Financial Assistance
The Basics of Social Security and Supplemental Security Income
Food Stamp Program
Tax Relief for the Elderly
Income Taxes
Private Pensions
Age Discrimination in Employment
The Basics of Social Security and Supplemental Security Income
By Phillip Senturia, Managing Attorney of the Benefits Unit at Gateway Legal Services, Inc, a not-for-profit legal aid organization, where he specializes in Social Security law. Philip and Gateway represent claimants in hearings held throughout Missouri and Southern Illinois, including Hannibal, Columbia, Jefferson City, West Plains, Carbondale, Springfield, and Kansas City.
Editors’ Note: The information in this booklet on Social Security and Supplemental Security Income (SSI) is designed to give you a brief idea of what these programs are all about and what you have to do to qualify for them. All figures used to determine eligibility for benefits are current as of March 2007, and are subject to change at any time. For more detailed information about Social Security and SSI, call or visit the Social Security Administration Office nearest you.
Introduction to Social Security
For most American workers, the initials "FICA" on the paychecks may mean nothing more than a payroll deduction. Some refer to it as "just another tax," while other persons only know that it means money they have earned and cannot spend.
Actually, the letters "FICA" stand for "Federal Insurance Contributions Act," the official name for the Federal law that set up the Social Security Program of 1935. Social Security provides a minimum income for eligible workers and their families when the worker retires, becomes severely disabled, or dies. Following are some basic facts you should know about Social Security.
General Eligibility
Full retirement age for individuals born in 1937 or earlier is 65 years old. For each year later a person was born, their retirement age goes up two months, until 1943. Individuals born from 1943 through 1954 will all retire at age 66. After 1954, the retirement age moves upward again two months per year through 1960. For instance, someone born in 1938 reaches full retirement age at 65 years and two months of age, while someone born in 1959 reaches full retirement age at 66 years and 10 months of age. For individuals born in 1960 or later, full retirement age is 67.
Eligibility for Social Security benefits depends on how long you have contributed to the program as a worker. In order to qualify for retirement, disability or survivors benefits for you or your family, you must have a certain number of years of coverage. Historically, workers generally earned a quarter of coverage for each 3-month calendar quarter in which wages were paid of $50 or more. A quarter of coverage is now often called a “credit” because the quarters of coverage can be earned at any time during a year. A highly paid worker can earn all four quarters, or credits, in the beginning of the year. (Four quarters, of course, make one year of coverage.)
In 2007, for example, a worker receives one credit for each $1,000 of earnings, up to a maximum of four credits based on annual earnings of $4,000 or more. This amount goes up each year, and was lower in the past. This amount includes gross wages paid and net self-employment income.
Just more than 10 years of coverage (40 quarters) will generally fully insure a worker and family for life, but less than that will also be enough for full coverage if the worker has achieved a certain amount of work credit. The work credit requirement differs, depending on whether you are applying for retirement benefits or whether your spouse and dependents are applying for survivors benefits after your death. To find out how many quarters you have or how many you need to qualify, contact your local Social Security Administration office.
To be eligible for disability payments, you must meet the following test:
(1) You were recently employed; and
(2) You possess the same amount of work credit that would be required if you reached retirement age in the year you were disabled; and
(3) You have 20 quarters (five years) of coverage out of the preceding 40 calendar quarters (ten years) before you became disabled. The required coverage is lower if you became disabled before the age of 31. It is important to apply for disability benefits soon after you become disabled, because a lengthy delay may make you ineligible.
NOTE: For those disabled by blindness, (1) and (2) above are required, but not (3).
How Much to Expect
Being "covered" or insured only means that you and your family can get benefits. The amount you receive in monthly paychecks depends on the average yearly earnings of your working career under Social Security. These basic benefits are now automatically adjusted upward every January to keep pace with the cost of living. Because workers do not pay FICA tax beyond a certain amount of earnings in a year, there is always a maximum amount for retirement benefits. As of January 2007, the normal maximum monthly amount of retirement insurance benefits for an individual who reaches full retirement age in 2007 is $2,116. Sometimes, a retired person’s dependents (such as spouse or minor children) will also receive payments, up to a total of about 50% more.
If you are retired or near retirement and you want to figure out your Social Security benefits, call the Social Security Administration toll free at 1-800-772-1213 and ask to receive a Personal Earnings and Benefit Estimate Statement (PEBES). These statements are now also automatically sent annually to any individual who paid taxes on income during the previous year.
