Be careful with post-federal employment and annuities

Feds who retire on a disability annuity and then take a job in the private sector need to keep track of what they earn or the annuity could go out the window. Because the government lets retirees covered by a disability annuity earn up to 80 percent of their previous salaries it's also a good idea not to get too greedy.

The Merit Systems Protection Board (MSPB) recently issued a decision in a case involving a fed who exceeded that 80 percent threshold and had his disability annuity terminated by the Office of Personnel Management. Lawrence F. Balick a GS-11 Internal Revenue Service agent retired on a disability annuity on July 18 1975 and years later ran afoul of the OPM rule.

Between 1987 and 1991 Balick sold insurance for a number of insurance companies and some of them reported his commissions to the IRS on Form 1099 as nonemployee compensation. Two of the insurance companies Balick worked for reported his income as wages on Form W-2.

Balick reported the taxable income he calculated on his federal income tax return to OPM. In 1992 OPM audited Balick's income for the five-year period 1987 through 1991. OPM calculated his income by adding the amount of his gross receipts from insurance sales (commissions) to the amount of wages reported to the IRS on W-2 forms.

OPM did not allow any deductions for business-related expenses. Using this approach OPM concluded that Balick's income exceeded 80 percent of his previous salary - adjusted for pay raises - and therefore his "earning capacity" had been restored.

If your earning capacity is restored you are no longer entitled to a disability annuity. OPM concluded that Balick's disability payments should have stopped 180 days after Dec. 31 1987 - the last day of the year in which his income was restored. Not only did OPM stop Balick's annuity it said he owed $59 973 in overpayments plus $11 589.96 in interest.

Balick appealed this OPM ruling to the MSPB which ruled that OPM could reasonably define "wages" as that portion of Balick's income that was subject to federal employment taxes - for example Social Security and Medicare.

The MSPB also ruled that Balick could not reduce his wage income by deducting business expenses from his reported employee wage but he could deduct business-related expenses from his self-employment income.Following this formula the MSPB determined that OPM correctly computed the wage portion of Balick's income but incorrectly determined that he was not permitted to deduct business-related expenses from his self-employment income.

Looking only at Balick's wages the board determined that Balick exceeded the earnings limit in only three of the five years involved - 1987 1990 and 1991 - and ordered OPM to recompute the amount of Balick's overpayment.

This partial victory did not satisfy Balick who decided to appeal the MSPB decision to the U.S. Court of Appeals for the Federal Circuit.

The court did not buy Balick's contention that he should be permitted to deduct business expenses from his wage earnings to arrive at taxable income that would then be used by OPM to determine whether his earning capacity had been restored.

The court ruled that although Balick's computation was correct for income tax purposes it was equally correct for OPM to interpret the statute under which Balick's disability annuity was granted using its own criteria.

The court said Congress authorized OPM to administer the federal disability program and OPM has the right to interpret the law as it understands the congressional intent behind the law.

Presumably the purpose of the 80 percent threshold is to gauge whether an individual is still disabled. The ability to earn wages is a good measure of an individual's earning capacity. If you earn $100 000 and have $50 000 in expenses your earning capacity hasn't diminished. Only your taxable income has.

Balick also argued that the form he received from OPM contained misleading instructions relieving him of liability for benefits disbursed to him because of the erroneous instructions in the form.

That's quite a stretch. On the one hand Balick was arguing that his earning capacity hadn't been restored because his income hasn't met the 80 percent threshold.

On the other hand he was arguing that even if his earnings capacity was restored he should not be held liable for underreporting his income because the OPM form he completed was "misleading."

There are at least two lessons to be learned from the Balick case. The first one is Quit while you're ahead. Balick won partial vindication for his position from the MSPB but he overreached by taking his case to the appeals court.

The other lesson is If you're going to take a case to the appeals court don't insult its intelligence with frivolous arguments. Balick's contention that the OPM form was misleading certainly falls into that category.

Another lesson learned from the Balick case is that the federal disability annuity program is a generous one in that it allows employees to continue to work and still be considered "disabled " so long as they don't earn more than 80 percent of the salary they'd be earning if they still worked for the government. If 80 percent is the limit then stick to that limit. Don't be greedy. As they say on Wall Street bears and bulls make money but hogs get slaughtered.Bureaucratus is a retired federal employee who is a regular contributor to FCW and the author of Bureaucratus Moneyline a personal finance newsletter available by subscription on FCW's Web page at www.fcw.com.

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