U n i t e d S t a t e s G o v e r n m e n t

M e m o r a n d

FORM G-llSf (1-92)

R a i l r o a d R e t i r e m e n t B o a r d

D ecem ber 3, 2004

L-2004-14

TO:

FROM:

Marie C. Leeson

Chief of Calculation Analysis a n d Systems 

Through: Ronald Russo

Director of Policy and Systems

Steven A. Bartholow 'S&o** /€- ^ ot^ c^B^ ^ r9/ae3

General Counsel ^

SUBJECT: Penalties a n d End-of-Year Adjustment for Disability 

Work Deductions

This is in reply to your inquiry regarding the imposition of penalties in 

conn ection with disability work deductions involving the e m p lo y e e ’s 

se c o n d or later failure to report earnings. You indicated that the 

Office of Programs currently imposes a penalty d eductio n in the 

am o u n t of o n e m onth's annuity for e a c h month in which an 

annuitant has excess earnings an d fails to report those excess 

earnings while receiving an annuity. The question has b een raised, 

however, as to w hether the year-end adjustm ent should limit the 

total number of work deduction months and penalty deduction 

months to the num ber of months in the ca le n d ar year during which 

the excess earnings occurred. In other words, you ask w hether the 

end-of-year adjustment should be limited so that an annuitant would 

lose no more than 12 months of annuity.

You point out that section 2(e)(4) of the Railroad Retirement Act an d 

section 220.164 of the RRB's regulations provide for an end-of-year 

adjustment for a disabled employee whose annuity was withheld for
earnings over $400.00 per month. Section 2(e)(4) provides in 

pertinent part that:

* * * A ded uction shall b e im posed, with respect to any 

such individual w ho fails to m ake such report, in the annuity or 

annuities otherwise d u e the individual, in an am o unt equal to 

the am o u n t of th e annuity for e a c h m onth in which he is paid 

such earnings in such em ploym ent or self-employment * * *.i

You advise that, in a specific case, applying current p roced ure in 

making the end-of-year adjustment, the em ployee-annuitant was 

assessed 12 penalty deduction months in addition to the 3 months of 

work deductions. You ask w hether a loss of 15 months of annuities is 

appropriate and whether instead the num ber of penalty deduction 

months should be limited to the number of months of annuity that 

h av e not already b e e n lost to the work deductions within the 

c a le n d a r year in question. Therefore, in the exam ple case, if 

imposition of the penalty were limited, the em ployee would hav e 

b e e n assessed 3 work deduction months a n d 9 penalty deduction 

months.

It should b e n o ted that section 220.164(c)(2) of the RRB’s regulations 

provides in pertinent part that:

1 The final sentence of that section states that:

If the total amount of such individual’s earnings during such year (exclusive of e a rn in g s for

services described in subdivision (3)) is in excess of $4,800 (after deduction of disability related

work expenses), the number of months in such year with respect to which an annuity is not

payable by reason of such first and third sentences shall not exceed one month for each $400 of

such excess, treating the last $200 or more of such excess as $400; and if the amount of the

annuity has changed during such year, any payments of annuities which become payable solely by

reason of the limitations contained in this sentence shall be made first with respect to the month

or months for which the annuity is larger.

While this provision operates to reduce the dollar amount of the annuity withheld due to excess eamingg

depending on the amount of the excess earnings, it does not affect the resolution of the issue under

consideration here, which is the number of months of annuities which may be subject to the penalty
* * * If it is the em p lo y ee's first failure to report, the penalty 

d ed u c tio n is eq u a l to one month's annuity. If it is the 

e m p lo y e e ’s se c o n d or later failure to report, the penalty 

d ed u ctio n equals the annuity am ou nt for e a c h month in which 

th e em p lo y ee e a rn e d over $400.00 a n d failed to report it on 

time.

The regulation does not limit the num ber of penalty deduction 

months to th e months in the calen d ar year for which no annuity has 

already b e e n lost d u e to excess earnings. Rather, the regulation 

gives effect to the wording of the la n g u ag e in section 2(e)(4) of the 

Railroad Retirement Act and provides that an annuitant shall lose 

o n e m onth’s annuity as a penalty for e a c h month in which the 

annuitant works and does not timely report earnings to the Board.

