Federal Old-Age, Survivors and Disability Insurance; Report of Earnings Under the Social Security Earnings Test

SOCIAL SECURITY ADMINISTRATION

20 CFR Part 404

[Regulations No. 4]

RIN 0960-AE44

Federal Old-Age, Survivors and Disability Insurance; Report of

Earnings Under the Social Security Earnings Test

AGENCY: Social Security Administration.

ACTION: Final rule.

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SUMMARY: This final rule amends our regulations regarding reports of

earnings to the Social Security Administration (SSA) required of

beneficiaries who work and earn more than the applicable exempt amount.

Beneficiaries under age 70, who work and earn more than the applicable

exempt amount, are required by law to report their earnings to SSA

within three months and 15 days following the close of their tax year

(usually April 15). As a result of our ongoing efforts both to improve

customer service and to reduce the public's paperwork burden, we are

changing our regulations to state that we can accept the W-2 report

filed by the employer with SSA, and/or the self-employment income tax

return filed by the beneficiary with the Internal Revenue Service

(IRS), as the report of earnings. We will use the information (wages

and net earnings from self-employment) contained in those reports

together with other pertinent information to adjust benefits under the

earnings test.

DATES: This final rule is effective April 2, 1997.

[[Page 15608]]

FOR FURTHER INFORMATION CONTACT: Robert Augustine, Division of

Regulations and Rulings, Social Security Administration, 6401 Security

Blvd., Baltimore, MD 21235, (410) 966-5121. For information on

eligibility, claiming benefits, or coverage of earnings, call our

national toll-free number, 1-800-772-1213.

SUPPLEMENTARY INFORMATION: Under the Social Security earnings test set

out in section 203 of the Social Security Act (the Act), benefits are

reduced if the annual earnings of a beneficiary (receiving other than

disability benefits), under age 70, exceed certain exempt amounts. The

exempt amounts are established by law. Individuals who are entitled to

a monthly benefit (other than a disability benefit) during the year and

who earn over the exempt amount are required to file a report of

earnings with the SSA within three months and 15 days following the

close of their tax year (usually April 15). The reports may be filed on

a form prescribed by SSA, or in person, or by telephone. The report may

be filed by someone other than the beneficiary, provided the report

contains the required information. Failure to file a report as required

will result in a monetary penalty, unless we find that there was good

cause for filing late. There are 330,833 public reporting burden hours

associated with the completion and filing of these annual earnings

reports.

Working beneficiaries are also required to report their income to

the IRS during the same time period. SSA receives and processes W-2

information from employers. We also receive limited information from

IRS from individual self-employment income tax returns that are filed.

Wages and net-earnings from self-employment are ``posted'' to

individual earnings records as part of our mission to maintain accurate

earnings records for benefit payment. Until recently, we have been

unable to use the earnings information we receive from W-2 forms and

self-employment tax returns as the annual report because it took

several years for SSA to receive and process the earnings information

from the W-2 forms and the tax returns. For that reason, we provided in

Sec. 404.452(b) of our regulations that the filing of tax returns with

the IRS was not such a report as is required to be filed for the annual

earnings test, even where the tax returns showed the same wages and net

earnings from self-employment that must be reported to us for purposes

of the annual earnings test. Although SSA was unable to use earnings

information from W-2 forms and self-employment tax returns to adjust

benefits on a timely basis, we have traditionally used this information

as a check to ensure beneficiary compliance with the reporting

requirements of the annual earnings test.

Recent improvements in employer reporting practices and in SSA's

Annual Wage Reporting (AWR) process have made it feasible and desirable

for SSA to change its process for obtaining earnings information from

working beneficiaries. For the majority of beneficiaries, information

from the W-2 report and/or the self-employment tax return is now

processed quickly enough that it is sufficient to serve as the ``annual

report'' without need for further action by the beneficiary. Therefore,

as part of the ``reinventing government'' initiative and in order to

reduce the reporting burden on the public, improve customer service and

save administrative costs, we are revising Sec. 404.452 to state that

the form W-2 filed by the employer with SSA and/or the self-employment

income tax return filed by beneficiaries with IRS may serve as the

annual report of earnings. Because of this change, SSA will no longer

print and mail Annual Report of Earnings forms. For most beneficiaries,

the process will be totally automated, with SSA receiving and

processing earnings information reported for tax purposes and using

that information in conjunction with other relevant information to

adjust the Social Security benefits payable accordingly.