The amount of retirement benefits you receive can be affected by whether you take “early retirement.” You may choose to retire as early as age 62. However, for each month you take your benefits early, your monthly benefits are permanently reduced by a certain percentage (depending on your full retirement age). For an individual born in 1943, for instance, taking retirement at age 62 instead of age 66 (four years early) would result in a 25% reduction of their monthly payments on a permanent basis.
Working After Payments Start
After retirement, you may get an opportunity to go back to work on a full-time or part-time basis. Before you decide to work, you should know how your earnings would affect your Social Security benefits.
Workers younger than full retirement age can earn $12,960 in 2007 ($1,080 per month) without affecting their retirement checks at all. For every two dollars ($2) of earned income above that limit, Social Security will reduce their checks by one dollar ($1).
A worker can earn $34,440 (as of 2007) in the year they reach full retirement age without affecting their retirement checks. For every three dollars ($3) of earned income above that limit, Social Security will reduce a check by one dollar ($1). However, Social Security will only count earnings prior to the month in which the individual reaches full retirement age. Starting that month, earnings no longer reduce retirement benefits.
NOTE: For more information about recent changes in Social Security rules relating to work activity, ask for a copy of the free publication: HOW WORK AFFECTS YOUR BENEFITS at any Social Security Administration office.
A Note About So-Called “Notch Babies”
The term “notch” refers to Social Security benefits paid to people born between 1917 and 1921. The notch resulted from a 1972 change in the Social Security law that used a flawed formula to calculate how much someone’s benefits should be. This flawed formula provided excess benefits to those people whose benefits were calculated under it. Before Congress corrected this error in 1977, the benefits for many people born between 1910 and 1916 were calculated using the flawed benefit formula, and they received an unintended windfall from Social Security.
When Congress fixed the mistake, it wanted to avoid an abrupt change for those who were about to retire, so it provided a transition period. Therefore, when Social Security benefits are calculated for people born between 1917 and 1921, two computations are used. One calculation uses the new (and correct) 1977 formula, and the other uses a special transition formula. Benefits are based on whichever calculation pays the higher benefit. Benefits for everyone born in 1922 and later are calculated using only the new and correct 1977 formula, which generally results in lower benefits than those computed using the “notch” calculation method.
Thus, the “notch babies” (those born between 1917 and 1921) receive less money than those people born before 1917 who had similar work histories, but generally receive more benefits than those born in 1922 or later. Thus, the argument of “pro-notch baby” groups is that beneficiaries born between 1917 and 1921 should get more money simply because people born between 1910 and 1916 are getting too much money. Naturally, the people born after 1921 would also want to receive this extra money. This would result in the whole system changing back to the incorrect formula from 1972, resulting in billions and billions of extra dollars spent each year. The government has completed an investigation into the notch and determined that no changes will be made.
The discontent of “notch babies” is kept alive by profiteering “lobbying” groups who mislead people born between 1917 and 1921 into thinking that they are receiving less benefits than people both older and younger than they are. This is not true.
Introduction to Supplemental Security Income (SSI)
The Social Security Administration also administers the Supplemental Security Income (SSI) program. This program provides a basic monthly income to blind, disabled and elderly (age 65 or older) persons who urgently need financial assistance. Unlike Social Security, you can receive SSI checks even if you have never worked or if you do not qualify for Social Security for some other reason.
Who Qualifies?
SSI is available to persons who meet the income requirements and who are 65 or older, blind, or disabled.
"Blindness" is defined under the SSI program as central visual acuity of 20/200 or less in the better eye with the use of a corrective lens or visual field restriction to 20 degrees or less.
SSI defines a person as "disabled" if that person is unable to engage in any substantial gainful employment due to a physical or mental impairment that has lasted or is expected to last for at least 12 months or is expected to result in death.
As of January 2007, one’s individual “countable” income must be less than $622 a month. A couple’s countable income cannot be more than $933 a month. Social Security uses the term “countable” because not all income counts. The first $20 of most income, $65 more of wages, one-half of wages above $65, food stamps, home energy and housing assistance, and other exemptions are not counted as income. The Social Security Administration considers gross wages, rather than net income, or “take home” pay.
NOTE: By law, the above figures are subject to change once a year.
A single person can have available assets (i.e. easily converted to cash) up to $2,000 and still receive SSI. A couple can have up to $3,000. In addition, you may own a car worth $4,500 or less, a home of any market value as long as you reside in it, household goods worth $2,000 and a life insurance policy worth $1,500 (face value) without losing SSI benefits. There are some exceptions to these limitations. Contact the Social Security Office in your community for more information.
