95-20078. Reduction and Non-Payment of Annuities by Reason of Work  

  • [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]
    
    
    
    =======================================================================
    -----------------------------------------------------------------------
    
    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.
    
    -----------------------------------------------------------------------
    
    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
    
    

Document Information

Published:
08/16/1995
Department:
Railroad Retirement Board
Entry Type:
Proposed Rule
Action:
Proposed rule.
Document Number:
95-20078
Dates:
Comments must be received by September 15, 1995.
Pages:
42482-42490 (9 pages)
RINs:
3220-AA61: Reduction and Nonpayment of Annuities by Reason of Work
RIN Links:
https://www.federalregister.gov/regulations/3220-AA61/reduction-and-nonpayment-of-annuities-by-reason-of-work
PDF File:
95-20078.pdf
CFR: (26)
20 CFR 211.2
20 CFR 230.1
20 CFR 230.2
20 CFR 230.3
20 CFR 230.4
More ...