[Federal Register Volume 60, Number 158 (Wednesday, August 16, 1995)]
[Proposed Rules]
[Pages 42482-42490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20078]
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RAILROAD RETIREMENT BOARD
20 CFR Part 230
RIN 3220-AA61
Reduction and Non-Payment of Annuities by Reason of Work
agency: Railroad Retirement Board.
action: Proposed rule.
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summary: The Railroad Retirement Board (Board) proposes to revise Part
230 of its regulations to explain how employment or self-employment
after an annuitant's annuity beginning date may cause a reduction in or
non-payment of the annuity.
dates: Comments must be received by September 15, 1995.
addresses: Secretary to the Board, Railroad Retirement Board, 844 Rush
Street, Chicago, Illinois 60611.
for further information contact: Thomas W. Sadler, Assistant General
Counsel, Railroad Retirement Board, 844 Rush Street, Chicago, Illinois
60611, (312) 751-4513, TDD (313) 754-4701.
supplementary information: Sections 2(f) and 2(g)(2) of the Railroad
Retirement Act (45 U.S.C. 231a (f) and (g)(2)) provide for a reduction
in or non-payment of an annuity if post-retirement earnings exceed the
limits set forth in section 203 of the Social Security Act (45 U.S.C
403). Although these provisions were enacted as part of the Railroad
Retirement Act of 1974 (Pub. L. 93-445, Title I, 88 Stat. 1312), the
Board has never explained in its regulations how such provisions
operate.
Sections 230.5 through 230.16 of these proposed regulations explain
how the earnings limitations set forth in section 203 of the Social
Security Act apply to a railroad retirement benefit. Specifically,
these proposed sections explain how an individual attains an insured
status so that the earnings limitations are applicable to his or her
benefit, what portion of a railroad retirement benefit is subject to
these earnings restrictions (the work deduction component), and how a
railroad retirement benefit may be reduced or not paid because of post-
retirement earnings.
Secton 230.9 sets forth a revised interpretation of the work
deduction component subject to deduction for excess earnings. The
revised interpretation tracks explicitly the language of sections
2(f)(1) and 2(f)(2) of the Railroad Retirement Act. These sections
provide that the work deduction component of the tier I benefit is the
amount of that benefit attributable to post-1974 railroad service
[[Page 42483]]
and all social security coverage wages and self employment income. The
Railroad Retirement Board has been computing the work deduction as the
difference between a hypothetical tier I benefit computed on the basis
of all service and a hypothetical tier I benefit computed using only
pre-1974 railroad service. This method of computation substantially
overvalues pre-1975 railroad service and results in a smaller work
deduction component than contemplated by the language of the statute.
This revised definition would become effective no earlier than January
1, 1996.
The Labor Member of the Railroad Retirement Board dissented from
the vote of the majority of the Board to adopt the revised definition
of the work deduction component and wishes to express his views on that
change. It is the Labor Member's opinion that the previous definition
of the work deduction component of the tier I benefit is the correct
interpretation of the statute, giving meaning not only to the wording
of the statute itself, but also to the intention of Congress in
enacting that provision. Congress, in subjecting tier I benefits to
work deductions, like social security benefits, nevertheless recognized
that until 1975 these benefits were not subject to such deductions. By
providing that only that part of the tier I benefit as is computed on
the basis of social security wages and post-1974 railroad compensation
Congress intended to preserve that portion of the tier I benefit based
on railroad earnings before 1975 as not subject to work deductions. The
construction given the Railroad Retirement Act by the majority results
in a much smaller exempt amount with the value of pre-1975 railroad
earnings eroding more and more each year. In the view of the Labor
Member, this is directly contrary to the intention of Congress to
preserve the value of pre-1975 railroad service, and since the current
method follows past opinions of agency staff, the proposed change will
have difficulty passing legal challenge.
The Labor Member is of the opinion that the majority's
interpretation of the work deduction component has been manufactured
solely to increase the amount of that component, by as much as several
hundred dollars per month, so as to reduce benefit payments. He
believes that the majority's action is arbitrary and capricious,
compromises due process, and that it is wrong to change a long-standing
agency interpretation without a compelling reason to do so. Moreover,
analysis prepared by agency staff has shown that the change in
interpretation will be costly and impose substantial administrative
burdens on agency staff. Finally, the change in interpretation will
result in recurring benefit recomputations resulting from additional
earnings. Because of the delay in posting these earnings there will
occur additional overpayments that will be subject to recovery action.
In summary, the Labor Member believes that the action of the majority
is arbitrary and capricious, will adversely affect rights and
expectations of our beneficiaries, and is contrary to the intention of
Congress in drafting the language in question.
Sections 230.17 through 230.20 of these proposed regulations
explain how an annuitant must report his or her post-retirement
earnings to the Board and what penalties may apply for failure to make
such reports. Finally, proposed Sec. 230.21 explains when the Board may
suspend the payment of a benefit because the annuitant is currently
engaging in employment or self-employment.
Other restrictions apply to a railroad retirement benefit because
of post-retirement work. Sections 2(e)(3), (e)(5) and (g)(1) of the Act
(45 U.S.C. 231a(e)(3), (e)(5), and (g)(1)) provide for the non-payment
of a benefit for any month in which an annuitant performs compensated
service for an employer under the Act. Proposed Sec. 230.4 explains how
these provisions apply to a railroad retirement benefit. Section
2(e)(4) of the Act provides for a special earnings limitation for
disability annuitants. A reference to this limitation is found in
proposed Sec. 230.3. Proposed Sec. 230.22 explains how work outside the
United States may affect payment of a benefit.
