[Federal Register Volume 68, Number 164 (Monday, August 25, 2003)]
[Proposed Rules]
[Pages 50985-50991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21613]


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SOCIAL SECURITY ADMINISTRATION

20 CFR Part 404

[Regulation No. 4]
RIN 0960-AF62


Amendments to Annual Earnings Test for Retirement Beneficiaries

AGENCY: Social Security Administration (SSA).

ACTION: Notice of proposed rulemaking.

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SUMMARY: We are providing notice of proposed rulemaking to conform to 
the ``Senior Citizens' Freedom to Work Act of 2000''. This legislation 
was enacted on April 7, 2000, and became retroactively effective on 
January 1, 2000. It eliminates the Social Security annual earnings test 
for retirement beneficiaries, starting from the month in which they 
reach full retirement age. Before the passage of this legislation, 
persons reaching full retirement age were subject to an earnings test 
until the month in which they attained age 70.

DATES: To ensure that your comments are considered, we must receive 
them no later than October 24, 2003.

ADDRESSES: You may give us your comments by using: our Internet site 
facility (i.e., Social Security Online) at http://www.socialsecurity.gov/regulations/, e-mail to [email protected], 
telefax to (410) 966-2830 or by sending a letter to the Commissioner of 
Social Security, P.O. Box 17703, Baltimore, Maryland 21235-7703. You 
may also deliver them to the Office of Process and Innovation 
Management Regulations, Social Security Administration, 100 Altmeyer 
Building, 6401 Security Boulevard, Baltimore, Maryland 21235-6401, 
between 8 a.m. and 4:30 p.m. on regular business days. Comments are 
posted on our Internet site, or you may inspect them physically on 
regular business days by making arrangements with the contact person 
shown in this preamble.

ELECTRONIC VERSION: The electronic file of this document is available 
on the date of publication in the Federal Register on the Internet site 
for the Government Printing Office: http://www.access.gpo.gov/su_docs/aces/acess/140.html. It is also available on the Internet site for SSA 
(i.e., ``Social Security Online'') at http://www.socialsecurity.gov.

FOR FURTHER INFORMATION CONTACT: Dorothy Skipwith, Social Insurance 
Specialist, Office of Income Security Programs, Social Security 
Administration, 6401 Security Boulevard, Baltimore, Maryland 21235-
6401, (410) 965-4231 or TTY (410) 966-5609. For information on 
eligibility or filing benefits: Call our national toll-free numbers, 1-
800-772-1213 or TTY 1-800-325-0078, or visit our Internet web site, 
Social Security Online, at http://www.socialsecurity.gov.

SUPPLEMENTARY INFORMATION:

Background

    In addition to the revisions necessitated by the changes in the 
``Senior Citizens' Freedom to Work Act of 2000,'' Pub. L. 106-182, 
which eliminated the annual earnings test for persons reaching full 
retirement age, we are proposing changes necessitated by the ``Social 
Security Amendments of 1983,'' Pub. L. 98-21. This legislation will 
increase the full retirement age for persons born in 1938 or later in 
incremental amounts, with a full 2-year increase in full retirement age 
for persons born in 1960 or later. We are also proposing the revision 
of the existing regulatory sections, numbered below, to present them in 
plainer language and to update the examples.

Explanation of Proposed Changes

    The following is a brief summary of the sections we propose to 
revise and the changes to each of them.
    Section 404.338 Widow's and widower's benefits amounts. This 
section describes the benefit amount a widow or widower may expect to 
receive relative to the benefit amount of the deceased insured spouse. 
The benefit amount for the widow or widower may include increased 
benefits based on delayed retirement credit of the deceased insured 
spouse, or reduced benefits based on the deceased insured spouse 
retiring before reaching full retirement age. This section also 
includes discussion on widow or widower benefits based on a special 
primary insurance amount when the insured died before reaching age 62. 
We propose to revise this section to reflect the change in full 
retirement age.
    Sections 404.415 and 404.416 Deductions because of excess earnings; 
annual earnings test. Amount of deduction because of excess earnings. 
We propose to combine sections Sec. Sec.  404.415 and 404.416 into a 
revised section Sec.  404.415, ``Deductions because of excess 
earnings,'' because the topics are closely related and overlapping.
    Revised section Sec.  404.415 would explain the effect of excess 
earnings on the benefits of:
    1. An insured person caused by his/her excess earnings.
    2. An auxiliary beneficiary because of the excess earnings of the 
insured person on whose record he/she draws benefits.
    3. An auxiliary beneficiary because of his/her own excess earnings, 
which reduce only that beneficiary's benefits.
    This revised section Sec.  404.415 would also reflect the 
legislated changes in full retirement age and annual earnings test.
    Section 404.428 Earnings in a taxable year. This section clarifies 
the method for calculating a beneficiary's or prospective beneficiary's 
annual earnings with respect to the annual earnings test. It also 
clarifies when the claimant may use a taxable year other than a 
calendar year, and the number of months in a taxable year used in the 
earnings test calculation for the year of death. This section also 
defines which reporting year wage earners and self-employed individuals 
must use relative to the year in which the earnings were earned.
    We propose to revise the section to reflect changes in the annual 
earnings test and full retirement age.
    Section 404.429 Earnings; defined. This section defines wages and 
net earnings from self-employment for earnings test purposes. It also 
lists the self-employment occupations that are included in ``net 
earnings from self-employment'' for earnings test purposes. This 
section also defines the allowable level of a claimant's involvement 
and performance in an ongoing business in determining whether the 
claimant's retirement actually has taken place.
    We propose to revise the section to reflect the new annual earnings 
test and full retirement age legislation.
    Section 404.430 Excess earnings defined for taxable years ending 
after December 1972; monthly exempt amount defined. This section 
defines the maximum monthly and annual

