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Railroad retirement annuities are meant to replace, in part, earnings lost to an individual 

or a family because of old age, disability or death. Consequently, an annual earnings 

limit was established to limit the amount of earnings a retired individual may have. The 

amount of earnings an individual under full retirement age (age 70 prior to the year 2000 

and under age 72 before 1-1-83) has in a year may affect the amount of annuities 

payable, if earnings exceed the annual limit. Earnings over the annual limit are 

considered to be "excess earnings" and may cause deductions from annuity payments, 

depending on the kind of annuity and the amount of earnings.

The concept of "excess earnings" is relevant to the retirement age and service tier 1 

and vested dual benefit (VDB) work deduction components and to the full survivor 

nondisability annuity rate which is subject to work deductions. These amounts are 

reduced as follows:

• Beginning in the year 2000, annuitants who have excess earnings and are under full 

retirement age for the entire year lose $1 for every $2 of excess earnings (earnings 

over the annual exempt amount). Annuitants who will attain full retirement age 

during the earnings year will lose $1 for every $3 of excess earnings over the annual 

exempt amount. However, only the earnings through the month before the month of 

attainment will be counted for work deduction purposes. Work deductions no longer 

apply beginning in the month the annuitant attains full retirement age. (Note: Work 

deductions cease when the annuitant attain full retirement age. This does not 

include LPE work deductions.)

Example 1 - Mr Jones is under full retirement age for the entire year of 2004 and 

he reports an estimate of earnings of $20,000.

$20,000.00 Estimated earnings.

-11,640.00 - 2004 limit for annuitants under full retirement age

 8,360.00/2 - Excess earnings and divisor for annuitants under FRA

 4,180.00 - Amount to be recovered from work deduction components

Example 2: Mrs. Martin attains FRA in June of 2004 and reports an estimate of 

earnings through May 2004 of $39,000.

$39,000 Estimated earnings through April 2004.

- 31,080 2004 limit for annuitants who attain FRA in 2004

 7,920/3 Excess earnings and divisor for annuitants who attain FRA.

 2,640 = Amount to be withheld. Withholding cannot extend past April 

2004, the month before the annuitant attains FRA.

• For the period January 1983 through December 1989, all annuitants under age 70 

lose $1 for every $2 of excess earnings over the annual exempt amount. 
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Beginning in January 1990, annuitants under age 65 lose $1 for every $2 of excess 

earnings over the annual exempt amount. Annuitants who are age 65 through 69 

lose $1 for every $3 of excess earnings over the annual exempt amount. (Work 

deductions ceased at age 70.)

Example 1 – Mrs. Johnson is under age 65 in 1999 and had earnings of $23,000 

in that year.

$13,000.00 Final 1999 earnings.

- 9,600.00 - 1999 limit for annuitants under age 65.

 3,400.00/2 - Excess earnings and divisor for annuitants under FRA

 1,700.00 - Amount that was recovered from work deduction components

Example 2: Mr. Johnson attained age 65 in 1999 and he reported earning of 

$25,500. 

$25,000.00 Final 1999 earnings.

- 15,500.00 1999 limit for annuitants age 65 through 69.

 

9,500.00/3 

Excess earnings and divisor for annuitants who age 65 through 

69.

 3,166.67 = Amount recovered from the employee’s work deduction 

components.

• Prior to January 1983, annuitants under age 72 lost $1 for every $2 of excess 

earnings over the annual exempt amount. (Work deductions ceased at age 72.)

1105.5 Test to Determine if Work Deductions Apply

The test to determine if work deductions apply to an annuity consists of three basic 

parts:

A. Work Deduction Insured Status - In order to be subject to work deductions, an 

annuitant must have a "Work Deduction Insured Status." A work deduction 

insured status is defined as follows:

1. Employee - The employee has a "Work Deduction Insured Status: if he or 

she:

• Has sufficient quarters of coverage based on his or her own nonrailroad earnings to be eligible for a social security benefit or,

• Has accumulated wage quarters of coverage and/or railroad 

compensation quarters of coverage after 1974 which would equal the 

number of quarters of coverage to have an "Insured Status" under 

Social Security Administration rules. 
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2. Spouse or Divorced Spouse - The spouse or divorced spouse has a "Work 

Deduction Insured Status" if the employee has a "Work Deduction Insured 

Status".

3. Survivor Annuitants - All survivor annuitants are considered to have a 

"work deduction insured status" under the Social Security Act rules and 

are therefore, subject to annuity work deductions.

B. Annual Earnings Test - An annuitant, whose total yearly earnings are over the 

annual exempt amount, will be subject to annuity work deductions if the annuitant 

has a work deduction insured status. Only the earnings through the month 

before the month the annuitant attains full retirement age are counted in 

determining if earnings exceed the annual exempt amount.

EXCEPTION: There is no age limit for LPE work deductions.

C. Monthly Earnings Test - Regardless of total annual earnings, annuities are 

payable in full for any month in which the monthly earnings test applies and the 

annuitant neither earns wages over the limit set for his age nor performs 

substantial services in self-employment. The monthly exempt amount is onetwelfth of the annual limit. Restrictions on the use of the monthly earnings test 

are explained in FOM1 1105.40. 

EXCEPTION: If LPE work deductions apply, the monthly earnings test is not 

applicable.

The earnings test applies to all work performed in the United States and to 

certain work outside the United States that is covered under the Social Security 

(SS) Act. A separate earnings test (the foreign work test) applies to non-covered 

work outside the United States. See FOM1 1105.85. 

The Railroad Retirement (RR) Act requires these deductions under the earnings 

test, which are the same as the deductions defined in the SS Act. However, the 

RR Act also withholds payment for any month in which an annuitant works for a 

railroad employer.

Disability annuitants (employee, widower, or child) are not subject to the annual 

earnings test. Instead, any work activity by a disability annuitant is evaluated in 

terms of whether the ability to work demonstrates that disability has ceased. The 

earnings restrictions for a disabled employee are explained in FOM 1125. 