Certain situations will require more information than is contained

on the form W-2 and self-employment income tax return. When these

situations occur, a beneficiary will still have to contact SSA to

provide the information in order to ensure the correct amount of

benefits are paid, unless the information was otherwise provided to us.

In addition, some beneficiaries may wish to file a report directly with

SSA, in order to have their benefits adjusted sooner. (Most adjustments

now occur during the period February through May, based on reports

filed directly with us, but would take place June through October if

based on reports filed through IRS). In these instances, we will accept

a report of earnings in writing, in person, or over the telephone, from

beneficiaries who still need or wish to file a report.

For example, under IRS regulations, wages are reported on forms W-2

for the year in which they are paid. Under the Social Security earnings

test, wages are counted for the year in which services are performed.

Therefore, if the form W-2 shows wages that were earned in a year or

years prior to the year for which the report is made, e.g., deferred

compensation, the beneficiary will need to report to us the correct

amount of earnings for the year reported.

There is a similar provision for the self-employed (applicable to

years after the initial year of entitlement) that may require contact

when no services have been performed in the year for which net earnings

from self-employment are reported. Furthermore, in the year in which

the monthly earnings test applies (frequently the year of retirement),

a beneficiary who has not already done so will need to provide monthly

earnings information to SSA that cannot be discerned from the form W-2

or the self-employment income tax return.

Additional examples of situations where other pertinent information

must be provided are:

The beneficiary earned wages above the exempt amount and

also had a net loss from self-employment;

There were wages reported on a W-2 that will be included

on a self-employment tax return (e.g., ministers and certain church

workers);

The beneficiary is self-employed and reports earnings on a

fiscal year basis which is not the calendar year;

The beneficiary had Federal agricultural program payments

or income from carry-over crops that is included on the SE return;

The beneficiary estimated earnings over the exempt amount

and some benefits were withheld, but there were no earnings for the

year, i.e., no wages reported, no self-employment.

SSA already has methods of collecting some of the supplemental

information needed to correctly adjust benefits under the earnings test

when that information is needed. Much of the information can be

gathered in the initial claims process. We also work with employers and

payroll groups to have them report directly to us certain payments that

should not be counted under the earnings test. We will continue to use

these methods as well as develop other means to obtain supplemental

information needed to correctly adjust benefits without a separate

report of earnings from the beneficiary. We will provide an explanation

of the process during the claims interview, and we will provide written

information through our public information materials that will allow

beneficiaries to understand what earnings should be counted under the

earnings test and the situations in which we would need additional

information. When we adjust benefits based on the earnings posted to

the beneficiary's record, we will, in our notice to the beneficiary,

provide full information regarding the earnings that we used and the

situations in which those earnings

[[Page 15609]]

may not be correct. This will ensure that beneficiaries have full

knowledge of our actions. Our notice will also tell beneficiaries how

to obtain a reconsideration of our determination if they feel we were

wrong, and will advise them of their responsibility to give us any

further information that could be pertinent to their benefit

adjustment.

It should be noted that we are not revising our regulations

regarding extension of time for filing a report (Sec. 404.452(f)). The

deadline for filing employer reports (W-2 forms) is well within the

timeframes for required annual reports. In relying on these, as well as

the SE tax return information, SSA will assume that posted earnings are

based on timely filed reports. However, when a beneficiary requests an

extension of time from IRS for filing a self-employment tax return, the

beneficiary must either file a timely report of earnings with SSA, or

request an extension of time for filing such a report from SSA. An

extension granted by IRS will not be considered an extension of time

granted by SSA.