[[Page 50986]]

amounts of earnings that can be earned by retirement and survivor 
beneficiaries without the earnings causing a reduction in their 
benefits. It then also delineates the reduction if these earning limits 
are exceeded, as a proportion of the amount of earnings that are above 
those limits.
    We propose to revise this section by changing the section heading 
to ``Monthly and annual exempt amounts defined; excess earnings 
defined,'' and deleting obsolete material. This section would also 
reflect the changes in the annual earnings test and full retirement 
test, and display annual earnings test exempt amounts for 2000 through 
2003.
    Section 404.434 Excess earnings; method of charging. This section 
describes the method of charging estimated excess earnings of an 
insured person and also the excess earnings of a beneficiary. Although 
the excess earnings may not completely eliminate the benefits to be 
paid on the insured's record, all the estimated earnings of the 
calendar (or fiscal) year are charged to the earlier months of the 
year. This may eliminate benefits for those earlier months, and may 
allow full benefits in the later months of the year.
    This section also clarifies that the excess earnings of a person 
receiving benefits on another's record only diminish or eliminate the 
benefits of that beneficiary; they do not affect the benefits of the 
insured or those of others receiving benefits on the insured's record.
    This section also states that if both the insured and other(s) 
receiving benefits on an insured's record have excess earnings, the 
excess earnings of the insured are first charged to the total family 
benefits payable (or deemed payable), and then the excess earnings of 
the secondary beneficiary are charged against the insured's remaining 
benefits. We propose to rewrite this section in plain language.
    Section 404.435 Excess earnings; months to which excess earnings 
cannot be charged. This section lists the situations in which one's 
excess earnings in a month are not counted to cause reductions in 
benefits. The section defines the grace year and the termination grace 
year, and delineates the circumstances where an individual can have 
more than one grace year. The section cites examples to clarify these 
concepts.
    This section also states the presumption that an individual was 
engaged in self-employment and/or performing services for wages each 
month in a taxable year in which such earnings are reported, until the 
individual provides evidence to us about non-earning months in that 
year.
    We propose to rewrite this section in plain language, change the 
heading to ``Excess earnings; months to which excess earnings can or 
cannot be charged; grace year defined,'' to reflect the change in the 
full retirement age, update outdated examples, and delete obsolete 
material.
    Section 404.437 Excess earnings; benefit rate subject to deductions 
because of excess earnings. This section delineates the various benefit 
reduction factors to which a beneficiary may be subjected. We propose 
to rewrite the section by using simpler, clearer language. We also 
propose to revise the section heading to ``Excess earnings; benefits 
subject to deductions because of excess earnings.''
    Section 404.452 Reports to Social Security Administration of 
earnings; wages; net earnings from self-employment. This section 
contains the reporting requirements and conditions under which Social 
Security survivor and retirement beneficiaries who have not yet reached 
full retirement age, are required to report earnings to the Social 
Security Administration. The purpose of these reports are: (1) To 
enable the Social Security Administration to adjust the monthly benefit 
amounts that may have been affected by the earnings test; and (2) to 
establish whether a grace year has occurred because the earnings of a 
beneficiary fell below the earnings test amount. This section also 
conveys what reporting formats are acceptable, the filing deadlines and 
possible extensions, and the reporting requirements of persons 
receiving benefits on behalf of others (representative payees).
    We propose to rewrite this section to reflect changes in the full 
retirement age, to reflect section 309(c) of Public Law 103-296, which 
eliminates any exceptions to the requirement to file an annual report 
for beneficiaries under age 70 receiving auxiliary or survivors 
benefits when there are auxiliary or survivor beneficiaries living in a 
separate household and to delete obsolete material.

Regulatory Procedures

Clarity of These Regulations

    Executive Order 12866, as amended by Executive Order 13258, 
requires each agency to write all rules in plain language. In addition 
to your substantive comments on these proposed rules, we invite your 
comments and suggestions on how to make these proposed rules yet easier 
to understand.
    For example:
    [sbull] Have we organized the material to suit your needs?
    [sbull] Are the requirements in the rules clearly stated?
    [sbull] Do the rules contain technical language or jargon that is 
unclear?
    [sbull] Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the rules easier to understand?
    [sbull] Would more (but shorter) sections be better?
    [sbull] Could we improve clarity by adding tables, lists, or 
diagrams?
    [sbull] What else could we do to make the rules easier to 
understand?