However, the annual earnings test does apply when a disabled widow(er) attains 

age 60, because these benefits are then considered as age rather than disability 

benefits.
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1105.10 Annual Exempt Amounts

The annual exempt amount is the maximum amount of money that may be earned in a 

year without loss of annuities. Any earnings over the annual exempt amount will cause 

annuity deductions for a non-disability annuitant who is under full retirement age (age 

70 prior to the year 2000 and under age 72 before 1-1-83). Beginning 1-1-78, there is a 

separate annual limit for annuitants who are full retirement age and over; this limit is 

higher than the annual exempt amount for annuitants under full retirement age. Prior to 

1978, the earnings limit was the same for all annuitants.

Effective November 11, 1988, the higher exempt amount will apply to persons who die 

before their birth date in the year that they would have otherwise would have attained 

full retirement age.

1105.10.1 Table of Exempt Amounts

Click here for a table of yearly and monthly exempt amounts for annuitants under, 

attaining, or over full retirement age.

1105.10.2 Increase in Annual Exempt Amount

The 1977 SS Act amendments established the annual exempt amount for annuitants full 

retirement age and over through 1982. After 1982, the annual exempt amount for 

annuitants full retirement age and over will be adjusted automatically, as it is for 

annuitants under full retirement age. The increase in the exempt amount is based on 

the percentage rise in the average national wage for the second preceding year. For 

example, the increase in the under full retirement age exempt amount for l981 is based 

on the percentage rise in the average national wage from 1978 to 1979.

New exempt amounts are usually available in mid-October. 

1105.15 Determining Exempt Amount When Annuitant Dies

Effective November 11, 1988, the higher exempt amount will apply to persons who die 

before their birth date in the year that they would have otherwise attained full retirement 

age. Previous to that these rules applied.

Date of Death Monthly Exempt Amount

Before the month of the annuitant's full 

retirement age attainment.

Use the under full retirement age limit.

In or after the month of the annuitant's 

attainment of full retirement age. (Whether 

Use the full retirement age or over limit.
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the annuitant dies before the actual birthday 

is irrelevant).

Effective November 11, 1988, excess earnings are calculated using a 12-month taxable 

year. However, for deaths prior to November 11, 1988, when the year ends because of 

death, the annual limit must be calculated for the short taxable year. The monthly 

exempt amount for the year an annuitant dies is multiplied by the number of months in 

the year the annuitant was living, including the month of death. The 1988 exempt 

amount for a full retirement age annuitant who died in September 1988 is $6,300.00 (9 x 

$700.00).

Recalculation of the exempt amount for a short taxable year applies only when 

entitlement ends because of death. When entitlement terminates for a reason other 

than death, see FOM 1 1105.25. 

Before November 11, 1988

To compute the annual exempt amount applicable for the year the annuitant dies based 

on a "short taxable year", multiply the number of months the annuitant was alive in the 

year (including the month of death) times the monthly exempt amount.

If the annuitant dies in the year he would have attained full retirement age, but dies 

before the month of his attainment, his annual exempt amount becomes the amount for 

beneficiaries under full retirement age. If he dies in the month he attained or would 

have attained full retirement age, whether before or after the actual day, use the full 

retirement age annual exempt amount.

Example - An annuitant dies in June 1988 at age 67. His exempt amount is calculated 

as follows:

$ 700.00 (monthly exempt amount for annuitant over full retirement age in 1988)

X 6 (number of months annuitant is alive in 1988)

$4,200.00 (exempt amount for 1988)

1105.20 Earnings after Age Attainments 

• Full Retirement Age Attainment 

Beginning in the year 2000, no work deductions apply beginning in the month in 

which the annuitant attains full retirement age. Only the earnings through the 

month before the month of attaining full retirement age are counted for work 

deductions. If the annuitant’s earnings in that period do not exceed the annual 

exempt amount, no work deductions are applied. 

When assessing TWDs in a full retirement age attainment case, you should base 

the withholding on the amount of expected earnings through the month before 

the month of attaining full retirement age. If using an annual estimate based on 
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the previous year’s earnings, divide it by 12, then multiply the monthly amount by 

the number of months before the full retirement age attainment month.

When assessing PWDs, release a field assignment to secure a monthly 

breakdown of the earnings through the month before attainment of full retirement 

age in survivor cases.

In retirement cases, remove the regular work deductions and include code ALTA 

code paragraph 414.10 in the adjustment award letter. Code paragraph 414.10 

advises the annuitant to contact the field office and provide them with a monthly 

breakdown of the earnings. The field office will enter the monthly breakdown into 

SPEED.

B. Age 70 (or age 72) Attainments for Taxable Years Ending After December 1973

If the annuitant attained age 70 (or age 72) after December 1973, the charging of 

work deductions depends on whether the earnings are from wages or selfemployment:

1. Earnings are Wages - Only earnings earned in the months before the 

month of attainment of full retirement age, (age 70 prior to January 2000), 

(or age 72) are used in determining annual earnings for charging tier 

I/VDB and survivor annuity work deductions. Earnings after age 70 (or 

age 72) are not used. Work deductions no longer apply effective with the 

month in which the annuitant attains age 70 (or age 72).

Example - The annuitant (DOB 11-5-21) earns $10,550 through the month 

of October 1991 and $1,450 from November through December 1991. 

The total earnings for work deductions in 1991 is $10,550. Work 

deductions do not apply November 1, 1991 or later.

If a monthly breakdown of the annuitant's earnings cannot be obtained, 

follow the procedure in section 2 below.

2. Earnings are Self-Employment Earnings - If the annuitant worked to the 

end of the taxable year, the net earnings or loss for the full year are 

prorated for the months before the employee attains full retirement age 

(age 70 prior to the year 2000 or age 72 before 1-1-83). Only the earnings 

prorated to the months before attainment of full retirement age are used in 

determining annual earnings for charging tier I/VDB and survivor annuity 

work deductions. Work deductions no longer apply effective with the 

month in which the annuitant attains full retirement age.

