Controversy Over Disability Retirees’ Earned Income

You are here: Home

Legislation

Controversy Over Disability Retirees’ Earned Income

JANUARY 2000 - Officials Disagree On Earnings Definition - Controversies, relating to disability pensions, have been brewing as 1999 ends and will undoubtedly spill over to next year. Chief among them are the issues surrounding disability retirees returning to work in the public sector. Another is a growing dispute between retirement officials over what is earned income for a disability retiree.

According to the retirement law, disability retirees can work to supplement their pensions. That same law limits the amount of a disability retiree’s earnings.

According to the formula, a retiree can make the difference between his pension and the salary, currently being paid in his "old job," from which he was disabled, plus $5,000. If a retiree has earned income, exceeding the formula, then his disability pension will be reduced by the excess.

With the passage of Chapter 306 in 1996, the annual earnings statements filed by disability retirees, showing whatever earned income they made in that year, were to be filed with the Public Employee Retirement Administration Commission (PERAC), and no longer with the retirement boards. If PERAC determines that a disability retiree has exceeded the formula, it notifies the retirement board which can then conduct a hearing on the issue before implementing any pension reduction.

Almost one year ago, PERAC issued an opinion on what earned income meant for disability retirees. According to the agency, earned income "implies some labor, management or supervision in production thereof, not income derived from ownership of property."

PERAC went on to state that if a disability retiree, "operates a business for profit, individually or through an agent, that individual does not have the option of classifying such income as dividends as opposed to wages. Profits derived from the operation of a business through some labor, management or supervision of production of such profits are earned income, regardless of how a retiree categorized such income for income tax or other purposes."

Criticism of PERAC Opinion

"I believe that PERAC’s interpretation constitutes ‘overkill’ in reaction to, at most, a handful of retirees who failed to report earned income," says Paul Hynes, an attorney specializing in public pension law. "From cases that I’ve participated in and reviewed, it’s apparent PERAC has expanded the definition to include forms of income which other state and federal agencies, including retirement boards, have long considered to be unearned income."

Among the retirement boards taking issue with PERAC’s opinion, are some of the Commonwealth’s largest, including the State and Boston Retirement Boards. According to State Board attorneys, annual gross earned income for disability retirees is defined more narrowly by the retirement law as "compensation earned for personal services actually performed, including wages, salaries, fees, commissions or gratuities or similar income."

Recently, applying its definition, the State Board disagreed with a PERAC directive to include the foster care payments received by a disability retiree as earned income. To further support its position, the Board pointed out that the IRS does not include foster care payments as earned income.

When one of its disability retirees challenged a PERAC finding he had excess earnings, the Boston Board conducted a day and a half hearing. The case involved a business that the retiree began and is now operated by his children.

To summarize the dispute, PERAC included in his 1997 earnings certain payments made by the business to the retiree, not as a salary, but a return of his capital investment into the operations. As pointed out in the hearing, the IRS does not consider these payments to be earned income.

In its findings, the Board agreed with the retiree, and the IRS, that the 1997 payments were not earned income. At press time, the Boston Board had not taken action to recoup the excess claimed by PERAC, and the matter is on appeal to the Contributory Retirement Appeal Board.

Corrective Legislation Needed

"Assuming no accommodation is reached, we anticipate that these and similar cases will be decided by litigation," reports Association Counsel Bill Rehrey. "While we’ll be closely monitoring the issue, it’s unfortunate that in the meantime disability retirees are somewhat in the dark as to what are excess earnings.

"Perhaps all parties would be better served and more expeditiously if the legislature addressed the issue and provided a uniform comprehensive policy."

It will be of paramount concern to disability retirees to see how this issue develops in both the courts and the legislature over the first part of next year.

< Prev		Next >

Main Menu