Finally, the Railroad Unemployment Insurance and Retirement
Improvement Act of 1988, Public Law 100-647, section 7302(b) (102 Stat.
3342, 3777), amended section 2(e) of the Railroad Retirement Act to
provide for an earnings limitation applicable to the tier II and
supplemental annuity components of a railroad retirement annuity where
an employee or spouse annuitant performs work for wages for the last
employer(s) for whom he or she worked prior to his or her annuity
beginning date (commonly known as last person service). These
provisions are explained in proposed Sec. 230.23.
The Board, in conjunction with the Office of Management and Budget,
has determined that this is not a major rule under Executive Order No.
12866; therefore, no regulatory impact analysis is required.
Information collections required by this part have been approved by the
Office of Management and Budget under Control Nos. 3220-0032 and 3220-
0073.
List of Subjects in 20 CFR 230
Railroad employees, Railroad retirement.
For the reasons set out in the preamble, Title 20, Chapter II, of
the Code of Federal Regulations is proposed to be amended as follows:
1. Part 230 is revised to read as follows:
PART 230--REDUCTION AND NON-PAYMENT OF ANNUITIES BY REASON OF WORK
Sec.
230.1 Introduction.
230.2 Definitions.
230.3 Loss of disability annuity because of earnings and penalties.
230.4 Loss of annuity for month in which compensated service is
rendered.
230.5 Earnings limitation; definitions.
230.6 Earnings limitation; annual earnings test.
230.7 Earnings limitation; earnings in a taxable year.
230.8 Earnings limitation; work deduction insured status.
230.9 Earnings limitation; retirement work deduction component.
230.10 Earnings limitation; survivor work deductions.
230.11 Earnings limitation; yearly amount subject to work
deductions.
230.12 Earnings limitation; method of charging.
230.13 Earnings limitation; monthly benefits payable.
230.14 Earnings limitation; monthly earnings test.
230.15 Earnings limitation; self-employment--substantial services.
230.16 Evaluation of factors involved in substantial services test.
230.17 Obligation to report earnings.
230.18 Penalty deductions for failure to timely report earnings.
230.19 Good cause for failure to make required reports.
230.20 Request by Board for reports of earnings; effect of failure
to comply with request.
230.21 Current suspension of work deduction component because an
individual works or engages in self-employment.
230.22 Employment outside the United States.
230.23 Last person service work deductions.
230.24 Exception concerning service to a local lodge or division of
a railway labor organization.
Authority: 45 U.S.C. 231f.
Sec. 230.1 Introduction.
This part describes what events may cause a reduction in or
nonpayment of part or all of an individual's annuity under the Railroad
Retirement Act as the result of the annuitant engaging in
[[Page 42484]]
employment or self-employment after his or her annuity beginning date.
Sec. 230.2 Definitions.
Annuity means a payment due an entitled person for a calendar month
and made to him or her on the first day of the following month.
Retirement Age means age 65, with respect to an employee or spouse
who attains age 62 before January 1, 2000 (age 60 in the case of a
widow(er), remarried widow(er) or surviving divorced spouse). For an
employee or spouse who attains age 62 (or age 60 in the case of a
widow(er), remarried widow(er), or surviving divorced spouse) after
December 31, 1999, retirement age means the age provided for in section
216(1) of the Social Security Act.
Social Security Overall Minimum Guarantee means the benefit paid to
an employee which is equal to the total amount of family benefits which
would be payable under the Social Security Act on the earnings record
of that employee had his or her railroad compensation been covered
under that statute and not the Railroad Retirement Act. This benefit is
only paid when it is greater than the amount of annuities produced by
the benefit formulas under the Railroad Retirement Act.
Tier I Benefit means the benefit component of an annuity under the
Railroad Retirement Act calculated using Social Security Act formulas
and based upon earnings covered by either the Railroad Retirement Act
or the Social Security Act.
Tier II Benefit means the benefit component calculated under a
formula found in the Railroad Retirement Act and based only upon
earnings in the railroad industry.
Vested Dual Benefit means a monthly payment due an entitled person
in addition to the tier I and tier II benefit. The benefit is payable
to employee annuitants who met certain requirements under the Railroad
Retirement Act and Social Security Act prior to 1975. The vested dual
benefit restores, in part, any reduction in the tier I benefit due to
receipt of a social security benefit.
Work Deduction Component means that part of an individual's annuity
which is subject to non-payment or reduction because of employment or
self-employment after the annuity beginning date (see Sec. 230.9 of
this part). The work deduction component for a survivor annuitant is
the entire annuity (see Sec. 230.10 of this part). The special work
deduction component for last person service work deductions is defined
in Sec. 230.23 of this part.
Sec. 230.3 Loss of disability annuity because of earnings and
penalties.
The provisions pertaining to loss of a disability annuity because
of earnings and penalties may be found in part 220, Subpart M of this
chapter.
Sec. 230.4 Loss of annuity for month in which compensated service is
rendered.
(a) If an individual in receipt of an annuity renders compensated
service to an employer covered under the Railroad Retirement Act, as
defined in part 202 of this chapter, he or she shall not be paid an
annuity with respect to any month in which such service is rendered.
(b) If an employee in receipt of an annuity renders compensated
service to an employer covered under the Railroad Retirement Act, as
defined in part 202 of this chapter, no spouse annuity or divorced
spouse annuity based on the employee's earnings record shall be paid
with respect to any month in which the employee renders such service.
Sec. 230.5 Earnings limitation; definitions.