Example - The annuitant (DOB 11-5-21) earns $12,000 for the taxable 

year 1991. These earnings are prorated as $1,000 per month for each 

month in 1991. The earnings of $10,000 are credited through the month 

of October 1991. The remaining $2,000 is credited to November through 
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December 1991. The total earnings for work deductions in 1991 is 

$10,000. Work deductions do not apply November 1, 1991 or later.

C. Age 72 Attainments for Taxable Years Ending Before January 1973

If an annuitant has attained age 72 in a taxable year ending before January 

1973, the earnings for the entire year are used to determine the amount of 

excess earnings. However, only months prior to the month of attainment of age 

72 are charged work deductions.

Example - The annuitant (DOB 11-5-00) earns $15,550 for the taxable year of 

1972. This would normally require 12 permanent work deductions for 1972. 

However, the annuitant attained age 72 in November 1972. Therefore, work 

deductions do not apply November 1, 1972 or later.

1105.25 Earnings After Entitlement Ends

These rules for counting earnings apply when annuity entitlement ends for a reason 

other than the death of the annuitant. When an annuitant died before November 11, 

1988, the rules in FOM 1 1105.15 should be used.

1105.25.1 Retirement and O/M Annuities

In retirement age and service cases (employee, spouse, divorced spouse, or retirement 

overall minimum), use the same rules as SSA when determining the earnings to be 

used in the tier 1/VDB annual earnings test. This means that the total earnings for the 

earnings year are counted for the annual earnings test.

A spouse annuitant (entitled only by reason of having a child in his or her care) is 

entitled to a “termination grace year” if the entitlement is ending because there is no 

longer a child-in-care. This means that the “monthly exempt amount “can be applied in 

for any month in the terminating year in which the spouse has a non-work month. This 

is true even if the spouse was previously paid for a non-work month in a prior year.

1105.25.2 Survivor Annuities

Earnings for months beginning with the month the person is no longer qualified for an 

annuity are not counted for deduction purposes, if entitlement ends for a reason other 

than death. Excess earnings deductions may apply only if the annuitant earned over 

the annual limit in his short entitlement year (January through the last month of 

entitlement). This rule applies to survivor annuities. It does not apply when an annuity 

continues to be paid with no break in entitlement (e.g., a mother becomes entitled as an 

aged widow or a child has continuous entitlement to a student's annuity).

EXAMPLE: A mother received an annuity for January through July; her annuity was 

terminated because she remarried in August and she was under age 60. The mother's 

earnings are counted only in the months January through July to determine if work 
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deductions apply. If she earned more than the annual exempt amount in January 

through July, work deductions apply in her case.

If an annuitant's entitlement ends, but the annuitant again becomes qualified for later 

months in the year, see FOM 1 1105.60. 

1105.30 Taxable Year

Earnings for deduction purposes are counted for a period of a taxable year. In the 

absence of evidence to the contrary, the calendar year is considered to be the taxable 

year in assessing work deductions. When a taxpayer dies, his taxable year ends with 

the date of death regardless of whether the taxable year was a calendar year or a fiscal 

year.

Effective November 11, 1988, the taxable year for purposes of excess earnings is 

defined as being 12 months. Previously, the taxable year ended with the date of death 

regardless of whether the taxable year was a calendar year or a fiscal year.

1105.31 Fiscal Year

A fiscal year is an accounting period of 12 months ending on the last day of any month 

other than December, or is a period varying from 52 to 53 weeks. When a beneficiary 

reports earnings on the basis of a fiscal taxable year, the annual report must be made 

on or before the 15th day of the fourth month following the close of the fiscal taxable 

year. You should make the appropriate changes on the annual report form to conform 

with the fiscal year. The applicable earnings test is determined by when the fiscal year 

ends during the calendar year. For example, a fiscal year annual report for 2/82 

through 1/83 would have the 1983 yearly and monthly exempt amounts apply for all 12 

months subject to the earnings test.

1105.35 Determining Amount of Excess Earnings

Annuity payments are subject to deduction if a non-disability annuitant has earnings 

over the annual exempt amount. The amount of earnings in excess of the annual limit 

is the basis for determining the amount of annuities to be withheld. An annuitant may 

lose $1.00 in annuities for every $2.00 earned over the annual limit if the annuitant is 

under full retirement age. The year the annuitant attains full retirement age, the 

annuitant may lose $1.00 for every $3.00 earned over the annual exempt amount.

The term "excess earnings" refers to the amount of annuities to be withheld because of 

earnings over the annual limit. To determine the amount of excess earnings, deduct the 

annual limit from the reported earnings, and divide the result by two or three depending 

on the annuitant's age. The amount of excess earnings should be rounded down to the 

next lower multiple of $1.00, if it is not a multiple of $1.00.
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EXAMPLE: The employee reported earnings of $15,781.63 for 1991. Since the 

employee is over full retirement age, the annual limit for 1991 is $9,720. The amount of 

excess earnings to be withheld from the annuity is $2,020.00.

$15,781.63

- 9,720.00 annual limit equals:

6,061.63 divided by 3 equals:

$2,020.54 excess earnings rounds down to:

$2,020.00

1105.40 Monthly Earnings Test And Grace Year

The annual earnings test determines the amount of annuities to be withheld based on 

the amount of earnings over the annual exempt amount. A monthly earnings test may 

be used to determine which months of annuities should be withheld.

Under the monthly earnings test, annuities are payable in full for any month the 

annuitant does not earn wages over the monthly exempt amount and does not perform 

substantial services in self-employment, regardless of the total annual earnings. 

However, the 1977 SS amendments restricted the use of the monthly earnings test.

1105.40.1 Initial Grace Year

The initial monthly earnings test cannot be used except in the grace year. The grace 

year is the first year after 1977 in which an annuitant has an entitlement month in which 

he does not earn wages over the monthly exempt amount and does not perform 

substantial services in self-employment (a non-work month). The first year an annuitant 

has a non-work month is the grace year, and that is the only time the initial monthly 

earnings test may be used. Once the monthly earnings test has been applied after 

1977, deductions for subsequent years are determined by the annual earnings test, 

regardless whether the annuitant worked every month.

