Earnings Test
Concept
In accordance with the requirements of Iowa Code Chapter 411, individuals who are receiving a benefit based upon a "disability" are subject to the following requirements on an annual basis, as provided by Iowa Code Chapter 411: Earnings Test: Iowa Code section 411.6(7), the System must " . . . reduce the members retirement allowance to an amount which together with the amount earned by the member shall equal one and one-half times the amount of the current earnable compensation of an active member at the same position on the salary scale within the member's rank as the member held at retirement."
Employment Compliance: "Should a disability beneficiary under age fifty-five be employed in a public safety occupation, the disability beneficiary's retirement allowance shall cease." "for purposes of this paragraph, "Public Safety Occupation" means a peace officer, as defined in section 97A.1; a protection occupation as defined in section 97B.49B; a sheriff, deputy sheriff, or airport fire fighter as defined in section 97B.49C; and a police officer or fire fighter as defined in section 411.1, who was not restored to active service."
Description
Members on disability retirement are required by Iowa Code Chapter 411 to annually submit to the System, a complete copy of their Federal and/or State of Iowa income tax report. A member who is 55 or older is exempt from this requirement, beginning for the year in which they turn 55. The System is required by statute to review the reports and shall reduce the member's monthly disability allowance if the member's earnings exceed the annual limit.
An example of how the formula works for determining the annual limit is as follows:
- 1.5 times earnable compensation of active member (Based on yearly earnings of $ 35,000.00) $ 52,500.00
- Less 2003 pension benefits- 25,000.00
- 2003 EARNINGS LIMIT $27,500.00
- 2003 Actual Earnings $28,000.00
- Amount over the limit $ 500.00
- Amount due the System $ 500.00
The amount due the System will be recovered through a reduction or suspension of future benefits.
Taxation FAQ
- Is a portion of my disability pension taxable?
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Effective with calendar year 2002, the System shall begin reporting a portion of accidental disability pension payments as taxable income. The portion of the accidental disability pension that is greater than the basic 60% formula will be reported to the IRS and the State of Iowa as taxable income. This requirement is based upon guidance received from the Internal Revenue System relating to the taxability of pension payments.
- If I do not return the forms, what will happen to my benefit?
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The tax withholdings will be defaulted. The Federal default provision is married status claiming three exemptions, and the State default provision is five percent exempting $0.
- Who decided disability pensions would be partially taxable?
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An IRS private letter ruling stated that the portion of the benefit that exceeds the work-related disability benefit formula (greater than 60%) is taxable.
- How can I obtain withholding forms if the ones previously sent to me were misplaced?
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New forms can be obtained by printing from the printable forms tab of our website, email request or by calling the System at 888-254-9200.
- Is everyone's disability computed at a 60% multiplier?
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No. Upon retirement for an "Accidental disability", Iowa law provides that the disabled member will receive the greater of the following: a) The monthly work related disability benefit, or b) The member's normal monthly retirement benefit determined by the member's length of service. Additional percentages are granted for members with service over 22 years. It is computed at 2% for each additional year of service over 22 years with a maximum multiplier of 82%. The additional benefit dollars paid due to the formula over 60% are subject to tax.
- If I do not want you to withhold taxes, do I still need to return the withholding forms?
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Yes, you must specify "no withholdings" on the form. For both the Federal and the State form, line #1 must be marked for the System to stop withholdings.
- Why is this taxation requirement being implemented by the System?
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The Board of Trustees carefully considered this requirement following the issuance of the ruling and it was determined that the System must comply with the ruling in order to maintain the "qualified plan status" of the System under the Internal Revenue Code. Earnings Test
- Does my wife's income count?
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No. If you file a joint return, you are required to mail a complete copy of your tax return including the supporting forms and schedules to detail both people's earned incomes. The earnings reported jointly are audited with the W2 forms. From the W2 forms, the spouse's earnings are then identified and not included in the test. Only the income of the member is subject to the earnings limit.
- I'm not employed– what do you need?
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If you are not required to file a tax return with the IRS, you should call the System at 888-254-9200 to request an Earnings Statement to claim you have no income. If you are married and filed a joint return, you will need to submit your return including the supporting forms and schedules.
- I didn't file a return. Now what?
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If you are not required to file a tax return with the IRS, you should call the System at 888-254-9200 to request an Earnings Statement to claim you have no income and verifying you did not file a return.
- I'm relocating out of state. Do I need to comply?
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Yes. If you were a resident outside of Iowa, you will submit your federal return.
- My wife owns a business, which we operate out of our home. Does that count toward my income for the Earnings Test?
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This can be answered properly after reviewing your return. If you receive earned income from the business, the answer would be yes. If the business is completely owned by your spouse, the earnings would not be counted toward the Earnings Test.
- Does the cities wages count the first year you are on a disability?
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If this is your first year of receiving disability payments, the wages you were paid as a police officer or fire fighter prior to your retirement will not be used in the test. Income actively earned after your retirement date will be counted in the Earnings Test.
- What happens if I exceed the limit?
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Beginning with your April or May benefit payment, your benefit will be reduced/suspended until the amount over the limit has been recovered.
- If I am hired in a law enforcement or fire fighting capacity in another state, is my pension affected?
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The income you earn will be counted in the Earnings Test. You will not be subject to Section 411.6(7) Returning to Duty, which does apply if you are employed within Iowa in a public safety occupation.
- Why do I have to comply with this test when I just turned 55 this month?
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You do not need to comply with the test for the year in which you turn 55. You must comply with the Earnings Test for the year prior to your 55th birthday. Next year, instead of receiving a memo from the System requesting information, you will receive a letter from the System notifying you that you are exempt from the test.
- When will I receive information in regards to the Earnings Test and when is the deadline?
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For members who retire with a disability retirement and are required to comply with the Earnings Test, a memo will be forwarded from the System early in February with the guidelines concerning the filing requirements.
- Send a signed copy of your tax return, not the original which is to be filed with the IRS.
- Both a Statement of Compliance and an Employment Compliance Statement are required in order to finalize the testing.
- The tax return and compliance statements should be submitted before May 15th to assure the non-interruption of your benefit.