This change in our rules will result in improved service to our

beneficiaries. First, this final rule will reduce the burden associated

with the double filing of information with both SSA and IRS. Second,

SSA will be able to shift resources devoted to the solicitation and

processing of reports from beneficiaries under the current annual

report process to other priority workloads, such as processing claims

for benefits and responding to telephone inquiries. Finally, this rule

supports the President's request in his remarks on May 22, 1995 on

signing the Paperwork Reduction Act of 1995, that agencies review their

regulations with the goal of reducing by half the frequency of reports

required from citizens. This final rule will eliminate the annual

report of earnings form and the need for most working beneficiaries to

file a separate report of earnings with SSA, resulting in a savings of

up to 330,833 public burden hours each year.

We are also revising paragraphs (a)(1) and (a)(2) of Sec. 404.452

by changing age 72 to age 70. These revisions reflect the statutory

change in the Social Security Amendments of 1977 that reduced from age

72 to 70, the age at which beneficiaries become exempt from the annual

earnings test. This change was originally scheduled to take effect in

1982 but, due to a provision in the Omnibus Budget Reconciliation Act

of 1981, it did not become effective until 1983. Since the statutory

provisions were self-implementing, we exempted working beneficiaries

age 70 and over from the annual earnings test beginning in 1983.

However, we have not previously updated this regulation to take account

of this statutory change.

This regulation was published in the Federal Register (62 FR 349)

as a notice of proposed rulemaking (NPRM) on January 3, 1997.

Interested parties were given 30 days to submit comments. No public

comments were received. We are, therefore, publishing this final rule

with no changes from the proposed rule.

Regulatory Procedures

Pursuant to section 702(a)(5) of the Act, 42 U.S.C. 902(a)(5), as

amended by section 102 of Public Law 103-296, SSA follows the

Administrative Procedure Act (APA) rulemaking procedures specified in 5

U.S.C. 553 in the development of its regulations. The APA provides in 5

U.S.C. 553(d)(1) for an exception to the requirement for a 30-day delay

in the effective date of a substantive rule if the rule grants or

recognizes an exemption or relieves a restriction. As indicated above,

this final rule will eliminate the annual report of earnings form and

exempt most working beneficiaries from the requirement to file a

separate report of earnings with SSA. This will result in a savings of

up to 330,833 public reporting burden hours each year and, by allowing

us to divert scarce resources to other priority workloads, enable us to

provide better overall service to the public. In light of these

considerations, we find that it is in the public interest to make this

rule effective upon publication.

Executive Order 12866

The Office of Management and Budget (OMB) has reviewed this rule

and determined that it meets the criteria for a significant regulatory

action within the meaning of Executive Order 12866. As indicated

earlier in this preamble, failure to file a timely report of earnings

will result in a monetary penalty, unless we find that there was good

cause for filing late. Since, for most beneficiaries, the W-2 and/or

self-employment tax return information will be considered the annual

report of earnings required by section 203(f) of the Act, we anticipate

that there will be very few penalties imposed on beneficiaries for

failing to report their earnings. The loss of penalty dollars is

estimated to be $60-75 million for the 5-year period of fiscal years

1997 through 2001. However, we believe that the loss of penalty income

should not be given undue consideration because this income results

from beneficiaries' failure to timely report their earnings to SSA. It

has always been the goal of SSA to achieve maximum reporting compliance

and if this goal was achieved, there would be no penalties imposed.

Furthermore, we believe that the loss of penalty revenue is more than

offset by the benefits that both the public and SSA will realize under

this rule. These benefits include the fact that up to 1.3 million

beneficiaries will no longer be required to complete the annual report

of earnings forms resulting in a reduction in the public reporting

burden of up to 330,833 hours. In addition, this initiative will shift

the annual report workload from SSA's peak workload period (January

through March) until later in the year and thus, will allow SSA to

divert scarce resources to other priority workloads, such as processing

claims for benefits and responding to telephone inquiries, resulting in

better overall service to the public.

Administrative savings for this initiative are estimated to be 540

workyears and $23.2 million for fiscal years 1997 through 2001.

