SL 40001.465 Modifications to Correct Erroneous Reports and Payments

A. Overview

An error occurs when a State or local government entity begins withholding and reporting wages for employees for whom there is no basis for coverage.

A State or political subdivision may have made reports and payments for Social Security coverage of its employees to the Internal Revenue Service (IRS), under the Federal Insurance Contributions Act (FICA), in the mistaken belief that such action was sufficient to provide coverage for its employees. 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.

Where the employer made payments with the intent to cover employees and in a good faith belief that the payments were sufficient to establish that coverage, the State may correct the error in order to preserve coverage for the period during which the error occurred. The State is not required to correct the error.

To correct the error, the State may provide retroactive coverage through either an Error Modification or a regular Section 218(e)(3) Modification. Alternatively, if the State does not wish to correct the error, it may still pursue a standard Modification with the standard retroactivity options (see SL 30001.375).

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 no position was 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.

The State’s options to correct the error are described below.

B. Error Modifications to correct the error back to the date it first occurred

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 employer made erroneous reports and payments.

It is important to note that 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, identify optional exclusions, indicate the Federal Employer Identification Number (EIN) 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, a Detailed Earnings Report (DEQY) for the individual who has been employed the longest. This should be done before submitting the Modification. SSA will use the information provided by these documents as evidence of the error.

In order to execute the Error Modification, SSA must establish that the entity is a political subdivision, that erroneous reports were filed with IRS, and that no refund has been received. Therefore, 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 that qualify as political subdivisions for Section 218 purposes made payments to IRS due to erroneous notification by IRS that coverage is mandatory under the provisions of the 1983 Amendments (see SL 30001.311C). If the entity decides it wants to preserve the coverage, an Error Modification is appropriate.

C. Section 218(e)(3) Modification to correct the error

1. Section 218(e)(3) Modifications

Section 218(e)(3) permits a State, under a regular Modification that provides retroactive coverage to current employees, to expand that retroactive coverage to former employees for whom the employer made erroneous contributions. A Section 218(e)(3) Modification includes an "add on" provision that the State may use in conjunction with the standard Modification language. The Section 218(e)(3) "add on" language deems former employees for whom the employer paid erroneous contributions to be part of the coverage group created by the Modification even though those former employees are not employees on the controlling date of the Modification (see SL 30001.375B-C).

When submitting a Section 218(e)(3) Modification to preserve the coverage of former employees, the State must designate a controlling date (SL 30001.375B) and specify that former employees are deemed to be employees on that date, thereby giving those former employees whatever retroactive coverage is provided to the current employees.

Former employees for whom the employer did not pay erroneous contributions or who received a refund do not obtain coverage through the 218(e)(3) Modification.

2. When a Section 218(e)(3) Modification cannot be used

A State may not use a Section 218(e)(3) Modification where State law prohibits retroactive coverage under the State's Agreement.

The State may not include the Section 218(e)(3) option in a Modification, unless the following conditions are met:

•

The employer paid contributions to the IRS in error and
•

Neither the employer nor the affected employees received a refund of those contributions.

A State may not include Section 218(e)(3) retroactive coverage in cases where the State chooses to use the divided-vote procedures for a referendum because the former employees to be covered through the Section 218(e)(3) Modification would be precluded from participating in the referendum. Accordingly, if the State wishes to include retroactive coverage under Section 218(e)(3), it must conduct a majority vote referendum.

3. Section 218(e)(3) language to be included in the Modification

The State may add the following language to a standard Modification in order to expand coverage to former employees for whom the employer paid erroneous contributions. The State should select the language based on whether the coverage group included in the Modification is an absolute coverage group or a retirement system coverage group.

•

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 Federal 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 Federal Employer Identification Number____________.

4. Choosing an effective date for a Section 218(e)(3) Modification

Any effective date consistent with Federal and State law may be used. The statute of limitations period for correcting earnings records 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 Social Security Act (Act) or RS 02201.001). The Act prohibits SSA from deleting an individual’s earnings for a specific year beyond this point, unless an exception applies (see RS 02201.008).

IMPORTANT: The Modification effective date (SL 30001.375A.1) chosen has implications for current, future, and former employees. The State should consider a Modification effective date that includes at least one period barred to refund under the IRS time limits to ensure that:

•

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; and
•

All former employees who were not reported would not be covered.

If the effective date chosen is within the statute of limitations period on earnings record corrections, it could cause a gap in coverage or require a recalculation of benefits depending on the particular facts involved and the rules of administrative finality (see RS 00605.580).

5. 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 for whom the employer paid erroneous contributions are deemed to be part of the coverage group on the effective date. Those current employees of the coverage group for whom the employer did not pay erroneous contributions are also covered. There is no coverage for former employees for whom the employer made no erroneous contributions.
3. No additional wage reports are needed for any barred period if the State certifies in writing that the contributions are paid.	3. Same
4. Statement required that refund from IRS was not made for any period open to correction.	4. Same
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.	5. The State should ask SSA to verify the erroneous reporting for any period barred to correction by obtaining an Employer Query Report (ERQY) or, if not available, obtain a Detailed Earnings Report (DEQY) for those employees whose payments for Social Security coverage were reported for any period barred to correction.
6. Modification must show reference to the appropriate section of the Act for the type of coverage wanted—218(b)(5) for absolute coverage, 218(d)(4) for majority vote retirement system coverage, or 218(d)(6) for divided vote retirement system coverage.	6. Modification must show reference to appropriate section of the Act for the type of coverage wanted—218(b)(5) for absolute coverage or 218(d)(4) for majority vote retirement system coverage. Divided vote retirement system referendum is not permitted with a 218(e)(3) Modification.
7. Any optional exclusions the State chooses should be shown in the Modification.	7. Same
8. Reference to statutory authority creating the entity should be shown in the Modification or other evidence should be provided establishing its status.	8. Same
9. EIN used for erroneous reports to IRS should be included in the Modification.	9. Same
10. Retirement system coverage can be obtained through either a majority vote referendum or, in those states where permitted, a divided vote referendum.	10. Retirement system coverage only can be obtained through a majority vote referendum.

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SL 40001.465 - Modifications to Correct Erroneous Reports and Payments - 10/26/2015
Batch run: 01/29/2020
Rev:10/26/2015

Program Operations Manual System (POMS)