If the beneficiary's taxable year (TY) is a FY, the initial grace year is the first TY ending after 12/31/77 in which the beneficiary has a non-service month (NSM) that is an entitled month after 12/77.

EXAMPLE:A self-employed beneficiary reports earnings on a FY basis that runs 5/1/99 through 4/30/00. He receives monthly benefits under the monthly earnings test (MET) for the NSMs 12/99 through 4/00 because his TY ends after 12/31/77 and he has NSMs for the FY ending 4/30/00. Therefore, 1999 is the initial grace year. Do not apply the MET for months in any TY after 4/00.

If the beneficiary had not previously had a TY in which he or she was for the first time both entitled and had a NSM, then the MET applies to all months of the first FY ending after 12/31/77.

EXAMPLE:Beneficiary's FY is 5/1/98 through 4/30/99 with earnings of $30,000 and NSMs of 11/98 through 4/30/99. She did not have a NSM prior to the FY ending 5/1/98. Therefore, she receives full benefits for 11/98 though 4/99 since the MET applies.

If the beneficiary previously had a TY with a NSM after 1977 then the MET cannot apply to later years.

EXAMPLE: The beneficiary became entitled to retirement insurance benefits (RIB) in 1997. He had NSMs in 1997 and 1998. His FY runs from 7/98 through 6/99. He has NSMs in 11/98 and 3/99. He earns $30,000 per year. Since his initial grace year was 1997, no benefits can be paid for 11/98 and 3/99.