Regulatory Flexibility Act

We certify that this final rule will not have a significant

economic impact on a substantial number of small entities since it

affects only individuals. Therefore, a regulatory flexibility analysis

as provided in Public Law 96-354, the Regulatory Flexibility Act, is

not required.

Paperwork Reduction Act

This final regulation will impose no new reporting or recordkeeping

requirements requiring OMB clearance. As indicated in the NPRM, we

estimate that this new Annual Report of Earnings process will reduce

the annual public reporting burden by up to 330,833 hours. This is the

annual reporting burden associated with the completion and filing of

forms SSA-777 and SSA-7770 (OMB Control Number 0960-0057). Although

this final regulation will eliminate those forms, SSA will continue to

collect earnings information, through a number of other collection

instruments already approved by OMB. In most cases, we will obtain this

information through forms W-2 and schedule SEs approved for use by IRS.

In those cases where additional information is required, we expect to

obtain that information during the initial claims interview through

forms approved for use by SSA (primarily the SSA-1 (Application for

Retirement Benefits; OMB Approval Number 0960-0007) and the SSA-795

(Statement of Claimant or Other Person; OMB Approval Number 0960-

0045)). In addition, OMB has approved a new

[[Page 15610]]

form, SSA-131, OMB Number 0960-0566, to collect the additional

information needed to correctly adjust benefits in special wage payment

situations.

(Catalog of Federal Domestic Assistance Program Nos. 96.001 Social

Security--Disability Insurance; 96.002 Social Security--Retirement

Insurance; 96.004 Social Security--Survivors Insurance)

List of Subjects in 20 CFR Part 404

Administrative practice and procedure, Blind, Disability benefits,

Old-Age, Survivors and Disability Insurance, Reporting and

recordkeeping requirements, Social security.

Dated: March 10, 1997.

John J. Callahan,

Acting Commissioner of Social Security.

For the reasons set out in the preamble, part 404 of chapter III of

title 20 of the Code of Federal Regulations is amended as follows:

PART 404--FEDERAL OLD-AGE, SURVIVORS AND DISABILITY INSURANCE

1. The authority citation for subpart E of part 404 continues to

read as follows:

Authority: Secs. 202, 203, 204 (a) and (e), 205 (a) and (c),

222(b), 223(e), 224, 225, and 702(a)(5) of the Social Security Act

(42 U.S.C. 402, 403, 404 (a) and (e), 405 (a) and (c), 422(b),

423(e), 424a, 425, and 902(a)(5)).

2. Section 404.452 is amended by revising paragraphs (a)(1) and

(a)(2), revising the last sentence of paragraph (b), and revising

paragraph (d) to read as follows:

Sec. 404.452 Reports to Social Security Administration of earnings;

wages; net earnings from self-employment.

(a) * * *

(1) The individual attained the age of 70 in or before the first

month of entitlement to benefits in the taxable year, or

(2) The individual's benefit payments were suspended under the

provisions described in Sec. 404.456 for all months in a taxable year

in which the individual was entitled to benefits and was under age 70.

(b) * * * The filing of an income tax return or a form W-2 with the

Internal Revenue Service may serve as the report required to be filed

under the provisions of this section where the income tax return or

form W-2 shows the same wages and net earnings from self-employment

that must be reported to the Administration under this section.

* * * * *

(d) Information to be provided to us. The report should show the

name and social security claim number of the beneficiary about whom the

report is made; identify the taxable year for which the report is made;

show the total amount of wages for which the beneficiary rendered

services during the taxable year (if applicable), the amount of net

earnings from self-employment for such year (if applicable); and show

the name and address of the individual making the report. To overcome

the presumption that the beneficiary rendered services for wages

exceeding the allowable amount and rendered substantial services in

self-employment in each month (see Sec. 404.435), we must also be told

the specific months in which the beneficiary did not render services in

employment for wages of more than the allowable amount (as described in

Sec. 404.435) and did not render substantial services in self-

employment (as described in Secs. 404.446 and 404.447).

* * * * *

[FR Doc. 97-8271 Filed 4-1-97; 8:45 am]

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