is not always readily apparent. The provisions of State law govern in determining whether a function is governmental or proprietary. What may be a proprietary function under the laws of one State may not be classified as such in another.

A political subdivision:

1. 1. 

   Is a separate legal entity of a State;

2. 2. 

   Has governmental powers and functions; and

3. 3. 

   Is an independent legal entity with the power to:

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     Hire, supervise, and discharge its own employees;

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     Sue and be sued (generally) in its own name;

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     Contract; and

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     Hold and convey real and personal property.

A “political subdivision” ordinarily includes counties, cities, townships, villages, schools, sanitation, utility, irrigation, drainage and flood-control districts, and similar governmental entities.

When evaluating whether an entity is a political subdivision, the Social Security Administration's (SSA) policy applies a factor-based analysis. SSA applies a similar analysis to the one described in the Internal Revenue Service (IRS) Revenue Rulings 57-128 and 65-26. These rulings provide that the following factors, among others, should be considered:

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  Whether there are any private interests involved, or whether the States or political subdivisions involved have the powers and interests of an owner;

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  Whether control and supervision of the organization is vested in public authority or authorities;

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  If express statutory, implied statutory, or other authority is necessary to create and/or use such an instrumentality and whether such authority exists; and

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  The degree of financial autonomy and the source of its operating expenses.

Generally, SSA considers provisions of State law when determining whether an organization is a separate and distinct political subdivision for coverage purposes. State law generally identifies political subdivisions as bodies “corporate and politic,” but exceptions exist. Libraries and hospitals are illustrative of organizations whose status is often not apparent from either title or statute. They may be integral parts of a political subdivision such as a city or county (not separate political subdivisions), instrumentalities of a State or political subdivision (separate political subdivisions), or they may be private nonprofit organizations (not separate political subdivisions).

While the status of an entity or an organization should usually be clear, there may be instances were SSA may request that the State obtain a State attorney general opinion addressing whether an entity or organization constitutes a political subdivision under State law. SSA gives a State attorney general opinion due weight in making Section 218 Agreement determinations (see SL 30001.301B).

“Instrumentality” and “integral part” are concepts that are closely related to political subdivisions. Understanding these additional concepts is important to understanding whether something can be considered a separate legal entity for the purposes of Section 218 coverage:

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:

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  Evaluate the entity to determine if it meets the definition for a political subdivision (see SL 30001.311C) and

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  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 purposes.

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.