Executive Order 12866

    We have consulted with the Office of Management and Budget (OMB) 
(OMB) and determined that these proposed rules meet the requirements 
for a significant regulatory action under E.O.xecutive Order 12866, as 
amended by Executive Order 13258. Thus, they were subject to OMB 
review.

Regulatory Flexibility Act

    We certify that these proposed regulations will not have a 
significant economic impact on a substantial number of small entities 
because they affect only individuals. Therefore, a regulatory 
flexibility analysis, as provided in the Regulatory Flexibility Act, as 
amended, is not required.

Paperwork Reduction Act

    These proposed rules contain reporting requirements as shown in the 
table below. Where the public reporting burden is accounted for in 
Information Collection Requests for the various forms that the public 
uses to submit the information to the Social Security Administration 
and the Internal Revenue Service, a 1-hour placeholder burden is being 
assigned to the specific reporting requirement(s) contained in these 
rules. We are seeking clearance of the burden referenced in these rules 
because the rules were not considered during the clearance of the 
forms.

[[Page 50987]]



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                                                                                                    Estimated
                 Section No.                     Number of      Average burden    Frequency of     annual hour
                                                respondents      per response       response          burden
----------------------------------------------------------------------------------------------------------------
Sec.   404.428(b)...........................               1                1                1                1
Sec.   404.429(d)...........................               1                1                1                1
Sec.   404.435(d)...........................               1                1                1                1
Sec.   404.435(e)...........................               1                1                1                1
Sec.   404.452(a)&(c).......................               1                1                1                1
Sec.   404.452(b)&(c).......................               1                1                1                1
Sec.   404.452(d)...........................               1                1                1                1
Sec.   404.452(e)(1)........................               1                1                1                1
Sec.   404.452(e)(2)........................               1                1                1                1
                                             ------------------
    Totals..................................               9                9                9                9
----------------------------------------------------------------------------------------------------------------

    An Information Collection Request has been submitted to OMB for 
clearance. We are soliciting comments on the burden estimate; the need 
for the information; its practical utility; ways to enhance its 
quality, utility and clarity; and on ways to minimize the burden on 
respondents, including the use of automated collection techniques or 
other forms of information technology. Comments should be submitted to 
the Social Security Administration at the following address: Social 
Security Administration, Attn: SSA Reports Clearance Officer, 1338 
Annex Building, 6401 Security Boulevard, Baltimore, MD 21235-6402.
    Comments can be received between 30 and 60 days after publication 
of this notice and will be most useful if received by the Social 
Security Administration within 30 days of publication.

(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; 96.006, 
Supplemental Security Income)

List of Subjects in 20 CFR Part 404

    Administrative practice and procedure in the Federal, old age, 
survivors and disability insurance program: earnings coverage; insured 
status; computation of, and eligibility for benefits.

    Dated: July 15, 2003.
Jo Anne B. Barnhart,
Commissioner of Social Security.

    For the reasons set out in the preamble, we propose to amend 
subparts D and E of part 404 of Chapter III of Title 20 of the Code of 
Federal Regulations as follows:

PART 404--FEDERAL OLD-AGE SURVIVORS AND DISABILITY INSURANCE (1950- 
)

Subpart D--[Amended]

    1. The authority citation for subpart D of part 404 continues to 
read as follows:

    Authority: Secs. 202, 203(a) and (b), 205(a), 216, 223, 225, 
228(a)-(e), and 702(a)(5) of the Social Security Act (42 U.S.C. 402, 
403(a) and (b), 405(a), 416, 423, 425, 428(a)-(e), and 902(a)(5)).

    2. Section 404.338 is revised to read as follows:


Sec.  404.338  Widow's and widower's benefits amounts.

    (a) A widow's or widower's monthly benefit is equal to the insured 
person's primary insurance amount. If the insured person dies before 
reaching age 62 and the widow or widower is first eligible after 1984, 
we may compute a special primary insurance amount to determine the 
amount of the monthly benefit (see Sec.  404.212(b)).
    (b) We may increase the monthly benefit amount if the insured 
person delays filing for benefits or requests voluntary suspension of 
benefits, and thereby earns delayed retirement credit (see Sec.  
404.313), and/or works before the year 2000 after reaching full 
retirement age (as defined in Sec.  404.409). The amount of the monthly 
benefit may change as explained in Sec.  404.304.
    (c) The widow's or widower's monthly benefit will be reduced if the 
insured person chooses to receive old-age benefits before reaching full 
retirement age. If so, the benefit will be reduced to the amount the 
insured person would be receiving if alive, or 82\1/2\ percent of his 
or her primary insurance amount, whichever is larger.