The current p ro c ed u re used by the Office of Programs is consistent 

with the legislative history of the provision in the Railroad Retirement 

Act. Specifically, section 2(e)(4) is essentially a re en actm en t of a 

portion of section 2(d) of the Railroad Retirement Act of 1937, the 

predecessor of the Railroad Retirement Act of 1974. The monthly 

earnings limitation and penalty provision of section 2(d) were a d d e d 

to the 1937 Act in 1954 (Public Law 746, 68 Stat. 1038). The la n g u a g e 

in the current section 2(e)(4) of the Railroad Retirement Act of 1974 is 

virtually identical to that a d d e d in 1954, ex c ep t that the monthly 

am o u n t which c a n b e ea rn ed without a loss of benefits is now 

$400.00. In 1954, the limit established was $100.00.

The legislative history of the 1954 a m en d m en t reflects a co n cern that 

there be a limitation imposed upon earnings by a disability 

annuitant:

The fourth sentence of the last paragraph 

of section 2(a) of the Railroad Retirement Act 

provides for presumptive recovery from a 

disability. Under this provision, an individual is
considered to have recovered from a disability 

if h e e a rn e d m ore than $75 in service for hire, or 

in self-employment, in e a c h of 6 consecutive 

c a le n d a r months. The purpose of this provision 

has b e e n misunderstood, a n d in som e cases, I 

regret to say, has b e e n ab u sed . In som e 

instances the disabled individual has m ad e 

arrangem ents to earn at least as m uch, if not 

more, than he did before he retired on disability 

and m an ag ed to continue to receive the 

disability annuity. In any event, this provision 

has proved very difficult to administer, a n d the 

Board an d all the standard railway labor 

organizations are in a g re e m e n t th at this 

provision should be stricken and a new 

provision in lieu thereof should b e a d o p te d .

Therefore section 2 of the bill provides for 

striking the fourth sen ten ce of the last 

p a ra g ra p h of section 2(a) which contains this 

provision. (Amending Railroad Retirement Act. 

Railroad Retirement Tax Act, a n d Railroad 

Unemployment Insurance A ct: Hearings on S.

2930 Before the Special Subcomm. On Railroad 

Retirement Legislation of the Senate Comm. On 

Labor a n d Public Welfare. 83rd Cong., 2d Sess.

31-32 (1954) (statem ent of A.E. Lyon, Executive 

Secretary, Railway Labor Executives 

Association).

The House Report explained how the new provision would work:

To rem edy the situation a n d still provide a 

practical disability or retirement test, the 

present test is eliminated an d section 3 of the 

bill ad d s to section 2(d) of the Railroad
Retirement Act a new paragraph providing a

m onth-to-month work clause under which a

disability annuitant would not b e paid his

annuity for any month in which he receives

m ore than $100 in earnings from em ploym ent

or self-employment of any form.........

* * * * *

The provision, in disability cases, for loss of 

an additional am ount equal to the am ount of 

the annuity for any month with respect to 

which no report was m ad e to the Board as 

required, is p attern e d after a similar provision in 

the Social Security Act, a n d is intended to h av e 

th e sam e general effect. If, for exam ple, a 

disability annuitant had accrued earnings of 

m ore than $100 in e a c h m onth b etw e en April 

a n d O ctober, inclusive, he will for 7 months 

have received annuities to which he was not 

entitled. Assuming the annuity was $100 a 

month, the Board would require him to repay 

the $700 overpaym ent either by deductions 

from later benefits or otherwise. In addition, the 

Board would m ake a deduction of 1 month's 

annuity from any later annuities d u e him if he 

fails to report these accruals before a c c e p tin g 

his annuity c h e c k d a te d July 1 (which would b e 

for June, the second month following April), 

ev en though he does not m ake the report until 

D ecem b er or does not m ake it at all. Limiting 

the penalty for failure to report to 1 m onth’s 

annuity would apply in this c a se only b e c a u s e it 

is his first failure to report. If, however, the sam e 

individual should return to work (in em ploym ent 

or self-employment paying in excess of $100 a 

month) for the sam e 7 months of the next year,
with the Board continuing to pay the annuity 

for these months, he will h av e ag ain b e e n 

overpaid $700 in annuities as he w as th e year 

before, but if he should again fail to m ak e the 

required report, the Board would not only 

recover the overpaym ent of the annuities but 

would have to m ake a deduction from 

annuities later d u e the em ployee in a n am o u n t 

; eq u a l to the total of the annuities for the 7 

months with respect to which he failed to m ake 

the report. (H.R. Rep. No. 1899, 83rd Cong., 2d 

Sess., 17-18(1954).

