Request By:
Mr. Joseph H. Walls
Comptroller and Inspector
City of Louisville
Louisville, Kentucky 40202
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: William P. Sturm, Assistant Attorney General
Your recent letter to the Attorney General requests a reconsideration of OAG 79-267 concerning whether the method used by the City of Louisville for paying city employees for sick leave is exempt from FICA contributions on these payments. Attached to your letter was a copy of an ordinance proposing to set forth a plan of compensation for city employees of the City of Louisville, an appropriation ordinance and budget worksheets.
As you point out in your letter, KRS 61.420 defines "wages" for Kentucky social security purposes to mean all remuneration for employment, "except that such term shall not include that part of such remuneration which, even if it were for 'employment' within the meaning of federal insurance contribution acts, would not constitute 'wages' within the meaning of the act."
Both 42 U.S.C.A. § 409(b) and 26 U.S.C.A. § 3121(a)(2) exclude from wages for employment tax purposes and for purposes of determining social security benefits the following:
"The amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provisions for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of (1) retirement, or (2) sickness or accident disability, or (3) medical or hospitalization expenses in connection with sickness or accident disability, or (4) death." 42 U.S.C.A. § 409(b).
In State of New Mexico v. Weinberger, 517 F.2d 989 (10th Cir. 1975) the Court held that the Secretary of Health, Education and Welfare could apply the standards set forth in SSR 72-56 requiring sick pay by a governmental unit to be treated as wages unless it could be shown that the governmental entity in question had legal authorization to make payments to employees solely on account of sickness (as opposed to merely a continuation of salary payments) during periods of absence due to illness. The Circuit Court of Appeals upheld the authority of the Secretary of Health, Education and Welfare to apply the standard in SSR 72-56 to the State of New Mexico. However, the court noted that since 1949 the University of New Mexico had had in effect a "plan" or system for determining payments to its employees who were absent from work because of sickness or accident disability. The amount of payments to each employee under the plan were recorded and appropriately stated on the University's books and records as "sick pay" and were made from a regular salary account.
Part IV, Section 2 of the Louisville ordinance states the policy for sick leave. Subsection (a) states that "all regular employees, except as otherwise provided herein, shall be entitled to sick leave with pay at the rate of one and one-half work days of earned sick leave for each full month of continuous service." As you pointed out, the amounts appropriated for sick pay payments are budgeted and accounted for separately. The appropriation ordinance sets forth the budget for each agency, and this ordinance incorporates by reference the budget worksheets for each agency. These worksheets show a separate account for sick leave from which payments for sick leave are deducted as paid. Also, the amount of sick leave paid is separately stated on the employee's paycheck stub. This method of providing for sick pay seems to be at least as comprehensive, if not more so, than that of the University of New Mexico in the Weinberger case which was recognized as constituting a "plan". Therefore, it appears that the method of providing for sick leave to employees of the City of Louisville is sufficiently definite to constitute a "plan or scheme" under 42 U.S.C.A. § 409(b) and 26 U.S.C.A. § 3121(a)(2). To this extent, OAG 79-267 is modified.
The second question presented in your letter is whether this ordinance would abridge any rights previously vested by statute, in contravention of KRS 83.520. It does not appear that the ordinance would abridge any rights vested under state statute, since state statutes do not specifically address themselves to sick leave payments. However, assuming that FICA contributions have been withheld from sick pay in the past, a change in procedure so that these contributions would no longer be withheld, may give rise to a right to have contributions paid in the past refunded.