Since legislation enacted in 1990, government employees have been permitted to opt out of paying Social Security tax, provided their employer offers a retirement program that at least replicates the retirement benefits an individual would receive from the Social Security program.
Because ARUP is considered a government employer (due to being an enterprise of the University of Utah) and because ARUP’s retirement plan contributions exceed the required contributions to Social Security, ARUP employees can choose to opt in or opt out of paying Social Security tax.
The Social Security tax exemption program was implemented at ARUP in August 2007 to make it possible for employees to save even more for retirement. Instead of paying Social Security tax, ARUP employees can contribute the money they would usually pay in Social Security tax to their own retirement accounts.
Under existing Social Security rules, both the employer and the employee must contribute 6.2% of an employee’s wages to Social Security. ARUP employees are given the opportunity to choose if they want to pay Social Security tax (opt in) or not pay Social Security tax (opt out).
How it Works
If employees decide to opt out, then Social Security tax will not be deducted from their paycheck, resulting in an immediate savings of 6.2% of their wages. Employees are encouraged to invest these savings into their ARUP retirement account by increasing their contribution to the 403(b) plan.
Keep in mind that if employees opt out of paying Social Security tax, they may have a reduced Social Security benefit upon retirement and other penalties may apply. Therefore, it is very important that employees invest the money they would have paid in Social Security tax and plan for their own retirement.
ARUP gives employees who opt out of paying Social Security an additional 3.1% pension contribution each pay period because ARUP does not have to pay 6.2% in Social Security tax for those employees. This 3.1% is combined with the 5% pension contribution that all employees receive each pay period, for a total pension contribution of 8.1%. Employees who elect to pay Social Security tax will continue to receive a 5% pension contribution each pay period.
Making Your Election
All new employees will automatically be opted out of paying Social Security tax and registered to contribute 9.2% (6.2% Social Security opt-out savings plus an additional 3%) to their 403(b) retirement accounts. Employees can access their retirement accounts and change their contribution rates at any time.
If new employees want to change their Social Security tax election, they must submit a Social Security tax election form within 30 days of their hire date. An open-enrollment period is held each year in June when all employees can change their election for the upcoming fiscal year, which begins on July 1. Once the election has been made, it will remain in effect throughout subsequent fiscal years until the employee elects otherwise.
Impact on Social Security Retirement Benefits
When employees pay Social Security tax, they earn “credits” toward Social Security retirement benefits. Individuals can earn up to four credits per year based on an earnings level that Social Security may change each year. Individuals need 40 credits (10 years of work) to be eligible for Social Security retirement benefits. If employees opt out of paying Social Security tax before they have enough credits to qualify for benefits, the credits will remain on their Social Security record. If they decide to opt in later or leave ARUP and begin working at another company where they pay Social Security tax, they will earn more credits. Once they have earned the required 40 credits, they will always be eligible for Social Security retirement benefits.
Employees who work in uncovered jobs (not paying Social Security taxes) for a time may be subject to the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) penalties if they have less than 30 years of substantial earnings. Visit www.ssa.gov to learn more about these penalties and how they may impact your Social Security benefits.
Social Security benefits are based on a complicated formula. For simplicity, think of the calculation for Social Security benefits as an average of the Social Security tax paid on an individual’s earnings. If an individual stops paying Social Security tax, they will have quarters with no contributions. This will lower the average and, therefore, the amount of Social Security retirement benefits. To see your estimated Social Security benefits at retirement, sign in or create an account at www.ssa.gov.
Impact on Social Security Disability Benefits
If you opt out of paying Social Security tax and become disabled, you may not meet the eligibility requirements to receive Social Security disability benefits. For an explanation of Social Security disability eligibility requirements, visit www.ssa.gov.
ARUP currently pays for long-term disability (LTD) insurance that covers full-time employees, as well as part-time employees who are scheduled to work at least 20 hours per week, in the event they become disabled while working for ARUP. If you stay with ARUP until you reach your full Social Security retirement age, you do not need to be concerned that you may not be covered by Social Security disability coverage. However, if you leave ARUP, you should consider obtaining your own long-term disability policy or make sure your new employer provides long-term disability coverage.Download the Social Security Tax Election Form.