Editor's Note: Proposed regulations from the IRS were issued on April 8. In the next issue of the Review we will discuss the implications of these federal proposals.

As municipalities prepare their 1992 budgets, a new provision of the federal tax and deficit reduction package which became law last October may be of considerable interest to many municipalities.

Under the new law, all municipal employees shall be covered by either a mandatory pension plan such as IMRF (Illinois Municipal Retirement Fund) or Social Security/Medicare after July 1, 1991.

Because the rules for this legislation have not been finished by the Internal Revenue Service (IRS) and the Social Security Administration (SSA), there are some rather large gray areas in the law. Some of these areas will be addressed below.

The National League of Cities (NLC) expects rules on this legislation from the federal government by May 1, 1991, but they rarely are timely.

In the following series of questions and answers, we will attempt to cover some concerns you may have about this new federal law.

Q. All of our employees participate in IMRF, and pay Social Security/Medicare. Are we in compliance with the provisions of the new law?
A. Yes. You are in compliance with the new law.

Q. We participate in a retirement system for all employees, but it is not IMRF. Does it absolve us from the new law?
A. Yes. To date, the definition of what is a "public retirement system" is vague. NLC has asked the IRS and the Social Security Administration to clarify this part of the law in their regulations.

It is expected by the IRS that the definition of a "public retirement system" will include, but not be limited to "a pension, annuity, or similar fund or system established by a state or a political subdivision." By "public", the IRS appears to infer a mandatory retirement system in which public employees participate — not necessarily ones that are established by public entities, such as IMRF. Again, this will be clarified in May when the rules are proposed.

Because of the vagueness of the law, the definition of "public retirement system" may include deferred compensation plans such as Section 457's if they were intended as a retirement plan and were mandatory.

Again, this is not a clear area. We need to wait for regulations from the IRS before this can be clarified. For now, it is safe to say in general that on July 1, 1991, the law will change, and require all employees to either be Social Security/Medicare participants, or members of a "public retirement plan" as defined by the IRS.

Q. We have no public retirement system, and do not participate in IMRF or Social Security/Medicare. What do we need to do?
A. You must either begin participating in IMRF or another pension plan if possible or cover your employees with Social Security/Medicare. Social Security/Medicare costs work out to a municipal contribution of 7.65% of all salaries paid and an identical percentage of withholding from employee salaries. This 7.65% figure consists of 6.2% to Social Security and 1.45% to Medicare.

Q. We have no "public retirement system," and

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only cover all employees under Social Security and Medicare. Do we need to have a pension plan?
A. No. You are in compliance with the law as long as you and all employees are paying Social Security/ Medicare taxes. Remember though, that a pension plan may substitute for Social Security/Medicare taxes.

This includes all police and fire officers in municipalities under 5,000 population who do not have a state-required public safety pension plan. As long as you cover all employees who are paid a salary with Social Security/Medicare, regardless of whether they are full or part-time workers, you are in compliance with the law.

Q. Who is an "employee" under the law?
A. Anyone who receives compensation from the municipality is an employee. This includes part-time employees as well. Also, as in the case of many attorneys, anyone who can represent the municipality in an official capacity is also an employee.

The only employees exempt from this law are those who 1) work to relieve an individual from unemployment, 2) are residents of a hospital, home or other institution and who work in the institution, 3) are employed on a temporary basis in case of fire, flood, storm, earthquake, or similar emergency, 4) are election officials or other workers who earn less than $100 in a calendar year, and 5) are compensated solely by fees and who are covered under Social Security/Medicare as "self-employed" workers. In other words, there are very few exemptions in Illinois from this law.

Q. Are elected officials "employees?"
A. Yes. All elected officials are "employees" of a municipality, and are required to be covered by Social Security/Medicare or some other public retirement system (such as IMRF) under this law.

This is true regardless of whether they are employed by other businesses and are covered by Social Security/Medicare or other pension plans there.

All compensation paid to them by the municipality (unless it is less than $100 in a calendar year) is subject to Social Security/Medicare taxes. Remember, participation in a qualified municipal retirement system is a substitute for Social Security/Medicare coverage.

Q. What about independent municipal attorneys — are they covered?
A. The federal government is not clear about how to deal with these types of workers under this law. According to the IRS, if the attorney is an official of the municipality, takes an oath, and can represent the city, he or she is covered, and all compensation paid to them

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is subject to Social Security/Medicare withholdings and municipal contributions.

It seems safe to assume, once again, that like an elected official who may be only part-time, an attorney from any particular law firm (or their own firm) who is on retainer with a municipality (and who is not directly an employee for the municipality) for a set amount of compensation annually must be covered by Social Security/Medicare for all compensation received. They may also participate in a mandatory retirement system instead of Social Security/Medicare. This rule applies to all other employees as well. (Currently, IMRF requires Social Security/Medicare withholdings and taxes.)

Any contractor with the municipality, such as the municipal attorney, may have a ruling on his particular case as to whether or not he is representing the "sovereign" city in an official capacity and is required to have social security deducted from his pay, or participate in a retirement system. He may do so by going to the IRS in Washington, D.C. for a ruling. There is no charge for this ruling, but personal appearance is required.

In sum, the federal government is trying to cover more people under Social Security/Medicare, not less. As such, municipal attorneys, regardless of their contracted status, or whether they work for other law firms, are most likely going to be considered "employees", and will have to be covered by Social Security/Medicare or an appropriate public retirement system for any compensation made to them by the municipality. The same could be true for city engineers.

Summary
Social Security/Medicare coverage is now mandatory for any person who works or receives compensation from a municipality, and who is not covered by a qualified "public retirement plan."

When regulations from IRS and SSA are promulgated, we will be updating you immediately on the clarifications in the law.

The law is still very complex, and you may have particular questions about individual cases that are not covered here. If you do, you may call Jim McCurdy at the League office at 217/525-1220, or the nearest Social Security Administration office in your community. •

April 1991 / Illinois Municipal Review / Page 19