As used in this part:
(a) Earnings shall have the same meaning as that term is defined in
Sec. 404.429 of this title. Generally, earnings shall include:
(1) Remuneration for services rendered as an employee, and
(2) Any earnings from self-employment (less any loss from self-
employment for the year).
(3) Deferred income from self-employment which is received in a
year after the year in which entitlement to an annuity under the
Railroad Retirement Act begins is not included in determining the
individual's excess earnings if it is based on services performed
before entitlement begins.
(b) Annual Exempt Amount means the maximum amount of money that can
be earned in a year without losing any annuity because of earnings.
Annuitants who are between 60 and retirement age during the entire year
have a lower annual exempt amount than those who attain retirement age
during the year, are over retirement age during the whole year or die
in the year they would have attained retirement age. The amount which
constitutes the annual exempt amount is determined periodically by the
Secretary of Health and Human Services in accord with Sec. 404.430 of
this title and is published in the Federal Register, usually in October
in the year preceding the year in which it applies. No annual exempt
amount applies with regard to the reduction due to last person service.
See Sec. 230.23 of this part.
(c) Excess earnings means, with respect to an individual who has
attained retirement age before the close of his or her taxable year,
33\1/3\ percent of the amount of earnings above the annual limit that
must be applied against the amount of benefit subject to work
deductions. If the individual has not attained retirement age before
the close of his or her taxable year, the applicable percentage is 50
percent. The excess earnings as derived under the preceding sentences,
if not a multiple of $1, shall be reduced to the next lower $1.
(d) Monthly exempt amounts means the amount of wages which an
annuitant may earn in any month without part of his or her annuity
being deducted because of excess earnings. The monthly exempt amount is
determined periodically by the Secretary of Health and Human Services
in accordance with Sec. 404.430 of this title and is published in the
Federal Register, usually in October in the year preceding the year in
which it applies. The monthly exempt amount applies only in an
annuitant's grace year or years (see Sec. 230.14 of this part).
Sec. 230.6 Earnings limitation; annual earnings test.
(a) Under the annual earnings test, deductions are made from an
annuity payable to an annuitant for each month in a calendar year in
which the auunitant is under age 70 and to which excess earnings are
charged. This deduction is in an amount equal to the lesser of the
amount of the excess earnings so charged or the total amount of the
work deduction component, as explained in Sec. 230.11 of this part.
(b) Deductions are made from an annuity payable on the basis of an
employee's earnings record because of the employee's excess earnings.
However, deductions will not be made from the annuity payable to a
divorced spouse who has been divorced from the employee for at least
two years.
(c) If an annuity is payable to a person who is not the employee
but who is entitled on the basis of the earnings record of the employee
and such person has excess earnings charged to a month, a deduction is
made only from that person's annuity for that month. This deduction is
in an amount equal to the lesser of the amount of the excess earnings
so charged or the total amount of the work deduction component, as
explained in Sec. 230.11 of this part. See Sec. 230.12 of this part for
the method of charging excess earnings.
Sec. 230.7 Earnings limitation; earnings in a taxable year.
(a) In applying the annual earnings test, all of an annuitant's
earnings for all
[[Page 42485]]
months of the annuitant's taxable year are used even though the
individual may not be entitled to an annuity during all months of the
taxable year. However, in the case of a survivor annuity, earnings
after the annuity terminates are not included in the total earnings for
the taxable year that is used for the annual earnings test. The taxable
year of an employee is presumed to be a calendar year until it is shown
to the satisfaction of the Railroad Retirement Board that the
individual has a different taxable year. A self-employed individual's
taxable year is a calendar year unless the individual has a different
taxable year for the purposes of subtitle A of the Internal Revenue
Code of 1986. The number of months in a taxable year is not affected by
the time an application is filed, attainment of any particular age,
marriage or the termination of marriage, adoption, or the death of the
annuitant.
(b) Remuneration for services rendered as an employee are
includable as earnings for the months and year in which the annuitant
rendered the compensated services. Net earnings from self-employment,
or net losses therefrom, are includable as earnings or losses in the
year for which such earnings or losses are reportable for Federal
income tax purposes.
(c) Earnings in and after the month an individual attains age 70
will not be used to figure excess earnings. For the employed
individual, wages for months prior to the month of attainment of age 70
are used to figure the excess earnings. For the self-employed
individual, the pro rata share of the net earnings or net loss for the
taxable year for the period prior to the month of attainment of age 70
is used to figure the excess earnings. If the annuitant was not engaged
in self-employment prior to the month of attainment of age 70, any
subsequent earnings or losses from self-employment in the same taxable
year will not be used to figure the excess earnings.
Sec. 230.8 Earnings limitation; work deduction insured status.
(a) An individual entitled to a retirement annuity must have a work
deduction insured status for his or her annuity to be reduced by work
deductions. No work deduction insured status is required for the
reduction due to last person service employment. See Sec. 230.23 of
this part.
(b) An employee has a work deduction insured status when he or she
has sufficient quarters of coverage under the Social Security Act to be
eligible for a social security benefit, or would be eligible for a
benefit under that Act if he or she was old enough and has accumulated
sufficient wage quarters which, when added to all quarters of railroad
compensation after 1974 would equal the number of quarters of coverage
necessary to have an insured status under the Social Security Act.
(c) A spouse has a work deduction insured status when he or she:
(1) Is married to an employee who has or who acquires a work
deduction insured status, or
(2) Is vested for a vested dual benefit amount.
(d) If the employee has a work deduction insured status, both the
employee and the spouse may lose part of their annuities because of the
employee's earnings. A spouse may also lose part of his or her annuity
if the spouse works.
