A retired annuitant is a former participant in a public retirement system, who is rehired by the same employer or by a different public employer that maintains positions under the same retirement system. This person has retired from service with the State or local government and is either receiving retirement benefits under the retirement system or has reached the normal retirement age under the retirement system.
If the annuitant is rehired by the same employer, or hired by another employer who maintains the same retirement system, the annuitant is exempt from mandatory Social Security coverage only. Beginning April 1, 1986, rehired annuitants are subject to Medicare tax withholding. If the annuitant is hired in a position that is covered under a Section 218 Agreement, the rehired annuitant is covered for Social Security and Medicare.
Rehired annuitants (e.g., teachers, police officers or firefighters) frequently ask:
"I've retired but I'm working again. Why are no Social Security taxes taken out of my wages? They're taking Medicare out but no Social Security."
"Social Security taxes were never deducted when I worked for the County as a teacher. Why are Social Security taxes being deducted now that I've retired and driving a school bus?"
There is confusion concerning the rules for mandatory Social Security coverage under Section 210(a)(7) of the Social Security Act (and corresponding provisions in the Internal Revenue Code) and Social Security coverage under Section 218 Agreements. In order to answer these questions, the employer must determine how rehired annuitants may be subject to Social Security coverage.
The employer must determine whether the position the rehired annuitant now occupies is covered by a Section 218 Agreement. If yes, the position is covered and Social Security and Medicare taxes are withheld. (See Divided Retirement System Rules paragraph below for exception.)
If the position is not covered under a Section 218 Agreement, then it must be determined whether mandatory Social Security applies. The key here is the retirement system not the position. Does the entity for which the rehired annuitant works maintain the same retirement system as the one under which the annuitant is qualified to receive a pension? If yes, mandatory Social Security does not apply because the annuitant is considered a member of a retirement system (even if the position the annuitant now occupies is not under that retirement system). Please note: the mandatory Social Security exclusion applies in a situation like this, if the retirement system in question meets the qualifying “Social Security replacement plan” definition established by IRS. If the retirement system does not meet that definition, then mandatory Social Security coverage would apply to the rehired annuitant. Medicare coverage, however, is mandatory for all employees rehired after March 31, 1986.
Example: A teacher retires in December 1999 from County A where she was a member of the Statewide Teachers Retirement System. In March 2000 she is hired by County B as a bus driver. The bus driver position is not covered by a Section 218 Agreement. County B maintains the same STRS as the one the teacher is qualified to receive a pension from but the bus driver job is not covered under STRS. However, because County B maintains the STRS, even though the bus driver position is not covered under it, mandatory Social Security does not apply because the teacher is considered a rehired annuitant. Mandatory Medicare applies because she was hired after March 31, 1986. If the bus driver position was covered by a Section 218 Agreement, Social Security and Medicare taxes would be withheld.
Certain States are authorized to divide a retirement system based on whether the employees in positions under the retirement system want Social Security coverage. (Section 218(d)(6)(C) of the Act.)
The States with authority include:
Alaska, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, North Dakota, Pennsylvania, Rhode Island, Tennessee, Texas, Vermont, Washington, Wisconsin and interstate instrumentalities.
If a member of the "no" group retires and subsequently is re-employed by the same entity as a member of the retirement system, the question whether the rehired annuitant retains the "no" vote or is a "new" member of the retirement system is determined by the State under its law.
Contact your State Social Security Administrator to determine whether rehired annuitants are subject to the divided retirement system rules.
IRS Publication 963, Federal-State Reference, page 6-9
IRS regulations 26 CFR 31.3121(b)(7)-2(d)(4)(ii)*
"An employee who is a former participant in a retirement system maintained by a State, political subdivision or instrumentality thereof, who has previously retired from service with the State, political subdivision or instrumentality, and who is either in pay status (i.e., is currently receiving retirement benefits) under the retirement system or has reached normal retirement age under the retirement system, is deemed to be a qualified participant in the retirement system without regard to whether he or she continues to accrue a benefit or whether the distribution of benefits under the retirement system has been suspended pending cessation of services. This rule also applies in the case of an employee who has retired from service with another State, political subdivision or instrumentality thereof that maintains the same retirement system as the current employer, provided the employee is a former participant in the system by reason of the employee's former employment. Thus, for example, if a teacher retires from service with a school district that participates in a state-wide teachers' retirement system, begins to receive benefits from the system, and later becomes a substitute teacher in another school district that participates in the same state-wide system, the employee is treated as a re-hired annuitant under this paragraph."