Subpart E--[Amended]

    3. 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, 702(a)(5) and 1129A 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, 902(a)(5) and 1320a-8a.).

    4. Section 404.415 is revised to read as follows:


Sec.  404.415  Deductions because of excess earnings.

    (a) Deductions because of insured individual's earnings. Under the 
annual earnings test, we will reduce your monthly benefits (except 
disability insurance benefits based on the beneficiary's disability) by 
the amount of your excess earnings (as described in Sec.  Sec.  
404.434), for each month in a taxable year (calendar year or fiscal 
year) in which you are under full retirement age (as defined in Sec.  
404.409).
    (b) Deductions from husband's, wife's, and child's benefits because 
of excess earnings of the insured individual. We will reduce husband's, 
wife's, and child's insurance benefits payable (or deemed payable--see 
Sec.  404.420) on the insured individual's earnings record because of 
the excess earnings of the insured individual. However, beginning with 
January 1985, we will not reduce the benefits payable to a divorced 
wife or a divorced husband who has been divorced from the insured 
individual for at least 2 years.
    (c) Deductions because of excess earnings of beneficiary other than 
the insured. If benefits are payable to you (or deemed payable--see 
Sec.  404.420) on the earnings record of an insured individual and you 
have excess earnings (as described in Sec.  404.430) charged to a 
month, we will reduce only your benefits for that month under the 
annual earnings test. Child's insurance benefits payable by reason of 
being disabled will be evaluated using Substantial Gainful Activity 
guidelines (as described in Sec.  404.1574 or Sec.  404.1575). This 
deduction equals the amount of the excess earnings. (See Sec.  404.434 
for charging of excess earnings where both the insured individual and 
you, a beneficiary, have excess earnings).

[[Page 50988]]

Sec.  404.416  [Removed]

    5. Section 404.416 is removed.
    6. Section 404.428 is revised to read as follows:


Sec.  404.428  Earnings in a taxable year.

    (a) When we apply the annual earnings test to your earnings as a 
beneficiary under this subpart (see Sec.  404.415), we count all of 
your earnings (as defined in Sec.  404.429) for all months of your 
taxable year even though you may not be entitled to benefits during all 
months of that year. (See Sec.  404.430 for the rule that applies to 
the earnings of a beneficiary who attains full retirement age (as 
described in Sec.  404.409)).
    (b) Your taxable year is presumed to be a calendar year until you 
show to our satisfaction that you have a different taxable year. If you 
are self-employed, your taxable year is a calendar year unless you have 
a different taxable year for the purposes of subtitle A of the Internal 
Revenue Code of 1986. In either case, the number of months in a taxable 
year is not affected by:
    (1) The time a claim for Social Security benefits is filed;
    (2) Attainment of any particular age;
    (3) Marriage or the termination of marriage; or
    (4) Adoption.
    (c) The month of death is counted as a month of the deceased 
beneficiary's taxable year in determining whether the beneficiary had 
excess earnings for the year under Sec.  404.430. For beneficiaries who 
die after November 10, 1988, we use twelve as the number of months to 
determine whether the beneficiary had excess earnings for the year 
under Sec.  404.430.
    (d) Wages, as defined in Sec.  404.429(c), are charged as earnings 
for the months and year in which you rendered the services. Net 
earnings or net losses from self-employment count as earnings or losses 
in the year for which such earnings or losses are reportable for 
Federal income tax purposes.
    7. Section 404.429 is revised to read as follows:


Sec.  404.429  Earnings; defined.

