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(Webmaster's Note: Following is the response from the Social Security Administration to the Office of the Inspector General (OIG) regarding the draft report, "Government pension offset exemption for Texas school districts' employees")
Thank you for the opportunity to review and provide comments on this draft report.
The Government Pension Offset (GPO) reduces Social Security spousal benefits by two-thirds of the amount of the government pension. Prior to July 1, 2004, Social Security beneficiaries could be exempt from GPO if, on “the last day” of employment, they were in a position covered by both Social Security and the government pension plan.
To meet this exemption, some Texas Teacher’s Retirement System (TRS) participants who had worked their careers in employment not covered by Social Security, transferred to a position that was covered by both TRS and Social Security just prior to retirement, often for only one day of employment. When this application of the last day test came to the attention of Congress, the Social Security Administration (SSA) advised that, while questionable from a public policy perspective, the application was legally supported. Congress ended the last day test in the Social Security Protection Act (SSPA), substituting a requirement that an individual work his or her last 60-months in covered employment in order to be eligible for the GPO exemption.
The draft OIG report indicates that SSA misapplied the law by affording the “last day” exemption to certain Texas TRS participants who paid a fee and worked their last day of employment in other school districts in positions for which Social Security taxes were paid. However, the legislative history of the SSPA clearly indicates that Congress knew how SSA was interpreting the law and administering the “last day” exemption.
Moreover, the fact that Congress felt compelled to take legislative action to end the practice indicates that it recognized the limits of the Agency’s discretion under the former statutory language. This issue was raised to Congress in an August 2002 Government Accountability Office (GAO) report entitled “Social Security Administration: Revision to the Government Pension Offset Should be Considered.”
That report acknowledged that individuals who paid a fee to obtain their one-day job in Social Security covered employment met the requirements for the “last day” exemption to the GPO provision as SSA was administering the provision. This report had no findings, either stated or implied, that indicated that SSA was not properly applying the “last day” exemption. In fact, the report concluded that, to address the issue of potential abuses resulting from the “last day” exemption, Congress needed to consider revising the Social Security Act to extend the requirement for covered employment for a longer period of time.
The Committee on Ways and Means report on the 2004 legislation that ended the “last day” exemption to the GPO cites GAO testimony that the exemption “allows a select group of individuals with a relatively small investment of work time and only minimal Social Security contributions to gain access to potentially many years of full Social Security spousal benefits.” This testimony, as well as GAO’s 2002 report, led to thorough investigations by Congress and SSA. Congressional interest in this issue was evidenced by a hearing that was held in May 2003.
The issue of whether the “last day” exemption to GPO should be retained or substantially modified was debated on the floor of the House of Representatives. Views on both sides of the issue were expressed -- that is, that the “last day” exemption should be retained and, alternatively, that this exemption was a loophole that was both costly and inappropriate. Throughout the time GAO was reporting to Congress, SSA was simultaneously communicating and working with members of the Social Security Subcommittee to seek a legislative change and to correct the loophole. Ultimately,
Congress determined that legislation was necessary to close the loophole. The final legislation (section 418 of the SSPA) replaced the “last day” exemption with a requirement that, to be exempt from GPO, the individual must work in employment covered by Social Security for at least 60 months before retirement from a State or local government job.
In developing our existing policy, we reviewed (1) whether a bona fide employment relationship existed, even though teachers paid a processing fee that in many cases exceeded the wages they expected to earn; and (2) whether teachers employed for as little as one day met the requirements of those section 218 agreements that specifically exclude employees in part-time positions from Social Security coverage.
Section 210(j)(2) of the Social Security Act defines an employee as “… any individual who, under the usual common law rules applicable in determining the employer employee relationship, has that status of an employee.” Pursuant to 20 CFR 404.1007(a), a common-law relationship exists if the employer can tell the employee “what to do and how, when, and where to do it;” i.e., the employer controls the employee’s work. The fact that some workers paid the employer a fee for processing their job applications did not change the fact that the employer controlled the conditions of employment. As an employer, the school district could designate when and where the employees worked, in what position they worked, could withhold pay for nonperformance, and could fire them. As a result, we determined that the common law test was met and an employment relationship existed, regardless of whether a fee had been paid.
The fact that a worker pays a fee to work does not impact the validity of the wages received or the underlying employee-employer relationship, as long as the fee is not considered a reimbursement of wages paid to the worker. We have no evidence of any of these fees being considered as such, nor does the draft OIG report state that this is the case.
With regard to the part-time status issue, it is true that many part-time positions are not covered under section 218 agreements in Texas. However, it is also true that full-time positions exist that may be filled on a part-time basis. In evaluating whether a position is covered under a section 218 agreement in Texas, it is the status of the position, not the status of the person who fills it, that is the determining factor. For example, if the position is one requiring a 40-hour workweek, individuals filling that position would have Social Security coverage, even if the position is filled by five individuals each working eight hours. Conversely, if the position requires a 20-hour work week and part-time positions are not covered by the section 218 agreement, then the individuals in that position would not be covered by Social Security whether it is five individuals each working four hours or one individual working 20 hours. We generally look to the employer to determine the position to which the employee was assigned and whether Social Security taxes are payable. In all of these cases, the employer paid the Social Security taxes, demonstrating its determination that the positions being filled were fulltime positions and, hence, covered under the section 218 agreement. In addition, pension contributions for this work were made to the Texas Teachers Retirement System for these employees. Based on our understanding of the applicable pension rules, the contributions would not have been made had these employees been working in temporary (part-time) positions.
In the past, OIG has been supportive of SSA’s implementation of the “last day” exemption to the GPO. Specifically, in response to an inquiry about the validity of oneday employment in one of the school districts, OIG noted that it was within SSA’s purview to determine whether a bona fide employment relationship existed and indicated that additional work by OIG would be redundant in light of the work done by SSA and GAO, along with the elimination of the one-day test. It is not clear why OIG’s views on this matter have changed.
Our responses to the specific recommendations are provided below:
Recommendation 1
SSA should develop policies and procedures to ensure individuals employed as one-day workers only receive GPO exemptions if appropriate. For example, SSA should obtain documentation to evaluate whether the terms and conditions of the employment are valid and whether the school district’s Social Security coverage complies with its section 218 agreement.
Response
We agree in part with this recommendation. Our policies regarding the “last day” exemption to the GPO are based on the applicable statute in effect before enactment of the Social Security Protection Act of 2004. These policies are appropriate and have been reviewed and approved by our Office of General Counsel. However, we agree to check to ensure that an appropriate section 218 agreement is in force for the school district.
Recommendation 2
SSA should reexamine the decisions to grant an exemption from GPO for the 168 spouses in our sample.
Response
We agree to review the section 218 agreement for the seven school districts where the
168 spouses worked and, if we identify problems in this review, we will take appropriate action.
Recommendation 3
SSA should identify and reexamine any decisions to grant exemptions from GPO for spouses in the population of 20,248 one-day workers employed by the seven school districts.
Response
As stated in the response to recommendation 2, we agree to review the section
218 agreements for these seven school districts and, if we identify problems in this review, we will take appropriate action.
Recommendation 4
SSA should review the one-day worker programs at the other eight Texas independent school districts identified in the allegation to determine whether their one-day workers programs would result in inappropriate GPO exemptions.
Response
We agree to review the section 218 agreements for the other eight school districts identified in the OIG review and, if we identify problems in this review, we will take appropriate action.
Web posted: 01/26/07