(e) A divorced spouse has a work deduction insured status when he
or she was married to an employee who has or who acquires a work
deduction insured status. A divorced spouse who has been divorced from
the employee for at least two years is not subject to deductions for
the employee's excess earnings, however, the divorced spouse is still
subject to deductions based on his or her own earnings.
Sec. 230.9 Earnings limitation; retirement work deduction component.
(a) Employee annuity. The amount of any employee annuity which is
subject to work deductions is the amount of the tier I component of the
employee annuity computed on the basis of the employee's railroad
retirement covered compensation and service subsequent to 1974 and the
employee's wages and self-employment income derived from employment
covered under the Social Security Act, plus any vested dual benefit
payable. If the annuity is reduced for early retirement, then the age
reduction factor is applied to this result. Work deductions will not
apply to the tier I component for any month in which that component is
reduced due to receipt of social security benefits.
(b) Spouse annuity. The tier I work deduction component for the
spouse or divorced spouse is the amount of the tier I component
computed on the basis of the employee's railroad retirement covered
compensation and service subsequent to 1974 and the employee's wages
and self-employment income derived from employment covered under the
Social Security Act. A spouse's vested dual benefit is entirely subject
to reduction for work deductions. Work deductions will not apply to the
tier I component for any month in which that component is reduced due
to receipt of social security benefits.
(c) Any benefit payable under the social security overall minimum
guarantee is treated as a social security benefit and is subject to the
same work deductions as would be applicable to a social security
benefit.
Sec. 230.10 Earnings limitation; survivor work deductions.
The total survivor annuity is subject to reduction for excess
earnings except that work deductions are not applicable to:
(a) A disabled child annuitant age 18 or over,
(b) A disabled annuitant under age 60 who became entitled to a
disabled widow's annuity before age 60 (work deductions become
applicable when the disabled widow attains age 60),
(c) Any survivor annuitant at least age 70, and
(d) Any survivor annuitant who receives a social security benefit
which is reduced for work deductions, if the total amount of excess
earnings are recoverable from the social security benefit.
Sec. 230.11 Earnings limitation; yearly amount subject to work
deductions.
The yearly amount subject to work deductions is determined by
multiplying the monthly work deduction component by the number of
months subject to withholding for work deductions in a year. The amount
to be withheld for work deductions is the annuitant's excess earnings
as defined in Sec. 230.5 of this part or the total work deduction
component, whichever would be less.
Sec. 230.12 Earnings limitation; method of charging.
(a) Months charged. Excess earnings, as described in Sec. 230.5 of
this part, of an individual are charged to each month beginning with
the first month the individual is entitled to benefits in the taxable
year in question and continuing, if necessary, to each succeeding month
in such taxable year until all of the individual's excess earnings have
been charged. Excess earnings, however, are not charged to any month
described in Secs. 230.13 and 230.14
(b) Amount of excess earnings charged--(1) Employee's excess
earnings. The employee's excess earnings are charged on the basis of $1
of excess earnings for each $1 of the employee's and his or her
spouse's or divorced spouse's monthly work deduction components.
(2) Excess earnings of annuitant other than the employee. The
excess earnings of an annuitant other than an employee-annuitant are
charged on the basis of $1 of excess earnings for each $1 of his or
[[Page 42486]]
her monthly work deduction component.
(3) Employee and spouse or divorced spouse both have excess
earnings. If both the employee and a spouse or divorced spouse entitled
on his or her compensation record have excess earnings, the employee's
excess earnings are charged first against the total work deduction
components payable on his or her compensation record, as described in
paragraph (b)(1) of this section. Next, the excess earnings of the
spouse or divorced spouse are charged (as described in paragraph (b)(2)
of this section) against his or her own work deduction component, but
only to the extent that such component has not already been charged
with the excess earnings of the employee.
Sec. 230.13 Earnings limitation; monthly benefits payable.
(a) No matter how much an annuitant earns in a given taxable year,
no deduction on account of excess earnings will be made in a work
deduction component in any month is which:
(1) The annuitant was not entitled to an annuity;
(2) The annuitant was entitled to a monthly earnings test and has a
month of entitlement in which he or she neither worked for wages
greater than the monthly exempt amount nor rendered substantial
services in self-employment (see Sec. 230.14 of this part);
(3) The annuitant was age 70;
(4) The annuitant was entitled to a disability annuity other than
as a disabled widow(er) and was under age 65;
(5) The annuitant was entitled to a disabled child's annuity; or
(6) The annuitant was a widow(er) under age 60 and entitled to a
disabled widow(er)'s annuity.
Sec. 230.14 Earnings limitation; monthly earnings test.
(a) No matter how much an annuitant earns in a given taxable year,
no deduction on account of excess earnings will be made in benefits
payable for any month which is a ``nonwork'' month (see paragraph (b)
of this section) in the annuitant's ``grace year'' (see paragraph (c)
of this section).
(b) A nonwork month is any month in which an individual is entitled
to an annuity and:
(1) Does not work in self-employment (see paragraphs (d) and (e) of
this section);
(2) Does not perform services for wages greater than the monthly
exempt amount (see Sec. 230.5 of this part); and
(3) Does not work in remunerative activity not covered by the
Social Security Act in excess of 45 hours in a month while outside the
United States. A nonwork month occurs even if there are no excess
earnings in the year.
