TN 19 (12-12)
RS 02505.196 Special Procedures for Corporate Officers and Self-Employed Beneficiaries
A. Handling corporate officers and self-employed beneficiaries
On December 23, 2011, we changed the policy on handling retirement allegations made by corporate officers and the self-employed.
1. Questionable retirement (QR) prior to 2011
We had a long-standing policy to develop questionable allegations of retirement made by corporate officers and the self-employed. The rationale for creating QR policy was that corporate officers and the self-employed could control the amount of their earnings, by reporting lower than actual earnings, thereby avoiding deductions under the annual earnings test (AET). We also believed that the application of QR to these individuals would provide long-term program dollar savings to the trust fund.
However, over time we found that the time spent questioning corporate officers and the self-employed, and the manual processing associated with the QR workload did not always result in consistent payment decisions. We made earnings determinations based on technically complex business reports and tax returns that often required accountants and tax experts to interpret.
In addition, while QR determinations provided immediate program savings to the Trust Fund, there were no long-range savings. Once the beneficiary reached full retirement age (FRA) and we applied the adjusted reduction factor (ARF), the beneficiary ended up with a higher ongoing monthly benefit amount. Since beneficiaries are living longer, this higher ongoing monthly benefit eventually eliminates any short-term program dollar savings. If we initially accept the beneficiary’s lower earnings allegations, we permanently reduce the benefit amount. This lower benefit amount results in benefit outlays over a lifetime of about the same as if we had imposed QR and then adjusted for an ARF.
2. Handling retirement allegations beginning 2011
Effective 12/23/2011, we accept and post the earnings allegations of corporate officers and the self-employed without questioning or developing these allegations. This change in policy applied to cases not yet adjudicated on 12/23/2011 and to cases that already had QR coding imposed for calendar year 2011. Do not re-develop QR earnings determinations for years prior to 2011, as those QR-determined earnings posted to the Master Beneficiary Record (MBR) are correct.
The elimination of QR does not affect the substantial services in self-employment policy. Continue to develop for substantial services to determine non-service months (NSMs) in a grace year for self-employed beneficiaries with excess earnings; follow instructions in RS 02505.065 through RS 02505.120.
B. Post-entitlement (PE) QR-related issues
Based on the decision to eliminate QR beginning 2011, Central Office:
This action allows previously identified QR cases to automatically process through the Earnings Enforcement Operation (EEO).
QR elimination does not change the substantial gainful activity (SGA) regulations. If you are evaluating work activity for SGA (i.e., CDRs) on a disability case, continue to evaluate corporate officers and self-employed beneficiaries per instructions.
The following instructions provide guidance on PE situations you may encounter.
1. QRI discovered with no QRED
Most MBRs for beneficiaries who attain FRA after 1/2011 should reflect no active QR status after 12/2010. If you encounter an MBR for a beneficiary who attains FRA after 1/2011 with a QRI and no QRED, take the following actions:
Input a QRED date of 12/2010 on MBRs with an MOE prior to 01/2011; or
Delete the QRI on MBRs with an MOE after 12/2010.
Do not contact the beneficiary for a current earnings estimate. Most records should automatically process through the EEO, and adjust earnings appropriately once there is a posting to the MEF.
FOs must forward these cases to the servicing processing center (PC), as modifications to POS prevents FOs from posting a QRED or deleting a QRI on the MBR.
2. Beneficiary files annual report (AR) or work report (WR)
EEO will not enforce former QR records that have earnings estimates over the yearly exempted amount when there is no posting to the MEF in the enforcement year. Such records continue to have work deductions based on the QR-determined earnings posted to the MBR until the beneficiary attains FRA or files an AR or WR.
If the beneficiary files an AR or WR:
Assume QR-determined earnings posted to the MBR for years prior to 2011 are correct. If the MEF and AR earnings for any of the years prior to 2011 are different, post the higher of the two earnings to the MBR for that year;
Request the beneficiary to file an AR for closed years 2011 and later if appropriate; follow RS 02510.015; and
Accept a WR for the current year.
