Reduction and Non-Payment of Annuities by Reason of Work

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

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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

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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

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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

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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;

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(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