Medicare tax

If anyone's interested, I found the answer. The Social Security Admin has a different agreement with each state. California's allows an employee to transfer between local agencies without a status change, so the guy is grandfathered in.

Here's an IRS Q&A on point. Pay particular attention to the definition of who is the same employer. What is the effect on the continuing employment exemption from Medicare tax when an employee originally hired in 1985 transfers in 2001 from one employer to another within the same political subdivision? An employee who is employed by the same political subdivision, but working in a different office or division, remains eligible for the continuing employment exception. Under section 3121(u)(2)(C) of the Code, services performed by state or local government employees hired on or before March 31, 1986, who participate in a public retirement system are exempt from Medicare taxes (if section 3121(b)(7) otherwise applies), provided that the employees were performing regular and substantial services for remuneration for that employer before April 1, 1986, their employment relationship with that employ was not entered into for purposes of meeting the exception under section

3121(u)(2)(C), and their employment relationship with that employee has not been terminated after March 31, 1986. [Emphasis added.] This is referred to as the "continuing employment exception" to the Medicare tax. Code section 3121(u)(2)(D) states that, for purposes of subparagraph (C): (i) all agencies and instrumentalities of a State (as defined in section 218(b) of the Social Security Act) . . . shall be treated as a single employer, and (ii) all agencies and instrumentalities of a political subdivision of a State (as so defined) shall be treated as a single employer and shall not be treated as described in clause (i). The term "political subdivision" ordinarily includes a county, city or town. Rev. Rul. 86-88, 1986-2 C.B. 172. Rev. Rul. 86- 88 states that an employee hired before April 1, 1986, does not qualify for the continuing employment exception if, after March 31, 1986, the employee transfers from a political subdivision employer to a state employer. Employees of a state have more latitude in their transfers under section 3121(u)(2)(D), as all agencies and instrumentalities of a state are considered to be a single employer. Thus, an employee who qualifies for the continuing employment exception continues to qualify when transferred from one employer to another within the same political subdivision. The following points must be kept in mind. First, the original hire date of the employee is used in evaluating the continuing employment exception, as long as there was no break in service. Thus, for an employee who transferred after April 1, 1986, from one state agency to another, the original date of hire would apply. If the employee transferred from employment with Town A to Town B, then the date of hire for this purpose would be that in Town B. If School Districts A and B are an elementary school and a high school district that merge into a new entity, a consolidated school district, then the continuing employment exemption applies to employees of both A and B. The continuing employment exception applies to cases of merger or consolidation of school districts, as the teachers continue to work for the same employers under a new name.

The agreements you refer to are known as Section 218 Agreements and have nothing to do with Medicare. They deal with FICA only. See my original answer as to why this person may be grandfathered.