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:
payments were made to IRS, and
no refund has been received.