EXAMPLE: A widow's annuity began 8-1-2004. She earned $50,000.00 before her 

retirement in July. She returned to work in 2005, but she earned less than the monthly 

exempt amount in March through May. Her 2005 earnings were $40,000.00.

Because she was entitled to an annuity and had non-work months in 2004 (August 

through December), 2004 is the widow's grace year. The monthly earnings test allows 

payment of her annuity August through December, even though her earnings of 

$50,000.00 would have caused deductions under the annual earnings test.

The monthly earnings test may not be used in 2005, because the grace year has 

expired. Deductions will be charged under the annual earnings test beginning with 

January, and for every succeeding month until the excess is recovered, regardless 

whether she had a non-work month.
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1105.40.2 Grace Year for Break in Entitlement or a Termination Year

There are two other cases when the monthly earnings test may be used:

A. Break in entitlement - A grace year may apply when there is a break in 

entitlement. When an annuitant becomes entitled to a different kind of annuity 

and there is a break in entitlement of at least 1 month, the monthly earnings test 

may be used in the new grace year. The different kinds of annuity are an 

employee, spouse, child, widow(er), mother/father or parent annuity. A change 

from a spouse's to a divorced spouse's annuity or a widow(er)'s to a remarried 

widow(er)'s annuity is not a break in entitlement for a grace year determination.

The grace year is the first year of entitlement to the new annuity in which the 

annuitant has a non-work month. The grace year must be after 1977.

B. Termination year - A grace year applies in the termination year for a child, or for 

a wife or mother/father entitled based on a child in care, unless the annuity 

terminates because of the death of the beneficiary. A termination grace year 

may apply to a child's annuity or O/M share, a spouse annuity or O/M share 

based on a child in care, or a surviving mother's/father's annuity based on a child 

in care. The monthly earnings test may not be used if the beneficiary is entitled 

to any other kind of annuity in the month after entitlement to the child's annuity or 

child in care annuity ends. This provision does not apply to a spouse's or 

widow(er)'s annuity based on age. The grace year must be after 1977.

This provision was added to prevent an overpayment because of earnings after 

the benefit terminated. The RR Act already provided that earnings after survivor 

annuity ends are not included in determining excess earnings. However, the 

termination grace year will benefit the wife, surviving child, or mother/father who 

has a non-work month and excess earnings in the year that entitlement ends, 

because it permits use of the monthly earnings test in a year after the initial grace 

year.

1105.40.3 Legislative Background

Before 1978, the monthly earnings test could be used in every year. Retirement work 

deduction components (tier I and the vested dual benefit), O/M shares and survivor 

annuities could be paid in any non-work month, regardless of total yearly earnings or 

the number of non-work months.

The 1977 SS amendment restriction on using the monthly earnings test was designed 

to cease benefit payments to certain annuitants for parts of the year, when their work 

patterns had not changed and their yearly earnings were substantial. The intent of the 

law is to allow annuitants to begin receiving monthly benefits upon retirement, when all 

work may cease. However, the grace year may actually apply before the year the 

annuitant retires, if he is entitled to an annuity and has a non-work month.
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When the 1977 SS amendments were first enacted, the grace year was the first year in 

which an annuitant had a non-work month during a period of entitlement. There was no 

restriction on which years could be a grace year. The result was that when the monthly 

earnings test had been used before 1978, annuities could not be paid for non-work 

months in 1978. This was an unfair disadvantage to annuitants who would have 

otherwise been paid for 1978 non-work months, and could not have anticipated the 

change in the law.

Consequently, Public Law 96-473 (the 10-19-80 SS amendments) was enacted to 

alleviate the harsh effects of the 1977 amendments. The change restricted the grace 

year to years after 1977. The monthly earnings test could be applied without restriction 

to years before 1978.

EXAMPLE: An annuitant became entitled in 1976 and had non-work months in 1976, 

1977 and 1978. The monthly earnings test can be applied in 1976 and 1977, under the 

law in effect before 1978. The monthly earnings test can also be applied in 1978 under 

the 10-19-80 amendments, because 1978 is the first year after 1977 in which the 

annuitant was entitled and had a non-work month.

1105.45 Non-Work Months

1105.45.1 Definition of Non-work Month

A non-work month is one in which the annuitant is entitled to an annuity and did not 

earn wages over the monthly exempt amount and did not render substantial services in 

self-employment.

A non-work month can exist whether or not the annuitant has excess earnings for the 

year, whether or not a payment is made on the basis of the non-work month, and 

whether or not the annuitant waives payment for the non-work month. The existence of 

the non-work month controls the grace year, not whether the annuitant receives an 

annuity based on the existence of the non-work month.

EXAMPLE: An annuitant became entitled to an annuity in January 2000. At a salary of 

$700.00 per month, his total yearly earnings were $8,400.00. He had no excess 

earnings, but 2000 is the first year in which he had a non-work month of entitlement (he 

did not earn over the monthly exempt amount of $840.00). Therefore, 2000 is the only 

year in which the monthly earnings test may apply. The fact that he had no excess 

earnings in 2000 is immaterial.

1105.45.2 Requirement to Reveal Non-Work Months

An entitled annuitant does not have a completely free option to determine the year to 

which the monthly earnings test applies. Once he is entitled, the monthly earnings test 

will be applied to the first year he has a non-work month of entitlement, regardless of 

whether he accepts payment for those months or waives payment for the non-work 

months. The existence of the non-work month is the controlling factor. In addition, an 
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annuitant does not have the option of concealing a non-work month solely for the 

purpose of eliminating use of the monthly test, to retain the use of the monthly earnings 

test for what he believes will be a more advantageous year.

1105.50 Applicant Options For Selecting Grace Year

An applicant with excess earnings should consider the use of the grace year when he 

files for an annuity. He may be able to determine the most advantageous use of the 

monthly earnings test according to when he files his annuity application. It is impossible 

to establish guidelines for selecting the most advantageous grace year, because many 

factors are involved.