(c) An annuitant's grace year is:
(1) The first year after 1977 in which there is a nonwork month;
(2) A year after 1977 in which there is a break in entitlement for
at least one month and the annuitant becomes entitled to a different
type of annuity. The new grace year would then be the taxable year in
which occurs the first nonwork month after the break in entitlement;
(3) The year in which an annuity based upon having a child in care,
a child's annuity, or a child's benefit under the social security
overall minimum guarantee ends for a reason other than the death of the
annuitant (this exception applies only if the annuitant is not entitled
to any type of benefit in the month after entitlement to the child's
annuity or the benefit based on a child in care ends; it does not apply
to an annuity based on age, only to an annuity payable because of a
child).
Example 1: John, age 65, will retire from his railroad job in
April of next year and apply for an annuity to begin May 1. Although
he will have earned $15,000 for January-April of that year and plans
to work part time, he will not earn an amount in excess of the
monthly exempt amount after April. John's taxable year is the
calendar year. Since next year will be the first year in which he
has a nonwork month while entitled to benefits, it will be his grace
year and he will be entitled to the monthly earnings test for that
year only. He will receive benefits for all months in which he does
not earn an amount in excess of the monthly exempt amount (May-
December) even though his total earnings for the year have
substantially exceeded the annual exempt amount. However, in the
years that follow, only the annual earnings test will be applied if
he has earnings that exceed the annual exempt amount, regardless of
his monthly earnings.
Example 2: Lisa was entitled to a widow's annuity based upon
having a child of her deceased husband, the railroad employee, in
her care. The child marries in May, thus terminating Lisa's annuity
in April. Since Lisa's entitlement did not terminate by reason of
her death and she was not entitled to another type of railroad
retirement annuity, she is entitled to a termination grace year for
that year. The following year Lisa applies for and becomes entitled
to a widow's annuity based upon age. Because there was a break in
entitlement to benefits of at least one month before entitlement to
another type of annuity, this year will also be a grace year if Lisa
has a nonwork month during it.
(d) An individual works in self-employment in any month in which he
or she performs substantial services (see Sec. 230.15 of this part) in
the operation of a trade or business (or in a combination of trades and
businesses if there are more than one) as an owner or partner, even
though there may be no earnings or net earnings caused by the
individual's services during the month.
(e) For purposes of applying the monthly earnings test, an
individual is presumed to have worked in self-employment in each month
of the individual's taxable year until it is shown to the satisfaction
of the Board that in a particular month the individual did not perform
substantial services in any trade or business (or in a combination of
trades and businesses if there are more than one) from which the net
income or loss is included in computing the individual's annual
earnings (see Sec. 230.7 of this part).
(f) For purposes of applying the monthly earnings test, an
individual is presumed to have performed services in any month for
wages of at least as much as the applicable monthly exempt amount set
for that month until it is shown to the satisfaction of the Board that
the individual did not perform services in that month for wages of at
least as much as the monthly exempt amount.
Sec. 230.15 Earnings limitation; self-employment--substantial
services.
(a) In the case of the monthly earnings test, work deductions do
not apply for any month in which the annuitant does not earn more than
the monthly exempt amount and does not render substantial services in
self-employment, regardless of total earnings for the year.
(b) A self-employed person's monthly work activity cannot be gauged
accurately by the amount of monthly earnings; therefore, the self-
employed person's services are measured by whether they are substantial
(only if, however, the monthly earnings test applies--once the monthly
earnings test has been applied in a particular year, work deductions
are assessed based on total yearly earnings).
(c) The general test of whether services are substantial is
whether, in view of the particular services rendered and the
surrounding circumstances, the person can reasonably be considered to
be retired in a particular month. In determining whether services
rendered in self-employment in a month are substantial, the following
factors, among others, may be considered:
(1) The amount of time devoted to the business;
(2) The nature of the services rendered;
[[Page 42487]]
(3) A comparison of the services rendered after retirement with the
services rendered before retirement;
(4) The setting in which the services were performed, including:
the presence of a paid manager, a partner, or a family member who
manages the business; the type of business that is involved; the amount
of capital invested; and whether the trade or business is seasonal.
(d) An individual who alleges that he or she did not render
substantial services in any month or months shall submit detailed
information about the operation of the trade or business covered,
including the individual's activities in connection therewith. When
requested to do so by the Board, the individual shall also submit such
additional statements, information, and other evidence as the Board may
consider necessary for a proper determination as to whether the
individual rendered substantial services in self-employment.
Sec. 230.16 Evaluation of factors involved in substantial services
test.
In determining whether an individual's services are substantial,
consideration is given to the following factors:
(a) Amount of time devoted to trades or businesses. Consideration
is first given to the total amount of time the self-employed individual
devotes to all trades or businesses, the net income or loss of which is
includable in computing his or her earnings as defined in Sec. 230.7.
For the purposes of this paragraph, the time devoted to trade or
business includes all the time spent by the individual in any activity,
whether physical or mental, at the place of business or elsewhere in
furtherance of such trade or business. This includes the time spent in
advising and planning the operation of the business, making business
contacts, attending meetings, and preparing and maintaining the
facilities and records of the business. All time spent at the place of
business which cannot reasonably be considered unrelated to business
activities is considered time devoted to the trade or business. In
considering the weight to be given to the time devoted to trades or
businesses the following rules are applied:
(1) Forty-five hours or less in a month devoted to trade or
business. Where the individual establishes that the time devoted to all
of his or her trades or businesses during a calendar month was not more
than 45 hours, the individual's services in that month are not
considered substantial unless other factors (see paragraphs (b), (c),
and (d) of this section), make such a finding unreasonable. For
example, an individual who worked only 15 hours in a month might
nevertheless be found to have rendered substantial services if he or
she was managing a sizable business or engaging in a highly skilled
occupation.
(2) More than 45 hours in a month devoted to trade or businesses.
