[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