TN 3 (09-07)
SL 40001.465 Modifications to Correct Errors
A State or political subdivision may have made reports and payments for Social Security coverage of its employees to the Internal Revenue Service, under the Federal Insurance Contributions Act, in the mistaken belief that such action provided coverage for the employees.
B. Erroneous Reports Without Coverage
An error occurs when a state or local government entity mistakenly believes that an employee’s position is subject to FICA and begins withholding and reporting wages. Reporting may be erroneous for Section 218 purposes even if, at the time of the error, the employee is eligible to receive provisional coverage under the Section 210 mandatory rules. The nature of the error depends on the entity’s belief and intent, which may be inferred from the circumstances.
To correct erroneous reporting, the State may provide coverage through an error modification or a regular Section 218(e)(3) modification. If the error involves a retirement system position, the State must comply with the referendum procedures before executing an error modification or a Section 218(e)(3) modification. If the position was not under a retirement system at the time the error was made, the coverage group would be covered as an absolute coverage group under Section 218(b)(5) of the Act and a referendum would not be necessary.
C. Error Modification
An error modification provides coverage as of the date the error first occurred. The effective date is the first day of the first period (quarter or year) for which the erroneous reports were filed, but no earlier than the date the entity came into existence. Use of an error modification sometimes results in a substantial contribution liability for the State or political subdivision. This occurs when the error exists over a long period, and there were employees of the entity who were not reported to IRS. For this reason, a modification that utilizes the provision of Section 218(e)(3) of the Act is sometimes preferable to using the error modification.
The error modification should list the entity, show the services covered, optional exclusions, the FEIN under which the erroneous reports were filed, and provide for coverage to begin on the first day of the period for which reports were first erroneously made to IRS. If the date of the erroneous posting is unknown, the State should ask SSA to verify the date by obtaining an Employer Query Report (ERQY) or, if that is not available, obtain a Detailed Earnings Report (DEQY) for the individual who has been employed the longest. This should be done before submitting the modification. The information provided by these documents is used as evidence of the error.
In order to execute the error modification, SSA must establish that the entity is a political subdivision and that erroneous reports were filed with IRS. Therefore, unless this has already been established, the modification should include a reference to the statutory authority under which the organization was created or provide other evidence establishing its status.
NOTE: Some 501(c)(3) entities made payments to IRS due to erroneous notification by IRS that coverage is mandatory under the provisions of the 1983 Amendments. If the entity decides it wants to preserve the coverage, an error modification is appropriate.
D. Section 218(e)(3) Modification To Correct Error
1. Section 218(e)(3) Situations
There may be situations where a State or political subdivision has erroneously made payments for Social Security coverage to IRS for some current and former employees, but there are other current or former employees for which the employer did not report or make payments for Social Security coverage. The problem then arises as to which type of modification would best be suited to provide retroactive Social Security coverage for current and former employees without causing substantial hardship for the employer and the affected employees.
An error modification could be used in these situations, but it would involve also covering and making Social Security coverage payments for both current and former employees of the governmental entity who had not previously been reported for Social Security coverage. Making those additional Social Security payments for as far back as the date the error began could result in a substantial Social Security contribution liability for the governmental entity.
If a standard modification is used in these situations, retroactive coverage would only be available to those current employees who are members of the coverage group and in an employment relationship with the governmental employer on the designated controlling date of the modification (SL 30001.375B-C). But the former employees whose earnings had been erroneously reported for Social Security would lose all Social Security coverage earned during the period still open to correction by the statute of limitations. This could mean a reduction in Social Security benefits for those former employees or, worse, loss of Social Security insured status and benefits.
Then there is the third, and perhaps a more amenable, alternative: a Section 218(e)(3) modification. This is a regular modification that deems former employees for whom Social Security contributions were erroneously paid to be part of the coverage group (in effect, deeming them to be included with the “current employee” group) on the date designated to control the granting of retroactive Social Security coverage (see SL 30001.375B-C), provided the following conditions are met:
2. The Purpose of a Section 218(e)(3) Modification
A Section 218(e)(3) modification basically protects the Social Security coverage for those former employees who were erroneously reported and for whom Social Security contributions were paid for the period open to correction under the statute of limitations.