Where an individual devotes more than 45 hours to all trades and
businesses during a calendar month, it will be found that the
individual's services are substantial unless it is established to the
satisfaction of the Board that the individual could reasonably be
considered to be retired in the month and, therefore, that such
services were not, in fact, substantial.
(b) Nature of services rendered. Consideration is also given to the
nature of the services rendered by the individual in any case where a
finding that the individual was retired would be unreasonable if based
on time alone (see paragraph (a) of this section). The more highly
skilled and valuable his or her services in self-employment are, the
more likely it is that the individual rendering such services could not
reasonably be considered retired. The regular performance of services
also tends to show that the individual has not retired. Services are
considered in relation to the technical and management needs of the
business for which they are rendered. Thus, skilled services of a
managerial or technical nature may be so important to the conduct of a
sizable business that such services would be substantial even though
the time required to render the services is considerably less than 45
hours.
(c) Comparison of services rendered before and after retirement.
Where consideration of the amount of time devoted to trade or business
(see paragraph (a) of this section) and the nature of services rendered
(see paragraph (b) of this section) is not sufficient to establish
whether an individual's services were substantial, consideration is
given to the extent and nature of the services rendered by the
individual before his or her ``retirement,'' as compared with the
services performed during the period in question. A significant
reduction in the amount or importance of services rendered for the
business tends to show that the individual is retired; absence of such
reduction tends to show that the individual is not retired.
(d) Setting in which services performed. Where consideration of
factors described in paragraphs (b) and (c) of this section is not
sufficient to establish whether or not an individual's services in
self-employment were substantial, all other factors are considered. The
presence of a capable manager, the kind and size of the business, the
amount of capital invested and whether the business is seasonal, as
well as any other pertinent factors, are considered in determining
whether the individual's services are such that he or she can
reasonably be considered retired.
Sec. 230.17 Obligation to report earnings.
(a) General Rule. An individual who during a taxable year is
entitled to an annuity is required to report to the Board the total
amount of his or her earnings for each taxable year. A exceed the
monthly exempt amount multiplied by the number of months in his or her
taxable year, except that a report is not required for a taxable year
if:
(1) The individual attained the age of 70 in or before the first
month of his or her entitlement to benefits in his or her taxable year,
or
(2) The individual's benefits subject to the earnings limitation
were suspended for reasons other than his or her excess earnings for
all months in which he or she was entitled to benefits and was under
age 70.
(b) Time for filing. The report required by paragraph (a) of this
section shall be made on a form prescribed by the Board and shall be
filed on or before the 15th day of the fourth month following the close
of an individual's taxable year or at such other time as may be set by
the Board.
(c) Representative payee. Where an individual is receiving benefits
on behalf of another, the representative payee shall be responsible for
the report required in paragraph (a) of this section.
(d) Requirement to furnish requested information. An annuitant, or
the person reporting on his or her behalf, is required to furnish any
other information about the annuitant's earnings and services that the
Board requests for the purpose of determining the correct amount of
benefits payable for a taxable year.
(e) Extension of time for filing report--(1) General.
Notwithstanding the provision described in paragraph (b) of this
section, the Board may grant a reasonable extension of time for making
the report of earning required under this section if it finds that
there is valid reason for a delay, but in no case may the period be
extended more than 3 months for any taxable year.
(2) Requirements applicable to requests for extensions: Before his
or her annual report of earnings is due, an annuitant may request an
extension of
[[Page 42488]]
time for filing the report. The request must be in writing and signed
by the requester.
(3) Valid reason defined. A valid reason is a bona fide need,
problem, or situation which makes it impossible or very difficult for
an annuitant (or his or her representative payee) to meet the annual
report due date prescribed by law. This may be illness or disability of
the one required to make the report, absence or travel so far from home
that he or she does not have and cannot readily obtain the records
needed for making the report, inability to obtain evidence required
from another source when such evidence is necessary in making the
report, inability of an accoutant to compile the data needed for the
annual report, or any similar situation which has a direct bearing on
the individuals' ability to comply with the reporting obligation within
the specified time limit.
(4) Evidence that extension of time has been granted. In the
absence of written evidence of a properly approved extension of time
for making an annual report of earnings, it will be presumed that no
extension of filing time was granted. In such case it will be necessary
for the annuitant to establish whether he or she otherwise had good
cause (Sec. 230.19) for filing the annual report after the normal due
date.
(Approved by the Office of Management and Budget under control
numbers 3220-0032 and 3200-0073)
Sec. 230.18 Penalty deductions for failure to timely report earnings.
(a) Penalty for failure to report earnings; general. Penalty
deductions are imposed only against an individual's retirement
benefits, in addition to the deductions required because of his or her
excess earnings, if:
(1) He or she fails to make a timely report of his or her earnings
as specified in Sec. 230.17 for a taxable year; and
(2) It is found that good cause for failure to timely report
earnings (see Sec. 230.19) does not exist; and
(3) A deduction is imposed because of his or her excess earnings
for that year; and
(4) An overpayment of benefits results, recovery of which is not
waived, provided however, that if the person is found to be without
fault in causing the overpayment, no penalty shall be assessed.
(b) Determining amount of penalty deduction. The amount of the
penalty deduction for failure to report earnings for a taxable year
within the prescribed time is determined as follows:
(1) First failure to file timely report. The penalty deduction for
the first failure to file a timely report is an amount equal to the
individual's work deduction component for the last month of the year in
which the overpayment occurs. If the total excess earnings deduction
for the year is less than the work deduction component the penalty
equals the total excess earnings or $10, whichever is larger.