It is generally advantageous to use the monthly earnings test in the year of retirement, 

when employment ceases. This is true when earnings are high enough to prevent 

payment of the annuity unless the monthly earnings test applies. Annuities may then be 

paid beginning the month that earnings do not exceed the monthly exempt amount. In 

this case, an individual may wish to defer filing for an annuity until the year he wishes to 

use the monthly earnings test. The regular rules for canceling an application apply if the 

annuitant chooses to cancel an application and re-file.

However, if the individual's earnings are low enough to permit payment of the annuity 

before he actually stops working, an earlier beginning date may be advantageous. 

Remember that retroactivity limitations may affect the benefits payable.

This consideration will have more effect on a survivor annuitant, because part of a 

retirement annuity is payable even when an annuitant has excess earnings.

1105.55 Monthly Withholding Of Work Deductions

Withholding for excess earnings is deducted from monthly annuities on a dollar-fordollar basis, beginning with the first month of the entitlement year and proceeding to the 

second and succeeding months until the required amount has been withheld. Annuities 

are not withheld for a month in the grace year if earnings do not exceed the monthly 

limit.

EXAMPLE: A retirement annuitant has excess earnings of $3390.00. His work 

deduction components total $400.00 each month. The components are withheld 

beginning with the first month of entitlement and for three succeeding months until 

$3390.00 has been deducted. If the grace year applies and his earnings in the second 

month do not exceed the monthly exempt amount, no deduction will be applied for that 

month. Deductions will then be applied in the fourth succeeding month.

1105.60 Two Periods Of Entitlement

When there are two periods of annuity entitlement in the earnings year, the amount of 

earnings used in the annual earnings test for retirement age and service tier 1/VDB and 

survivor nondisability work deductions depends on the type of annuity:
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A. Retirement Age and Service Cases - For each period of entitlement in the annual 

earnings test, count the total earnings for the earnings year. However, do not 

charge work deductions to any month for which an annuity is not payable due to 

a break in entitlement.

Example: A spouse has two periods of entitlement 1992. The first period based 

on child in care is from January through May. The second period based on age 

is from September through December. Total earnings for the year (January 

through December) are $6830.

Excess earnings for the first period of entitlement are:

$11,030 (Earnings January - December 1992)

 7,440 (1992 exempt amount for those under full retirement age)

 $3,590/2 = $1,795 (excess earnings first period of entitlement)

Excess earnings for the second period of entitlement are the same:

$11,030 (Earnings January - December 1992)

 7,440 (1992 exempt amount for those under full retirement age)

 $3,590/2 = $1,795 (excess earnings second period of entitlement)

The amount of the work deduction components withheld during the first period of 

entitlement are subtracted from the excess earnings of the second period of 

entitlement and only the remaining excess earnings are recovered in the second 

period of entitlement. Therefore, if the work deduction components withheld in 

the first period of entitlement totaled $295, the remaining excess earnings to be 

recovered from the second period of entitlement are $1,500 (to the extent of the 

work deduction components available). 

B. Retirement Disability to Age and Service Cases

Beginning with the month the employee attains full retirement age, work 

deductions no longer apply.

C. Survivor Cases - For the first period of entitlement, count earnings from January 

through the last month in that period and charge any excess earnings to months 

in that period of entitlement.

For the second period of entitlement, count earnings from January through the 

last month in the second period. Determine total excess earnings and subtract 

any excess chargeable against the first period. Charge the remaining excess 

only against the months in the second period of entitlement.

Example - A survivor has two periods of entitlement in 1992. The first period 

based on child in care is from January through May. Earnings for this period are 

$4926. The second period based on age is from September through December. 

Total earnings for the year (January through December) are $6,830.
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Excess earnings for the first period of entitlement are:

$9,126 (Earnings January - May 1992)

 7,440 (1992 exempt amount for those under full retirement age)

$1,686/2 = $843 (excess earnings first period of entitlement) 

Excess earnings for the second period of entitlement are the same:

$11,030 (Earnings January - December 1992)

 7,440 (1992 exempt amount for those under full retirement age)

 $3,590/2 = $1,795 (excess earnings second period of entitlement)

However, the amount of the work deduction components withheld during the first 

period of entitlement are subtracted from the excess earnings of the second 

period of entitlement and only the remaining excess earnings are recovered in 

the second period of entitlement. Therefore, if the survivor annuity withheld in 

the first period of entitlement totaled $843, the remaining excess earnings to be 

recovered from the second period of entitlement are $952.

D. Retirement and Survivor Combined - Spouse-to-Widow(er) Conversion - For the 

period of entitlement as a spouse, count the total earnings for the taxable year. 

Charge the excess earnings as explained in section (A). For the widow's period 

of entitlement, count earnings from January through the last month of the taxable 

year. Determine total excess earnings and subtract any excess earnings 

chargeable against the spouse entitlement period. Then charge the remaining 

excess earnings only against months in the widow's period of entitlement.

Example - An individual is entitled as a spouse from January through May 1978. 

Total earnings for the year (January through December) are $6,830. 

Excess earnings for the spouse entitlement are:

$11,030 (Earnings January - December 1992)

 7,440 (1992 exempt amount for those under full retirement age)

 $3,590/2 = $1,795 (excess earnings first period of entitlement)

The survivor entitlement begins June 1992 and extends through December 1992. 

Excess earnings for the survivor entitlement are the same: 

$11,030 (Earnings January - December 1992)

 7,440 (1992 exempt amount for those under full retirement age)

 $3,590/2 = $1,795 (excess earnings second period of entitlement)

However, the amount of the work deduction components withheld during the 

spouse entitlement are subtracted from the excess earnings of the survivor 

entitlement and only the remaining excess earnings are recovered in the second 

period of entitlement. Therefore, if the work deduction components withheld in 

the spouse entitlement totaled $295, the remaining excess earnings to be 
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recovered from the survivor entitlement are $1,500. The amount of earnings 

used in the annual earnings test for retirement age and service tier 1/VDB and 

survivor non-disability work deductions depends on the type of annuity:

1105.61 Estimated Earnings In Short Entitlement Year

When assessing TWDs in short entitlement year cases, the withholding should be 

based on the amount of expected earnings through the last month of entitlement. If you 

are using an annual estimate based on the previous year's earnings, divide it by 12, 

then multiply the monthly amount by the number of entitlement months in current year.