    (a) General. The term ``earnings'' as used in this subpart (other 
than as a part of the phrase ``net earnings from self-employment'') 
includes the sum of your wages for services rendered in a taxable year, 
plus your net earnings from self-employment for the taxable year, minus 
any net loss from self-employment for the same taxable year.
    (b) Net earnings or net loss from self-employment. Your net 
earnings or net loss from self-employment are determined under the 
provisions in subpart K of this part, except that:
    (1) In this section, the following occupations are included in the 
definition of ``trade or business'' (although they may be excluded in 
subpart K):
    (i) The performance of the functions of a public office;
    (ii) The performance of a service of a duly ordained, commissioned, 
or licensed minister of a church in the exercise of his or her ministry 
or by a member of a religious order in the exercise of duties required 
by the order;
    (iii) The performance of service by an individual in the exercise 
of his or her profession as a Christian Science practitioner;
    (iv) The performance by an individual in the exercise of his or her 
profession as a doctor of medicine, lawyer, dentist, osteopath, 
veterinarian, chiropractor, naturopath, or optometrist.
    (2) For the sole purpose of the earnings test under this subpart:
    (i) If you reach full retirement age, as defined in Sec.  404.409, 
on or before the last day of your taxable year, you will have excluded 
from your gross earnings from self-employment, your royalties 
attributable to a copyright or patent obtained before the taxable year 
in which you reach full retirement age; and
    (ii) If you are entitled to insurance benefits under title II of 
the Act, other than disability insurance benefits or child's insurance 
benefits payable by reason of being disabled, we will exclude from 
gross earnings any self-employment income you received in a year after 
your initial year of entitlement that is not attributable to services 
you performed after the first month you became entitled to benefits. In 
this section, services means any significant work activity you 
performed in the operation or management of a trade, profession, or 
business which can be related to the income received. If a part of the 
income you receive in a year is not related to any significant services 
you performed after the month of initial entitlement, only that part of 
your income may be excluded from gross earnings for deduction purposes. 
We count the balance of the income for deduction purposes. Your 
royalties or other self-employment income is presumed countable for 
purposes of the earnings test until it is shown to our satisfaction 
that such income may be excluded under this section.
    (3) We do not count as significant services:
    (i) Actions you take after the initial month of entitlement to sell 
a crop or product if it was completely produced in or before the month 
of entitlement. This rule does not apply to income you receive from a 
trade or business of buying and selling products produced or made by 
others; for example, a grain broker.
    (ii) Your activities to protect an investment in a currently 
operating business or activities that are too irregular, occasional, or 
minor to be considered as having a bearing on the income you receive, 
such as--
    (A) Hiring an agent, manager, or other employee to operate the 
business;
    (B) Signing contracts where your signature is required, so long as 
the major contract negotiations were handled by others in running the 
business for you;
    (C) Looking over the company's financial records to assess the 
effectiveness of those agents, managers, or employees in running the 
business for you;
    (D) Personally contacting an old and valued customer solely for the 
purpose of maintaining good will when such contact has a minimal effect 
on the ongoing operation of the trade or business; or
    (E) Occasionally filling in for an agent, manager, or other 
employee or partner in an emergency.
    (4) In figuring your net earnings or net loss from self-employment, 
we count all net income or net loss even though:
    (i) You did not perform personal services in carrying on the trade 
or business;
    (ii) The net profit was less than $400;
    (iii) The net profit was in excess of the maximum amount creditable 
to your earnings record; or
    (iv) The net profit was not reportable for social security tax 
purposes.
    (5) Your net earnings from self-employment is the excess of gross 
income over the allowable business deductions (allowed under the 
Internal Revenue Code). Net loss from self-employment is the excess of 
business deductions (that are allowed under the Internal Revenue Code) 
over gross income. You cannot deduct, from wages or net earnings from 
self-employment, expenses in connection with the production of income 
excluded from gross income under (b)(2)(ii) of this section.
    (c) Wages. Wages include the gross amount of your wages rather than 
the net amount paid after deductions by your employer for items such as 
taxes and insurance. Wages are defined in subpart K of this part, 
except that we also include the following types of wages that are 
excluded in subpart K:
    (1) Remuneration in excess of the amounts in the annual wage 
limitation table in Sec.  404.1047;
    (2) Wages of less than the amount stipulated in section Sec.  
404.1057 that you

[[Page 50989]]

receive in a calendar year for domestic service in the private home of 
your employer, or service not in the course of your employer's trade or 
business;
    (3) Payments for agricultural labor excluded under Sec.  404.1055;
    (4) Remuneration, cash and non-cash, for service as a home worker 
even though the cash remuneration you received is less than the amount 
stipulated in Sec.  404.1058(a) in a calendar year;
    (5) Services performed outside the United States in the Armed 
Forces of the United States.
    (d) Presumptions concerning wages. For purposes of this section, 
when reports received by us show that you received wages (as defined in 
paragraph (c) of this section) during a taxable year, it is presumed 
that they were paid to you for services rendered in that year unless 
you present evidence to our satisfaction that the wages were paid for 
services you rendered in another taxable year. If a report of wages 
shows your wages for a calendar year, your taxable year is presumed to 
be a calendar year for purposes of this section unless you present 
evidence to our satisfaction that your taxable year is not a calendar 
year.
    8. Section 404.430 is revised to read as follows:


Sec.  404.430  Monthly and annual exempt amounts defined; excess 
earnings defined.

