Request By:
Ms. Nell Foresman
Manager, Accounting Department
Louisville Water Company
435 South Third Street
Louisville, Kentucky 40202
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Martin Glazer, Assistant Attorney General
You seek advice from this office as to whether Sick Pay (or leave) as practiced by the Louisville Water Company is in cludable or ex cludable for purposes of determining FICA taxes (Social Security) .
You indicate that the Social Security Administration has submitted its verbal opinion to Ms. Martha Bellwood of the Kentucky Department for Human Resources that it could find no statutory authority for excluding sick pay from FICA taxes, but that it would like a written opinion from this office.
Ms. Bellwood has forwarded a pamphlet (Transmittal No. 13) entitled in part "Handbook for State Social Security Administrators", dated April 19, 1979.
Apparently, this handbook is an interpretive bulletin of portions of the Social Security Act.
Under Section No. 400, wages are defined in part as "all remuneration paid to employees for services in employment covered under the agreement unless the remuneration is specifically excluded . . ."
Section 413 provides in part:
"The following types of payments are excluded from wages if made under a plan or system established by the employer.
(a) Payments on account of retirement . . .
(b) Payments on account of sickness or accident disability" (emphasis supplied . . .)
Section 413.5 discusses the plan's existence and some criteria to its existence are the following:
(1) if it is in writing;
(2) if there is a reference to the plan in the contract of employment;
(3) employees contribute to the plan;
(4) there is a special fund, separate and apart from the salary account.
Section 415 deals with payments during a period of sickness. Subsection (a) provides in part:
"Payments made by a State or local governmental employer can be excluded under this subsection only if there is a legal authority to pay 'on account of sickness' and evidence that the payments were made under this authority." (Emphasis supplied)
Subsection (b) provides:
"Legal authority to pay on account of sickness means either an express statutory authorization to make such payments or the absence of any restrictions on the employer's ability to do so. The first step in determining whether such legal authority exists is to examine the State statutes and constitution. If either document restricts an employer's ability to pay on account of sickness, the sick pay exclusion does not apply. If there is no such restriction in the State statutes or constitution, and the question concerns a local government, local laws or ordinances must be examined to determine whether there is legal authority to pay on account of sickness. The opinion of the State attorney general on the question is also desirable." (Emphasis supplied)
Subsection (c) provides:
"Such evidence might take the following forms:
a. An ordinance, regulations, or resolution by a government body providing specifically for sick payments; or
2. A separate appropriation solely for sick payments; or
3. A separate sick-pay account. The sick pay account may be used either to make payments direct to the employe or to reimburse the regular salary account for payments made from it."
Subsection (d) warns that some sick pay plans authorize sick pay leave for absences other than the employee's illness (such as a child or member of the employee's family. In such cases, such payments are not excludable from wages and:
"Where an employer's plan or system provides both for payments which are excluded from wages and payments not so excluded, the employer must be able to identify the excluded payments. Otherwise, all the payments must be reported as wages."
Now, how do these guidelines apply to the Louisville Water Company and its employees:
KRS 96.230 - 96.310 authorize and grant powers for water works in cities of the first class. Louisville is the only city of the first class in Kentucky (KRS 81.010).
All of the Louisville Water Company's stock is owned by the City of Louisville. The Louisville Water Company is operated by a board of waterworks (KRS 96.240) composed of four persons appointed by the mayor (no more than two of each major political party).
KRS 96.310 provides in part:
"The board of waterworks may establish and enforce reasonable rules and regulations for its own government. "
and
KRS 96.250 provides in part for election of officers of the board and "The board may appoint such other employes as it deems necessary or proper and may fix the compensation of its officers and employes."
So, in reviewing the statutes, we find authorization for the establishment of a board of waterworks by a city of the first class and those statutes give the board powers to employ its own employees, fix their compensation and provide by rule for its own government. We find no specific prohibition to the payment of sick pay. The definition of "legal authority" here is "the absence of any restrictions on the employer's ability to do so [make payments on account of sickness] " (Section 415(b) - Handbook for State Social Security Administrators).
The Louisville Water Company has entered into an agreement with its union employees (Local 1683 American Federation of State, County and Municipal employees, AFL-CIO) in Rule 32 to pay accumulated sick leave. These payments can only be made for sickness of the employee and not for sickness of members of his family. Upon an employee's retirement, he, or his estate in the event of his death, is paid the value of his unused sick leave days.
Likewise, the company pays similar sums under its "Personnel Handbook" by policy to its non-union employees. Therefore, subsection (c) of Section 415 is met in that there is evidence of "an ordinance, regulations or resolution by a government body providing specifically for sick payments . . ." (Emphasis supplied)
And finally, the Louisville Water Company in its budget separates Sick Leave from its salary and wages accounts. The 1978 Budget, approved by the board on December 13, 1977 provides in Separate Account No. 9212, Sick Leave of $120,450. This evidences "a separate appropriation solely for sick payments" and "[a] separate sick pay account" (415 (2) and (3)).
Therefore, it is the opinion of this office that the payments made for sick leave to employees of the Louisville Water Company are not "wages" for inclusion in determining social security FICA payments. Of course, in the final analysis, the federal authorities will have to make their own determination.
We are aware of two prior opinions which reach an opposite conclusion, to wit: OAG 74-226 dealing with state employees and OAG 79-267 dealing with the City of Louisville's own employees, but they are distinguishable under the facts and the statutory and regulatory language dealing with those particular entities. The Louisville Water Company's authority and factual situation differ considerably.