This situation arises mostly in family group cases in which a working parent is receiving 

an annuity based on having a minor child in care. Be sure to check and see when the 

youngest child entitling the parent will attain age 18 (age 16 for cases with surviving 

divorced or remarried young mothers/fathers).

EXAMPLE: A KM, whose youngest child will attain age 16 in July 1999, had 1998 

earnings of $24,000.00. Permanent work deductions were assessed for 1998. No 1999 

estimate was provided so normally, we would use the final 1998 earnings amount as an 

estimate for 1999.

However, since the KM is only entitled through June 1999, the 1999 estimate should be 

revised as follows:

$24,000.00 divided by 12 months = $2,000.00.

$2,000.00 times 6 months (Since the youngest child will attain age 16 in July, the KM is 

only entitled through June 1999) = $12,000.00.

When accessing PWDs in the short entitlement year, secure a monthly breakdown of 

the earnings through the last month of entitlement

1105.65 Annuities To Which Excess May Be Charged

When a retirement employee has excess earnings the excess may be charged against 

his/her annuity and the annuities of all others entitled on his/her earnings record. A 

spouse annuity or divorced spouse annuity may be affected by the employee's 

earnings, as well as the benefit of any auxiliary beneficiary included in the O/M 

computation. See FOM1 1105.65.1 for the specifics on when a divorced spouse is 

subject to withholding based on the employee’s excess earnings. The earnings of any 

auxiliary beneficiary receiving a benefit directly or included in the O/M, will affect the 

payment only of his or her own benefit. That is, the earnings of a spouse or divorced 

spouse included in the O/M or receiving an annuity, a child O/M auxiliary beneficiary, or 

a survivor annuitant affect only the payment of that person's own benefits.
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1105.65.1 Divorced Spouse Annuities

Prior to January 1, 1985, a divorced spouse’s annuity was subject to withhold based on 

the employee’s earnings in the same manner as if she was a spouse.

Beginning January 1, 1985, a divorced spouse who has been divorced from the 

employee for at least 2 years will not be affected by the employee’s earnings.

Beginning January 1, 1991, based on a change in the Social Security Act, the following 

changes apply regarding the divorced spouse annuity being impacted by the 

employee’s earnings:

• If the employee’s ABD was prior to the month of the divorce, none of the divorced 

spouse annuity is subject to deductions based on the employee’s excess 

earnings.

• If the employee’s ABD is in the month of the divorce or later, the divorced spouse 

benefit is subject to deductions until the spouse has been divorced from the 

employee for at least two years.

Beginning August 17, 2007, based on amendments to the RRA, the divorced spouse is 

not subject to withholding for the employee’s excess earnings if the employee is 

receiving a disability.

1105.70 When Deductions Are Not Made

Excess earnings deductions are not made for any month in which:

A. The annuitant is not entitled to an annuity, or the annuity was waived;

B. In the first year the annuitant is entitled to the monthly earnings test and has a 

month of entitlement in which he did not work for wages of more than the monthly 

exempt amount and did not render substantial services in SE. 

C. The annuitant is full retirement age or over (age 70 prior to the year 2000 and 

age 72 before 1-1-83).EXCEPTION: 1. In retirement cases in which the 

spouse's or divorced spouse's work deduction components or O/M shares are 

used to recover the employee's excess earnings, the age of the spouse or 

divorced spouse is immaterial. The spouse's or divorced spouse's work 

deduction components or O/M shares may be withheld even if she is over FRA;

D. An employee disability annuitant is under full retirement age;

E. The annuitant is entitled to a disabled child's insurance annuity or is included in 

the employee's O/M as a disabled child;

F. A surviving divorced spouse is under full retirement age and entitled to a disabled 

surviving divorced spouse's annuity;
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G. A remarried widow(er) is under full retirement age and entitled to a disabled 

remarried widow(er)'s annuity; or

H. A widow(er) is under age 60 and entitled to a disabled widow(er)'s insurance 

annuity.

1105.75 Work Deductions For Dual Annuitant

When an employee is entitled to both an age and service annuity and a spouse or 

widow(er)'s annuity, both annuities are subject to work deductions if the employee has a 

work deduction insured status. However, the amount of the employee annuity work 

deductions withheld (tier 1 and VDB) must be subtracted from the total amount of 

excess earnings to be withheld from the spouse or survivor annuity. If the amount 

withheld from the employee annuity equals the amount of excess earnings, no work 

deductions are assessed against the spouse or survivor annuity.

EXAMPLE: An employee who is also receiving a widow’s insurance annuity earned 

$35,506.00 in 1999. The employee has a work deduction insured status. Retirement 

computed the employee’s final 1999 work deductions. They withheld the employee’s 

full tier 1 work deduction component for the entire year totaling $4,825.00. The survivor 

examiner should assess 1999 work deductions as follows:

$35,506.00 Amount of Earnings

- 15,500.00 Minus Exempt Amount

20,006.00 /3 = $6,668.00 Amount Subject to Withholding

-4,825.00 Minus Amount Withheld by Retirement

$1,843.00 Amount to be withheld from the Survivor Annuity

When processing a dual case, the earnings information from the most recently filed 

application can be used to adjust the annuitant’s current work deduction status. For 

example, if a spouse has tier 2 work deductions when applying for own employee 

annuity and ceases to work from all employers, the existing tier 2 work deductions 

applied in the spouse annuity should be removed effective as of the date that work 

stopped.

1105.80 Limited Retroactivity For Reduced Age Annuitant

Under the provisions of the RR Solvency Act, a retirement or survivor annuity that is 

reduced for age is not payable before the month the annuity application is filed.

Under the SS Act, an age-reduced benefit may not retroact before the month of filing if it 

causes a further reduction for age.