    (a) Monthly and annual exempt amounts. (1) The earnings test 
monthly and annual exempt amounts are the amounts of wages and self-
employment income which you, as a Social Security beneficiary, may earn 
in any month or year without part or all of your monthly benefit being 
deducted because of excess earnings. The monthly exempt amount, (which 
is 1/12 of the annual exempt amount), applies only in a beneficiary's 
grace year or years. (See Sec.  404.435(a) and (b)). The annual exempt 
amount applies to the earnings of each non-grace taxable year prior to 
the year of FRAfull retirement age, as defined in Sec.  404.409. A 
larger ``annual'' exempt amount applies to the total earnings of the 
months in the taxable year that precedes the month in which you attain 
FRAfull retirement age. The full annual exempt amount applies to the 
earnings of these pre-FRAfull retirement age FRAmonths, even though 
they are earned in less than a year. For beneficiaries using a fiscal 
year as a taxable year, the exempt amounts applicable at the end of the 
ends of their fiscal year apply.
    (2) We determine the monthly exempt amounts for each year by a 
method that depends on the type of exempt amount.:
    (i) For the lower exempt amount (the one applicable before the 
calendar year of reaching the FRAfull retirement age), we multiply $670 
(the lower exempt amount for 1994) by the ratio of the national average 
wage index for the second prior year to that index for 1992. If the 
amount so calculated is not a multiple of $10, we round it to the 
nearest multiple of $10 (i.e., if the amount ends in $5 or more, we 
round up, otherwise we round down). The annual exempt amount is then 12 
times the rounded monthly exempt amount.
    (ii) The higher exempt amount (the one applicable in months of the 
year of attaining full retirement age FRA that precede such attainment) 
was set by legislation (Pub. L. 104-121) for years 1996-2002. To 
calculate the higher exempt amount for any year after 2002, we will 
multiply $2,500 (the higher exempt amount for 2002) by the ratio of the 
national average wage index for the second prior year to that index for 
2000. We round the result as described in paragraph (a)(2)(i) of this 
section for the lower exempt amount.
    (iii) The following are the annual and monthly exempt amounts for 
taxable years 2000 through 2003.

----------------------------------------------------------------------------------------------------------------
                              For years through taxable year preceding  Months of taxable year prior to month of
                                year of reaching full retirement age               full retirement age
                             -----------------------------------------------------------------------------------
            Year                 Reduction: $1 for every $2 over the       Reduction: $1 for every $3 over the
                                            exempt amount                             exempt amount
                             -----------------------------------------------------------------------------------
                                     Annual              Monthly               Annual              Monthly
----------------------------------------------------------------------------------------------------------------
2000........................              $10,080                 $840              $17,000               $1,417
2001........................               10,680                  890               25,000                2,084
2002........................               11,280                  940               30,000                2,500
2003........................               11,520                  960               30,720                2,560
----------------------------------------------------------------------------------------------------------------

    (b) Method of determining excess earnings for years after December 
1999. If you have not yet reached your year of full retirement ageFRA, 
your excess earnings for a taxable year are 50 percent of your earnings 
(as described in Sec.  404.429) that are above the exempt amount. After 
December 31, 1999, in the taxable year you will reach full retirement 
age, the annual (and monthly, if applicable) earnings limit applies to 
the earnings of the months prior to the month in which you reach full 
retirement age. Excess earnings are 33\1/3\% of the earnings above the 
annual exempt amount. Your earnings after reaching the month of FRAfull 
retirement age are not subject to the earnings test.
    9. Section 404.434 is revised to read as follows:


Sec.  404.434  Excess earnings; method of charging.

    (a) Months charged. If you have not yet reached your year of full 
retirement age, and if your estimated earnings for a year result in 
estimated excess earnings (as described in Sec.  404.430), we will 
charge these excess earnings to your full benefit each month from the 
beginning of the year, until all of the estimated excess earnings have 
been charged. Excess earnings, however, are not charged to any month 
described in Sec. Sec.  404.435 and 404.436.
    (b) Amount of excess earnings charged. (1) Insured individual's 
excess earnings. For each $1 of your excess earnings we will decrease 
by $1 the benefits to which you and all others are entitled (or deemed 
entitled-see Sec.  404.420) on your earnings record. (See Sec.  404.439 
where the excess earnings for a month are less than the total benefits 
payable for that month.)
    (2) Excess earnings of beneficiary other than insured individual. 
We will charge a beneficiary, other than the insured, $1 for each $1 of 
the beneficiary's excess earnings (see Sec.  404.437). These excess 
earnings, however, are charged only against that beneficiary's own 
benefits.
    (3) You, the insured individual, and a person entitled (or deemed 
entitled) on your earnings record both have excess earnings. If both 
you and a person

[[Page 50990]]

entitled (or deemed entitled) on your earnings record have excess 
earnings (as described in Sec.  404.430), your excess earnings are 
charged first against the total family benefits payable (or deemed 
payable) on your earnings record, as described in paragraph (b)(1) of 
this section. Next, the excess earnings of a person entitled on your 
earnings record are charged against his or her own benefits remaining 
after part of your excess earnings have been charged against his/her 
benefits (because of the reduction in the total family benefits 
payable). See Sec.  404.441 for an example of this process and the 
manner in which partial monthly benefits are apportioned.
    (c) Earnings test applicability.
    Public Law 106-182 eliminated the Social Security earnings test, 
beginning with the month in which a person attains full retirement age 
(as defined in Sec.  Sec.  404.409), for taxable years after 1999. In 
the year that you reach full retirement age, the annual earnings test 
amount is applied to the earnings amounts of the months that precede 
your month of full retirement age. (See Sec.  404.430). The reduction 
rate for these months is $1 of benefits for every $3 you earned above 
the earnings limit in these months. The earnings threshold amount will 
be increased in conjunction with increases in average wages.
    10. Section 404.435 is revised to read as follows:


Sec.  404.435  Excess earnings; months to which excess earnings can or 
cannot be charged; grace year defined.