P.L. 90-248 to the 1967 Social Security Amendments added Section 218(f)(3) – much later to become Section 218(e)(3) – to the Social Security Act. The provision permits a State, under a regular modification, to provide the retroactive coverage given to current employees to also be given to those former employees whose earnings were erroneously reported for Social Security coverage. Retroactive coverage would not apply to those former employees for whom a refund of Social Security contributions had been made or to those former employees for whom no Social Security contributions had been paid at all.
When submitting a Section 218(e)(3) modification to preserve the coverage of former employees who were reported, the State must designate the date the agreement is made applicable to the coverage group (SL 30001.375B) and specify that former employees who were reported are deemed to be a part of the coverage group on that date, thereby giving those former employees whatever retroactive coverage is provided current employees.
3. Section 218(e)(3) Language to be Included in Modification
Depending upon whether Social Security coverage is being extended as a part of the absolute coverage group or as part of the retirement system coverage group, coverage of the erroneously reported former employees can be accomplished by including language similar to the following in the text of the modification:
Absolute Coverage Group
Included in the additional coverage group(s) (as defined in Section 218(b)(5) of the Act), are the services performed by individuals formerly employed by (name of entity) for whom contributions were timely paid to the Secretary of the Treasury and for which no refund has been made. (Name of entity) previously reported the contributions of these individuals in error using Employer Identification Number ___________.
Retirement System Coverage Group
Included in the additional coverage group (as defined in Section 218(d)(4) of the Act), are the services performed by individuals as employees of (name of entity) and as members of the (name of the retirement system) for whom contributions were timely paid to the Secretary of the Treasury and for which no refund has been made. (Name of entity) previously reported the contributions of these individuals in error using Employer Identification Number____________.
4. Choosing an Effective Date for a Section 218(e)(3) Modification
Although any effective date consistent with Federal and State law may be used, it is desirable that the effective date include at least one period barred to refund under the IRS time limits. The statute of limitations period that is open to correction is three years, three months and 15 days after the end of the calendar year in which the wages were paid (see Section 205(c)(1)(B) of the Act or POMS RS 02201.001). By statute, SSA is barred from deleting an individual’s earnings for a specific year beyond this point. If the modification effective date (SL 30001.375A1) is retroactive into at least one period barred to correction, this validates the coverage that is given within the statute of limitations period. SSA will retain the earnings for the barred period because earnings from any barred period cannot be deleted, even if the entity does not want coverage and no modification is executed.
By selecting an effective date within the first period barred to correction:
The erroneously reported earnings of former and current employees would be protected;
Those current employees from whom Social Security contributions were not withheld would be liable only for Social Security contributions on wages paid for periods open to correction under the statute of limitations and would get Social Security credit from those periods forward;
All future employees would be covered for Social Security;
All former employees who were not reported would not be covered.
5. When a Section 218(e)(3) Modification Cannot be Used
There are situations where a Section 218(e)(3) modification cannot be used:
State law limits retroactivity to current years; or
The State chooses to use the divided vote procedure to cover the retirement system (because former employees could not vote and would not be protected).
6. Error Modification Versus 218(e)(3) Modification Comparison Chart
|Error Modification||218(e)(3) Modification|
1. Effective date – Date erroneous reporting began.
1. Effective date – First period barred to refund under IRS statutes for which a refund has not been made.
2. Covered employees – All previous and current employees who are part of the coverage group.
2. Covered employees – All previous and current employees who were reported are deemed to be part of the coverage group on the effective date. Those current employees of the coverage group who were not reported or paid Social Security contributions are covered. There is no coverage for former employees who were not reported or paid Social Security contributions.
3. No additional wage reports are needed for any barred period if the State certifies in writing that reports are correct.
3. No additional wage reports are needed for the one barred period if the State certifies in writing that the report for that period is correct.
4. Statement required that refund from IRS was not made for any periods open to correction.
4. Statement required that refund from IRS was not made for any periods open to correction, unless the statement is included in the body of the modification.
5. The State should ask SSA to verify the period of erroneous reporting by obtaining an Employer Query Report (ERQY) or, if not available, obtain a Detailed Earnings Report (DEQY) for the individual who has been employed the longest.