1105.85 Foreign Work Test

The Social Security Administration has determined that, in some cases, differences in 

the values of foreign currencies make it administratively impractical to apply a test 
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based on the dollar amount of earnings to work outside the U.S. that is not covered 

under the SS Act. The foreign work test is used to determine if earnings in non-covered 

employment outside the U.S. will result in annuity deductions. The U.S. includes the 50 

states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam and 

American Samoa.

1105.85.1 Foreign Work Test For Age and Service Cases

Earnings from work outside the United States, even when not covered for benefits 

under the Social Security Act, is still considered "earnings" for work deduction purposes. 

The 45 hour Work Test (also referred to as the "Special Work Test") applies to 

retirement age and service tier 1/VDB cases.

The 45 hour work test does not apply in survivor work deduction cases. 

Effective May 1, 1983 or later, the "Special Test" provides for the withholding of the full 

monthly amount of the annuity subject to work deductions for any month the annuitant 

engages in non-covered remunerative activity outside the United States for 45 or more 

hours in a given month. For months preceding May 1, 1983, the special test provided 

for withholding the full work deduction amounts if the annuitant worked in any part of 

seven or more days per month.

A deduction may be imposed for non-covered self-employment outside the U.S. even if 

no "substantial services" were performed. All that is required is that the person "carry 

on a trade or business". Therefore, the "substantial service" determinations do not 

apply to services performed outside the U.S. 

The following chart determines whether the special test or the regular annual earnings 

test applies:

A. Deductions For Work As Employee Outside U.S

Type of Employment Test Applicable

1. U. S. Citizens

a. Employment covered by the SS Act 

for American employer; or foreign 

subsidiary of U.S. corporation where 

corporation has entered into 

agreement with the Internal Revenue 

Service (IRS) for coverage.

Annual
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b. Employment not covered by the SS 

Act for employer other than above, or 

because specifically excluded from 

coverage.

Special

2. Aliens

a. Employment covered by the SS Act 

because of U.S. vessel or aircraft and

contract of employment entered into 

in U.S. or during performance of 

contract of employment, vessel or 

plane touched a port or airfield in U.S.

Annual

b. Employment not covered by the SS 

Act because (a) is not applicable.

Special 

B. Deductions for Self-Employment of U. S. Citizens Outside the U. S.

Type of Employment Test Applicable

1. Practice of Profession as Physician Special

2. Activity Would Be Covered if Carried on in U. 

S. and:

• Income from personal services and 

capital investment (in which case part of 

the net earnings is covered).

Annual

• Income from personal services only (in 

which case none of the net earnings is 

covered).

Special

Exception No. 1: Minister who works for 

American employer or has U. S. 

congregation.

Annual

Exception No. 2: Earnings are in excess of 

the exempt amount.

Annual

C. Deductions for Self-Employment of Aliens Outside U. S.
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Self-Employment Activity Test Applicable

1. Resident of U.S. and Self-Employment would 

be covered if carried on in U.S. (including 

resident ministers, whether or not they have 

elected coverage).

Annual

2. Non-resident of U.S. Special

Do not impose work deductions under either the annual earnings test or the 

special test against citizen or aliens on the basis of income which is not 

considered to be "earnings", such as rentals from real estate, capital gains, 

dividends, interest, or other excluded income.

1105.85.2 Work Covered by the Foreign Work Test

The foreign work test applies if an annuitant engages in the following non-covered 

remunerative activities:

A. Employment outside the U.S. which is not covered under the U.S. Social Security 

Act. Generally, this includes work for foreign employers, unless the employer is a 

subsidiary of a U.S. corporation. Coverage determinations may be affected by the 

existence of a totalization agreement (international social security agreement).

A beneficiary working outside the U.S. who might normally be covered under the U.S. 

Social Security system may find that, because of an international agreement, his 

work is covered only under the foreign system. Consequently, his work would be 

subject to the foreign work test instead of the annual earnings test.

EXAMPLE: A U.S. citizen beneficiary, permanently residing in Germany, works as a 

self-employed person. Since he is a U.S. citizen, he would normally be subject to 

U.S. Social Security coverage. Under the terms of the international social security 

agreement with Germany, however, his work is subject only to the German laws on 

social security coverage and he is exempt from U.S. coverage. Therefore, his selfemployment activity is subject to the foreign work test rather than the annual earnings 

test. Whether or not his earnings are actually covered by Germany is immaterial. As 

long as the work activity is exempt from U.S. coverage, the annual earnings test is 

not applicable. 

B. Self-employment outside the U.S. which will not be reported as earnings for U.S. 

social security tax purposes; or

C. Self-employment outside the U.S. by a nonresident alien, unless the SE will be 

reported for U.S. social security tax purposes.

The annual earnings test applies for any employment outside the U.S. that is covered 

for U.S. social security tax purposes and for self- employment outside the U.S. by a 
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U.S. citizen or a resident alien. When a U.S. citizen or resident alien is self-employed 

outside the U.S., the net earnings from SE will be reported for U.S. social security tax 

purposes unless a U.S. citizen established "foreign residence" or "presence in a foreign 

country". Refer to FOM 1 1105.85.4. 

A deduction may be imposed under the foreign work test for non-covered SE outside 

the U.S. even though no services were performed. All that is required is that the person 

carries on a trade or business, i.e., holds himself out to others as engaged in the selling 

of goods or services for profit. The fact that a person has not actively participated in the 

business, nor derived a profit from it, does not matter. However, deductions do not 

apply under either the foreign work test or the annual earnings test for income that is 

excluded from net earnings (rentals from real estate, capital gains, dividends, interest or 

other excluded income).

Practice as a physician outside the U.S. is non-covered remunerative activity, and 

deductions are governed by the foreign work test.