    (a) Monthly benefits payable. We will not reduce your benefits on 
account of excess earnings for any month in which you, the 
beneficiary--
    (1) Were not entitled to a monthly benefit;
    (2) Were considered not entitled to benefits (due to non-covered 
work outside the United States or no child in care, as described in 
Sec.  404.436);
    (3) Were at full retirement age (as described in Sec.  404.409);
    (4) Were entitled to payment of a disability insurance benefit as 
defined in Sec.  404.315; (see Sec.  404.1592 and Sec.  404.1592a(b)) 
which describes the work test if you are entitled to disability 
benefits;
    (5) Are age 18 or over and entitled to a child's insurance benefit 
based on disability;
    (6) Are entitled to a widow's or widower's insurance benefit based 
on disability; or
    (7) Had a non-service month in your grace year (see paragraph (b) 
of this section). A non-service month is any month in which you, while 
entitled to retirement or survivors benefits:
    (i) Do not work in self-employment (see paragraphs (c) and (d) of 
this section);
    (ii) Do not perform services for wages greater than the monthly 
exempt amount set for that month (see paragraph (e) of this section and 
Sec.  404.430); and
    (iii) Do not work in non-covered remunerative activity on 7 or more 
days in a month while outside the United States. A non-service month 
occurs even if there are no excess earnings in the year.
    (b) Grace year defined. (1) A beneficiary's initial grace year is 
the first taxable year in which the beneficiary has a non-service month 
(see paragraph (a)(7) of this section) in or after the month in which 
the beneficiary is entitled to a retirement, auxiliary, or survivor's 
benefit.
    (2) A beneficiary may have another grace year each time his or her 
entitlement to one type of benefit ends and, after a break in 
entitlement of at least one month, the beneficiary becomes entitled to 
a different type of retirement or survivors benefit. The new grace year 
would then be the taxable year in which the first non-service month 
occurs after the break in entitlement.
    (3) For purposes of determining whether a given year is a 
beneficiary's grace year, we will not count as a non-service month, a 
month that occurred while the beneficiary was entitled to disability 
benefits under section 223 of the Social Security Act or as a disabled 
widow, widower, or child under section 202.
    (4) A beneficiary entitled to child's benefits, to spouse's 
benefits before age 62 (entitled only by reason of having a child in 
his or her care), or to mother's or father's benefits is entitled to a 
termination grace year in any year the beneficiary's entitlement to 
these types of benefits terminates. This provision does not apply if 
the termination is because of death or if the beneficiary is entitled 
to a Social Security benefit for the month following the month in which 
the entitlement ended. The beneficiary is entitled to a termination 
grace year in addition to any other grace year(s) available to him or 
her.

    Example 1: Don, age 62, will retire from his regular job in 
April of next year. Although he will have earned $15,000 for 
January-April of that year and plans to work part time, he will not 
earn over the monthly exempt amount after April. Don's taxable year 
is the calendar year. Since next year will be the first year in 
which he has a non-service 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 over the monthly exempt amount (May-December) 
even though his earnings have substantially exceeded the annual 
exempt amount. However, in the years that follow, up to the year of 
full retirement age, only the annual earnings test will be applied 
if he has earnings that exceed the annual exempt amount, regardless 
of his monthly earnings amounts.
    Example 2: Marion was entitled to mother's insurance benefits 
from 1998 because she had a child in her care under age 18. Because 
she had a non-service month in 1998, 1998 was her initial grace 
year. Marion's child married in May 2000 and her entitlement to 
mother's benefits terminated in April 2000. Since Marion's 
entitlement did not terminate by reason of her death and she was not 
entitled to another type of Social Security benefit in the month 
after her entitlement to a mother's benefit ended, she is entitled 
to a termination grace year for 2000, the year in which her 
entitlement to mother's insurance benefits terminated. She applied 
for and became entitled to widow's insurance benefits effective 
February 2001. Because there was a break in entitlement to benefits 
of at least one month before entitlement to another type of benefit, 
2001 will be a subsequent grace year if Marion has a non-service 
month in 2001.

    (c) You worked in self-employment. You are considered to have 
worked in self-employment in any month in which you performed 
substantial services (see Sec.  404.446) 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 you had no earnings 
or net earnings resulting from your services during the month.
    (d) Presumption regarding work in self-employment. You are presumed 
to have worked in self-employment in each month of your taxable year 
until you show to our satisfaction that in a particular month you did 
not perform substantial services (see Sec.  404.446(c)) in any trades 
and businesses from which you derived your annual net income or loss 
(see Sec.  404.429).
    (e) Presumption regarding services for wages. You are presumed to 
have performed services in any month for wages (as defined in Sec.  
404.429) of more than the applicable monthly exempt amount in each 
month of the year, until you show to our satisfaction that you did not 
perform services for wages in that month that exceeded the monthly 
exempt amount.
    11. Section 404.437 is revised to read as follows:


Sec.  404.437  Excess earnings; benefit rate subject to deductions 
because of excess earnings.