(2) Second failure to file timely report. The penalty deduction for
the second failure to file a timely report is an amount equal to twice
the amount of the individual's work deduction component for the last
month of entitlement of the year in which the overpayment occurs.
(3) Subsequent failures to file timely reports. The penalty
deduction for the third or subsequent failure to file a timely report
is an amount equal to three times the amount of the individual's work
deduction component for the last month of entitlement of the year in
which the overpayment occurs.
Example. For the first late report, the violation period begins
with the date of entitlement and ends with the last overpaid year
for which the report is late. For subsequent late reports, the
penalty applies to each overpaid year for which the report is late.
For example, an employee has the following earnings record:
------------------------------------------------------------------------
Year Earnings
------------------------------------------------------------------------
1980............................... Excess
1981............................... ...................................
1982............................... Excess
1983............................... ...................................
1984............................... Excess
1985............................... Excess
1986............................... ...................................
1987............................... Excess
1988............................... ...................................
------------------------------------------------------------------------
If the employee reports his 1980, 1982 and 1984 earnings in
February 1985, the report is late for 1980 and 1982. Since this is
the first late report, there is one penalty. The penalty is equal to
the work deduction component for December 1982. If the employee
reported his 1985 and 1987 earnings in July 1988, the report is late
for 1985 and 1987. Since this is a subsequent late report, 1985 is
considered the second late report and 1987 is the third late report.
The penalty amount for 1985 is two times the work deduction
component for December 1985. The penalty amount for 1987 is three
times the work deduction component for December 1987.
(c) Penalty deduction imposed under Sec. 230.22 not considered. A
failure to make a report as required by Sec. 230.22 of this part for
which a penalty deduction is imposed is not counted as a failure to
report in determining under this section whether a failure to report
earnings or wages is the first or subsequent failure to report.
(d) Limitation on amount of penalty deduction. Notwithstanding the
provisions described in paragraph (b) of this section, the amount of
the penalty deduction imposed for failure to file a timely report of
earnings for a taxable year may not exceed the number of months in that
year for which the individual received and accepted a benefit and for
which deductions are imposed by reason of his or her earnings for such
year.
Sec. 230.19 Good cause for failure to make required reports.
(a) General. The failure of an individual to make a timely report
required under this part will not result in a penalty deduction
provided for in this part if the individual establishes to the
satisfaction of the Board that his or her failure to file a timely
report was due to good cause. Before making any penalty determination
provided for in this part the individual shall be advised of the
penalty and good cause provisions and afforded an opportunity to
establish good cause for failure to file a timely report. The failure
of the individual to submit evidence to establish good cause within a
specified time may be considered a sufficient basis for a finding that
good cause does not exist. For example, ``good cause'' may be found
where failure to file a timely report was caused by:
(1) Serious illness of the individual, or death or serious illness
in his or her immediate family;
(2) Inability of the individual to obtain, within the time required
to file the report, earnings information from his or her employer
because of death or serious illness of the employer or one in the
employer's immediate family; or unavoidable absence of his or her
employer; or destruction by fire or other damage of the employer's
business records; or failure or refusal of the employer to furnish the
information upon timely request therefor;
(3) Destruction by fire, or other damage of the individual's
business records;
(4) Failure on the part of the Board to furnish forms in sufficient
time for an individual to complete and file the report on or before the
date it was due, provided the individual made a timely request to the
Board for the forms.
(5) Reliance upon a written report to the Board made by, or on
behalf of, the annuitant before the close of the taxable year, if such
report contained sufficient information about the annuitant's earnings
or work to require suspension of his or her work deduction component
and the report was not subsequently refuted or rescinded.
(b) Good cause for subsequent failure. Where circumstances are
similar and an
[[Page 42489]]
individual fails on more than one occasion to make a timely report good
cause normally will not be found for the second or subsequent
violation.
Sec. 230.20 Request by Board for reports of earnings; effect of
failure to comply with request.
(a) Request by the Board for report during taxable year; effect of
failure to comply. The Board may, during the course of a taxable year,
request an annuitant to make a declaration of his or her estimated
earnings for his or her taxable year and to furnish any other
information about his or her earnings that the Board may specify. If an
annuitant fails to comply with such a request from the Board the
annuitant's failure in itself constitutes justification for a
determination that it may reasonably be expected that the annuitant
will have deductions imposed under the earnings for that taxable year,
and consequently the Board may suspend payment of the annuitant's work
deduction component for the remainder of the taxable year.
(b) Request by the Board for report after close of taxable year;
failure to comply. After the close of his or her taxable year, the
Board may request an annuitant to furnish a report of earnings for the
closed taxable year and to furnish any other information about earnings
for that year that the Board may specify. If the annuitant fails to
comply with this request, such failure shall in itself constitute
justification for a determination that the annuitant's work deduction
component is subject to deductions for each month in the taxable year
(or only for the months thereof specified by the Board).
Sec. 230.21 Current suspension of work deduction component because an
individual works or engages in self-employment.
(a) Circumstances under which benefit payments may be suspended.
If, on the basis of information obtained by or submitted to the Board,
it is determined that an individual entitled to an annuity for any
taxable year may reasonably be expected to have deductions imposed
against his or her work deduction component by reason of his or her
earnings for such year, the Board may, before the close of the taxable
year, suspend such component of the individual and of all other persons
entitled to benefits on the basis of the individual's earnings record.
(b) Duration of suspension. The suspension described in paragraph
(a) of this section shall remain in effect with respect to the work
deduction component for each month until the Board has determined
whether or not any deduction under that part applies for such month.
Sec. 230.22 Employment outside the United States.