The legislative history quoted ab o v e makes clear that the penalty 

ded u ctio n im posed by section 2(e)(4) is not a penalty for earnings in 

excess of the monthly earnings limitation, but is a penalty for the 

failure to report such earnings to the Board in a timely m anner. The 

e n a c tm e n t of th e original restriction in 1954 w as in response to 

abuses by disability annuitants. Congress recognized that the 

assessment of an overpaym ent alone might not deter violation of 

th e requirem ents of the earnings limitation. Yet th e initial penalty 

im posed for the first failure to report excess earnings is eq u al to only 

o n e m onth's annuity. A m ore substantial penalty is im posed only 

w hen a disability annuitant fails again to m ake the required report.

The provisions calling for a year-end adjustm ent in the assessment of 

disability work deductions were a d d e d to the Railroad Retirement 

Act of 1937 in 1959 (Public Law 86-28, 73 Stat. 25). The section-bysection explanation of the bill stated that:

Under the present provision of section 2(d) of 

the act, the disability annuity of an individual under a g e 

65 is not paid for any month in which he earns a b o v e $100 

in any form of employm ent. Subsection (b) would a m e n d 

such section 2(d) to provide that the annuity for a month
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or m onths which is withheld b e c a u s e of such earnings or 

an y d ed u c tio n which is applied for 1 or m ore months by 

reason of a failure to report earnings for such month or 

months is to b e restored if the earnings of the disability 

annuitant for the whole calen d ar year do not e x c e e d 

$1,200. Further, w here the annuitant's total earnings 

e x c e e d $1,200 in a ca le n d a r year the num ber of months 

for which his annuity is not paid in such year b e c a u s e of 

earnings of over $100 in e a c h such month is in no event to 

e x c e e d 1 m onth for e a c h $100 of earnings over $1,200 

(with the last $50 or more of such excess being treated as 

$100). (S. Rep. No. 222, 86*h Cong. V* Sess., April 24, 1959, 

pp. 25-26).

The section-by-section explanation of the 1959 a m e n d m e n t clearly 

indicates th at the year en d adjustm ent will result in a rem oval of a 

penalty im posed for not reporting earnings only when the disability 

annuitant's earnings for the entire year do not ex ceed the annual 

limit. In a c a se , however, w here the annual earnings d o e x c e e d the 

annual limit, only the annuity am ount lost d u e to the excess earnings 

m ay b e adjusted; no adjustm ent is to b e m a d e for the penalty 

imposed for not timely reporting those earnings.

It is our opinion that the use of the term "otherwise" in the phrase "in 

the annuity or annuities otherwise due the individual," merely m eans 

that the deduction may be m ad e from any annuity payments which 

m ay b e c o m e d u e to an individual at any time, a n d not just from 

those annuity payments due for the calendar year at issue. The plain 

lang uage of section 2(e)(4) of the Railroad Retirement Act supports 

the procedure currently used by the Office of Programs. Specifically, 

in a c a s e w here a disability annuitant fails to report excess earnings 

for a sec o n d (or other subsequent time after an initial failure to report 

excess earnings), section 2(e)(4) requires that a penalty in the
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W am ount of one month's annuity be assessed for e a c h month that the 

an nuitant has excess earnings a n d fails to report them to the Board. 

Imposition of th e penalty in this m anner was upheld in Reese v. 

Railroad Retirement Board. 906 F.2d 355 (8th Cir. 1990), w here the 

Court included a footnote which show ed that in 1981 the em p lo y ee 

h a d earnings over the earnings limitation in 7 months. In th at case, 

the Board determ ined there to be an overpaym ent of the annuity 

a m o u n t for e a c h of the 7 months an d also im posed a penalty of the 

annuity am o u n t for e a c h of the sam e 7 months. The Court n o ted 

th at th e Board w as "required” to impose the penalty.

In summary, for the reasons discussed ab o v e, it is my opinion th at in 

m aking the year-end adjustm ent of disability work deductions, it is 

a p p ro p riate to assess a penalty deduction in the a m o u n t of o n e 

m o n th ’s annuity for e a c h month in which the annuitant h a d excess 

earnings and failed to timely report those earnings to the Board.

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