1105.85.3 Work Covered by the Annual Earnings Test

Because the earnings are reportable for U.S. social security tax purposes, the following 

kinds of work are covered by the annual earnings test:

A. Employment of a U.S. citizen or resident alien by an American employer;

B. Employment of a U.S. citizen or resident alien by a foreign subsidiary of a U.S. 

corporation that actually has entered into an agreement for coverage for its 

employees under the SS Act;

C. SE in a trade or business that results only in income such as rentals from real 

estate, capital gains, interest income, dividends, etc.;

D. SE of an alien who is a resident of the U.S.;

E. SE of a citizen of the U.S., when the citizen has not established "foreign residence" 

or "presence in a foreign country". See FOM 1 1105.85.4; and

F. Services of ministers. A minister is a duly ordained, commissioned or licensed 

minister of a church performing services in the exercise of his/her ministry, or a 

member of a religious order performing the duties required by the order. A minister 

is not performing services in the exercise of his/her ministry when he/she is working 

as an employee of any governmental entity. In applying the retirement tests, all

ministers, whether citizens or aliens, are treated as if they had elected SS coverage, 

even though they may not have done so. Thus, the fact that a minister has not 

elected coverage would not prevent his being subject to the annual earnings test 

with respect to his/her SE outside the U.S., if his/her work would be covered under

the SS Act had he/she made the election.
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1105.85.4 Citizens Self-Employed Outside the U.S.

Practice as a physician outside the U.S. is always subject to the foreign work test. Other 

SE carried on by a citizen outside the U.S. is subject to the annual earnings test only if it 

can give rise to net earnings from SE (i.e., net earnings are subject to U.S. SS taxes). 

Whether such SE can give rise to reportable SS taxes may depend on whether the 

citizen has established "foreign residence" or "presence in a foreign country." All or part 

of a citizen's income or loss may be excludable in determining the amount of net 

earnings from SE if the citizen established "foreign residence" or "presence in a foreign 

country."

"Foreign residence" means bona fide residence in a foreign country (or countries) for an 

uninterrupted period that includes an entire taxable year. Mere presence is not enough 

to establish "bona fide residence." Generally, one who goes to a foreign country for an 

extended or indefinite stay for any reason and maintains a home there is a bona fide 

resident, even though he intends to return to the U.S. at some future time. "Presence in 

a foreign country" means presence in a foreign country (or countries) during a total of at 

least 510 full days during any period of 18 consecutive months. "Foreign residence" or 

"presence in a foreign country" must exist for the particular taxable year under 

consideration in order for a person to qualify for a special tax exemption for that year.

1105.85.5 Advising Annuitants

When inquiries about or notices of changes to foreign addresses are received, advise a 

retirement annuitant that work in a foreign country may affect payment of the annuity. 

Emphasize the annuitant's responsibility to report earnings over the monthly exempt 

amount or work outside the U.S. for more than 45 hours per month. A report should 

include the annuitant's citizenship status and whether or not the annuitant is selfemployed.

1105.85.6 Definition of Terms Used Pertaining to Employment Outside the United 

States

A. U.S. Citizen - A citizen of the U. S. by birth or naturalization.

B. U.S. - Effective 9-13-60, the term means the 50 states, District of Columbia, the 

Commonwealth of Puerto Rico, the Virgin Islands, Guam, and American Samoa.

The inclusion of Guam and American Samoa in the definition of resident and 

non-resident alien (for purposes of work deductions outside the U.S.) is effective 

from 1-1-61, for services performed as an employee and to taxable years 

beginning after 1960 for self-employment in a trade or business.

C. Outside the U.S - This term applies to the place where a person performs his 

services or to the place where the trade or business is conducted but not to the 

place where the person lives. 
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D. Carry On a Trade or Business - This term means the person holds himself out to 

others as engaged in the selling of goods or services for profit. The fact that a 

person has not actively participated in the business nor derived a profit from it is 

not material. The mere holding himself out as being available to participate is 

sufficient to find that he was carrying on a trade or business during any given 

period even though circumstances (such as illness) may have prevented actual 

participation.

1105.90 Returning Annuity Because Of Excess Earnings

When an annuitant reports excess earnings, (s)he may have already incurred an 

overpayment. The following guidelines should be used in advising an annuitant about 

the return of an annuity payment. When an annuitant is advised to return a payment, no 

tracing action is necessary. Any overpayment will be determined when permanent work 

deductions are assessed.

A. An employee disability annuitant should be advised to return his/her check for 

any month (s)he earns over the disability earnings monthly limit. See FOM 1 

1125.5.2 for more information about disability earnings limit after deduction of 

disability related work expenses.

B. A non-disabled survivor annuitant should be advised to return the check; 

C. A disabled survivor annuitant should not return a payment when work is started 

because a continuance of disability determination must first be made; and

D. A retirement or spouse annuitant, under either the RR or the O/M formula, should 

not return a payment because part of that annuity is payable.

1105.95 Recovery Of Earnings Overpayment

An overpayment because of excess earnings is generally recovered by cash refund or 

by credit card and in some retirement cases partial withholding can be an added option, 

if one of the conditions listed in the next section applies. Penalty deductions that are 

applied in retirement age and service or disability cases, including the overall minimum, 

are recovered by the same method as the overpayment. 

Partial withholding or an actuarial adjustment may be used to recover an overpayment 

due to excess earnings if one of the conditions in FOM 1105.95.1 is met. 

Overpayments in survivor cases must be recovered by cash refund or full withholding.

1105.95.1 Partial Withholding

Partial withholding may be offered in a retirement case if one of the following conditions 

exist and partial withholding would normally be offered. See FOM 1 1205.25.3. 

A. The overpaid annuitant is at least FRA or (age 70 prior to the year 2000 and 72 

before 1983); or
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B. Work deductions are assessed only in the month of the annuity beginning date; 

or

C. The overpaid person states he is no longer working, and future excess earnings 

are not likely; or

D. Tier II is at least $10.00 greater than the partial withholding amount plus the 

amount of the current Medicare premium.

NOTE: Partial withholding may be offered even if temporary work deductions are 

being applied.

1105.95.2 Actuarial Adjustment

An actuarial adjustment may be offered in a retirement case if tier II is at least $10.00 

greater than the actuarial adjustment amount plus the amount of the current Medicare 

premium. Actuarial adjustment may be offered even if temporary work deductions are 

being assessed, but not if any of the other conditions in FOM 1 1205.25.4 apply.