(a) General rule. An annuitant who has a work deduction insured
status as provided in Sec. 230.8 of this part shall lose his or her
work deduction component for any month during which he or she works in
remunerative activity not covered by the Social Security Act outside
the United States for more than 45 hours. In the case of a survivor
annuitant subject to work deductions, earnings from remunerative
activity outside the United States shall be charged against the annuity
to the same extent that such earnings would have been charged had the
remunerative activity taken place within the United States.
(b) Spouse annuitant. If an employee-annuitant loses his or her
work deduction component for any month in accordance with paragraph (a)
of this section, then the amount of any spouse or divorced spouse work
deduction component is also not paid in that month. However, the
benefits of a divorced spouse who has been divorced from the employee-
annuitant for at least 2 years are not subject to withholding because
of the employee-annuitant's work activity.
(c) Outside the United States. Work activity outside the United
States means work activity outside the territorial boundaries of the 50
States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands,
Guam, and American Samoa. Self-employment by an alien in Puerto Rico,
the U.S. Virgin Islands, Guam, or American Samoa is considered to be
outside the U.S. unless the alien is a permanent resident of a State,
the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam,
or American Samoa.
(d) Remunerative activity not covered by the Social Security Act.
Remunerative activity not covered by the Social Security Act includes
all employment or self-employment outside the United States unless the
wages or net earnings from self-employment are subject to social
security taxes as provided for in the Internal Revenue Code. A trade or
business which produces only income which is not considered earnings
from self-employment (for example dividends, or rental from real
estate) is not considered remunerative employment.
(e) Obligation to report. Any annuitant under age 70 who becomes
employed or self-employed outside the United States shall file with the
Board a report of such employment or self-employment before the
annuitant accepts benefits for the second month following the month in
which he or she worked or engaged in self-employment. Such report shall
be made on the form and in accordance with instructions provided by the
Board.
(f) Penalty for failure to report. An individual who fails to file
a report within the time limits required by paragraph (e) of this
section and who is not able to show good cause for such failure, as
provided for in Sec. 230.19 of this part, shall be subject to the
penalty deductions provided for in Sec. 230.18 of this part.
(g) Extension of time to file. An individual may request an
extension of time to file the report required in paragraph (e) of this
section in accordance with Sec. 230.17 of this part.
(Approved by the Office of Management and Budget under control
numbers 3220-0032 and 3220-0073.)
Sec. 230.23 Last person service work deductions.
(a) General rule. An individual in receipt of an employee or spouse
annuity who receives remuneration in any month for services rendered as
an employee to the last person or persons (LPS) by whom such individual
was employed before the date on which his or her annuity began to
accrue shall, in addition to any other deduction required by this part,
be subject to a deduction in his or her work deduction component, as
defined in paragraph (b) of this section, for that month of $1 for
every $2 of remuneration received. Unlike the earnings limitation found
in Secs. 239.5-230.15 of this part there is no monthly or annual exempt
amount. Each $2 of remuneration received from a last person service
employer subjects the work deduction component to a $1 reduction for
that month.
(b) Work deduction component. For purposes of this section, the
work deduction component of an individual in receipt of an employee
annuity shall be that portion of the annuity payable in any month which
is computed under section 3(b) of the Railroad Retirement Act as
adjusted by section 3(g) of that Act (tier II benefit) plus the amount
computed under section 3(e) of that Act (supplemental annuity). With
respect to an individual in receipt of a spouse annuity, his or her
work deduction component shall be that portion of the annuity payable
in any month computed under section 4(b) of the Railroad Retirement Act
as adjusted under section 4(d) of that Act (tier II benefit).
(c) Method of charging. An individual in receipt of a spouse
annuity shall have
[[Page 42490]]
the work deduction component of that annuity reduced by the amount of
any deduction in the employee annuity required by paragraph (a) of this
section. Where both an employee and his or her spouse have received
remuneration as described in paragraph (a) of this section, the
employee's work deduction component is reduced for his or her earnings
and the spouse's work deduction component is reduced first for his or
her earnings and then for the employee's earnings.
(d) Maximum deduction. Any deductions imposed by this section for
any month shall not exceed 50 percent of the work deduction component.
(Approved by the Office of Management and Budget under Control
Numbers 3220-0032 and 3320-0073.)
Example. An employee receives wages of $400 from his or her last
person service employer in a given month. The deductions in the
employee's and his or her spouse's work deduction components are
computed as follows:
------------------------------------------------------------------------
Component
Annunity component LPS deduction after
deduction
------------------------------------------------------------------------
Employee tier 2............ $1,000 \1\ $191.75 $808.25
Supplemental annuity....... 43 \2\ 8.25 34.75
Spouse tier 2.............. 450 200.00 250.00
--------------------------------------------
Totals................. $1,493 $400.00 $1,093.090
------------------------------------------------------------------------
\1\ $200 x $1,000/$1,043 = 191.75.
\2\ $200 x $43/$1,043 = 8.25.
Sec. 230.24 Exception concerning service to a local lodge or division
of a railway labor organization.
In determining whether an annuity is subject to the provisions of
this part, the Board shall disregard any remuneration for services
rendered after December 31, 1936, to an employer which is a local lodge
or division of a railway labor organization if the remuneration for
such service is required to be disregarded under the provisions of
Sec. 211.2 of this chapter.
Dated: August 7, 1995.
By Authority of the Board.
For the Board.
Beatrice Ezerski,
Secretary to the Board.
[FR Doc. 95-20078 Filed 8-15-95; 8:45 am]
BILLING CODE 7905-01-M