3. Processing EEO exceptions
The EEO considers records for the current enforcement year and the three prior years. Therefore, EEO will except records from automated processing through calendar year 2014, if the transaction involves a QR period prior to 01/2011. The exception generates the “Questionable Retirement Indicated on MBR” remark for the PC to investigate QR prior to completing the EEO action manually. Based on the PC input, the system generates a notice to the beneficiary explaining the adjustments for the prior years and estimate for the current year.
When working a QR exception case from EEO:
Assume QR-determined earnings posted to the MBR for years prior to 2011 are correct unless MEF earnings for the year are higher;
Post higher MEF earnings for the given year to the MBR using MACADE, if applicable; and
Clear the exception alert.
4. Allegations of misreporting of earnings or level of services
a. Misreporting earnings
If you receive an allegation that a beneficiary, who is a corporate officer or self-employed, is misreporting his or her earnings, do not develop or refer the allegation to the Office of Inspector General (OIG). The IRS independently handles these earnings-taxation issues.
If the IRS determines that a beneficiary misreported earnings, it reports the correct earnings, which adjust the MEF for the year. EEO triggers any benefit adjustments based on the adjusted earnings and posts the appropriate overpayment to the record.
For example, Mr. Smith, a beneficiary who is a corporate officer, has earnings of $20,000.00 posted to his MEF for tax year 2011, which match the earnings posted to the MBR. In 2013, someone reports to the IRS that Mr. Smith misreported his earning for 2011. The IRS conducts an audit and determines Mr. Smith’s actual earnings are $40,000.00. The IRS reports the actual earnings for 2011, which adjusts Mr. Smith’s MEF record. Later in 2013, an EEO run compares the corrected 2011 MEF record with the 2011 earnings posted to the MBR. It posts the corrected 2011 earnings to the MBR and adjusts Mr. Smith’s benefits for 2011, causing an overpayment posting.
b. Misreporting services
If you receive a creditable allegation that a self-employed beneficiary misreported his or her level of services in a grace year to qualify for benefits under the substantial service test:
For example, Mrs. Jones who is self-employed, files a retirement claim in July. Her alleged net earnings as a self-employed housekeeper are over the AET limit and prevent payment for any month in the year of filing. However, she also alleges that beginning in July she will work no more than 30 hours per month. Therefore, we pay her benefits starting in July under the monthly earnings test. The following year we receive a credible allegation that Mrs. Jones actually never decreased her hours of work. After investigating, we determined based on the evidence, that Mrs. Jones level of services in self-employment was substantial, as she continued working over 45 hours a month from July through December. Based on the determination, no benefits were payable in the year of filing and an overpayment was posted to her record. We also referred her case to OIG for the possibility of fraud based on the new determination.
C. Processing QR appeal cases
Beneficiaries who have a pending appeal on a QR determination still have an open determination. Because the determination is not final, we must address the QR determination. The action you take depends on the level of the appeal.
1. Reconsideration pending at the PC
a. QR issue-only
If an appeal is pending on a QR determination, then:
Input the MEF earnings or beneficiary’s alleged earnings to the MBR, whichever is higher, for years prior to 2011, if these years contain QR-determined earnings and the appeal covers these earnings; and
Post the MEF earnings for closed years and a WR for the current year, if appropriate;
Correct the QRED or delete the QRI on the MBR, if appropriate. There may not be a QRI on the record as CO has already deleted QRIs on records with a MOE after 12/2010; and
Make a favorable reconsideration determination for the entire QR period the beneficiary appealed.
b. Multiple issues
If the pending appeal request is on a QR determination with other issues, such as the amount of an overpayment, then:
2. Appeals pending at Office of Disability Adjudication and Review (ODAR)
Administrative Law Judges (ALJs) and the Appeals Council (AC) process pending QR appeals according to existing procedures. PCs must effectuate ODAR’s decision using the following instructions.
a. Partial favorable or favorable decision
Depending on ODAR’s decision, clear the QR portion of the decisions per RS 02505.196D.1. in this section.
b. Unfavorable decision
Depending on ODAR’s decision:
Change the earnings on the MBR to ODAR’s determined earnings; or
Keep the posted earnings on the MBR if ODAR does not provide earnings in the decision; and
Do not change the QRED on the MBR. If the record has a QRI with no QRED, then place a QRED or remove the QRI per RS 02505.196C.1. in this section.