    We will further reduce your benefits (other than a disability 
insurance benefit) because of your excess earnings

[[Page 50991]]

(see Sec.  404.430), after your benefits may have been reduced because 
of the following:
    (a) The family maximum (see Sec. Sec.  404.403 and 404.404), which 
applies to entitled beneficiaries remaining after exclusion of 
beneficiaries deemed not entitled under Sec.  404.436 (due to a 
deduction for engaging in non-covered remunerative activity outside the 
United States or failure to have a child in one's care);
    (b) Your entitlement to benefits (see Sec.  404.410) for months 
before you reach full retirement age FRA (see Sec.  404.409) (this 
applies only to old-age, wife's, widow's, widower's or husband's 
benefits);
    (c) Your receipt of benefits on your own earnings record, which 
reduces (see Sec.  404.407), your entitlement (or deemed entitlement; 
see Sec.  404.420) to benefits on another individual's earnings record; 
and
    (d) Your entitlement to benefits payable (or deemed payable) to you 
based on the earnings record of an individual entitled to a disability 
insurance benefit because of that individual's entitlement to worker's 
compensation (see Sec.  404.408).
    12. Section 404.452 is revised to read as follows:


Sec.  404.452  Reports to Social Security Administration of earnings: 
wages; net earnings from self-employment.

    (a) Reporting requirements and conditions under which a report of 
earnings, that is, wages and/or net earnings from self-employment, is 
required. (1) If you have not reached full retirement age (see Sec.  
404.409) and you are entitled to a monthly benefit, other than only a 
disability insurance benefit, you are required to report to us the 
total amount of your earnings (as defined in Sec.  404.429) for each 
taxable year. This report will enable SSA to pay you accurate benefits 
and avoid both overpayments and underpayments.
    (2) If your wages and/or net earnings from self-employment in any 
month(s) of the year are below the allowable amount (see Sec. Sec.  
404.446 and 404.447), your report should include this information in 
order to establish your grace year (see Sec.  404.435) and possible 
eligibility for benefits for those months.
    (3) Your report to us for a taxable year should be filed on or 
before the 15th day of the fourth month following the close of the 
taxable year; for example, April 15 when the beneficiary's taxable year 
is a calendar year. An income tax return or form W-2, filed timely 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/or net earnings from self-
employment that must be reported to us. Although we may accept W-2 
information and special payment information from employers, you still 
have primary responsibility for making sure that the earnings we use 
for deduction purposes are correct. If there is a valid reason for a 
delay, we may grant you an extension of up to four (4) months to file 
this report.
    (4) You are not required to report to us if:
    (i) You reached full retirement age before the first month of your 
entitlement to benefits; or
    (ii) Your benefit payments were suspended under the provisions 
described in Sec.  404.456 for all months of a taxable year before the 
year of full retirement age, or for all months prior to your full 
retirement age in the full retirement age year, unless you are entitled 
to benefits as an auxiliary or survivor and your benefits are reduced 
for any month in the taxable year because of earnings and there is 
another person entitled to auxiliary or survivor's benefits on the same 
record, but living in a different household.
    (b) Report required by person receiving benefits on behalf of 
another. When you receive benefits as a representative payee on behalf 
of a beneficiary (see subpart U of this part), it is your duty to 
report any earnings of the beneficiary to us.
    (c) Information required. If you are the beneficiary, your report 
should show your name, address, Social Security number, the taxable 
year for which the report is made, and the total amount of your wages 
and/or net earnings from self employment during the taxable year. If 
you are a representative payee, your report should show the name, 
address, and Social Security number of the beneficiary, the taxable 
year for which the report is made, and the total earnings of the 
beneficiary, as well as your name, address, and Social Security number.
    (d) Requirement to furnish requested information. You, the 
beneficiary (or the person reporting on his/her behalf) are required to 
furnish any other information about earnings and services that we 
request for the purpose of determining the correct amount of benefits 
payable for a taxable year (see Sec.  404.455).
    (e) Extension of time for filing report. (1) Request for extension 
to file report. Your request for an extension of time, or the request 
of your authorized agent, must be in writing and must be filed at a 
Social Security Administration office before your report is due. Your 
request must include the date, your name, the Social Security number of 
the beneficiary, the name and Social Security number of the person 
filing the request if other than the beneficiary, the year for which 
your report is due, the amount of additional time requested, the reason 
why you require this extension (see Sec.  404.454), and your signature.
    (2) Evidence that extension of time has been granted. If you do not 
receive written approval of an extension of time for making your report 
of earnings, it will be presumed that no extension of time was granted. 
In such case, if you do not file on time, you will need to establish 
that you had good cause (Sec.  404.454) for filing your report after 
the normal due date.

[FR Doc. 03-21613 Filed 8-22-03; 8:45 am]
BILLING CODE 4191-02-P