What May Reduce Your SSI Benefits?
Any unearned income over $20 a month reduces the amount of your SSI check. This type of income includes Social Security payments, pensions, gifts and other unearned money. People who work while receiving SSI can earn up to an additional $65 per month without having their benefits reduced. For every two dollars ($2) of earned income above that amount, their SSI check is reduced by one dollar ($1).
Eligible people living in a friend’s or relative’s home may face a reduction in SSI benefits. Also, an unmarried couple living together may be listed by the Social Security Administration as "holding out as husband and wife." When this happens, and both persons are receiving SSI, each check will be reduced, if necessary, so that the two checks together will equal the amount that a couple would receive. If you feel that such rulings are wrongly applied to your situation, you can challenge them administratively or in court. (See Appeals Process)
Appeals Process
If your application for Social Security or SSI benefits is denied or if any of your benefits are reduced or terminated, you have the right to appeal the decision. Here are the steps:
(1) After the action is taken against you, you must make a written request for reconsideration or for a hearing in front of an administrative law judge within 60 days of the denial. Note: If you previously were receiving benefits, and you are being terminated because you have medically improved and are now able to work, and you disagree, and you file your request for reconsideration or hearing within 10 days of the denial, your benefits will continue until the reconsideration decision is made.
(2) If you win an appeal at any level, you will be entitled to all of the benefits you would have received if your application had been granted right away.
(3) If an administrative law judge finds against you, you have a right to request a review by the Social Security Appeals Council in Virginia within 60 days of the adverse decision. The council can refuse to review the case.
(4) If the council refuses to review or decides against you, you have another 60 days to appeal to the U.S. District Court.
Under an experimental new appeals structure, many applicants for benefits based on disability are able to skip the reconsideration stage.
Forms are available from any Social Security Administration office or on the Internet at http://www.ssa.gov. You are allowed to have a friend or relative assist in any appeal proceeding. You may also want to contact an attorney to help with an appeal or any other matter concerning the Social Security and SSI programs. In new claims for benefits, most attorneys only charge a fee if the claim is successful and charge a percentage of the retroactive benefits award. Consult the listing at the end of this booklet for legal assistance information.
Representative Payees
Some Social Security recipients receive checks on behalf of beneficiaries. These recipients are known as representative payees. Their primary responsibility is to use the Social Security money for the basic or personal needs of the beneficiary.
The representative payee is usually a spouse or other relative, friend or legal guardian. An institution such as a nursing home can also be designated as a representative payee.
Appointment of a representative payee begins with a friend or relative notifying the Social Security office that an individual is incapable of handling her or his own affairs. A doctor’s statement to that effect must also be filed. The Social Security Administration then determines whether the individual is mentally competent to continue receiving her or his own checks. If the Social Security Administration finds that the individual is not competent to do so, it will select a representative payee. This selection may be challenged.
If, at some point after the appointment of a representative payee, an individual feels competent to personally receive the Social Security checks, that individual can ask the Social Security Administration to stop payment to the representative payee. For more details about stopping representative payments or changing your representative payee, call or visit the Social Security office nearest you.
Food Stamp Program
By Karen Warren and Amy Smoucha of Legal Services of Eastern Missouri, Inc. Karen is a managing attorney at Legal Services working with the Public Benefits Project, the Elder Law Project, and the Special Projects Unit. Amy is a public benefits specialist with the Public Benefits Project.
Editors’ Note: This information is designed to give you a brief description of the Food Stamp Program and what you have to do to qualify for it. The rules listed below are specific to individuals 60 and older; other rules may apply if you are younger than 60 or are an immigrant. All figures are current as of February 2007, but are subject to change. For more detailed information call or visit the Family Support Division Office (formerly the Division of Family Services) nearest to you.
Introduction
Steadily rising food costs pose special problems for millions of older Americans on fixed incomes. The Food Stamp program helps stretch the food budgets of persons with eligible incomes. Food Stamp benefits are issued on an Electronic Benefits Transfer (EBT) card. It is issued by the Federal Government and looks like a credit card, but it can only be used to purchase food.
How to Get Food Stamps
To apply for food stamps, you can have an application mailed to you or you can visit the nearest Missouri Family Support Division (FSD) office to apply in person. FSD is required to take your application on the same day that you visit the office. If you request an application by mail, FSD is required to mail you one on the same day that you request an application.
As with all financial assistance programs, you must meet certain income eligibility requirements. You should provide proof to the FSD office of all income, rent, utility, child care, and medical expenses – including out-of-pocket expenses for health insurance premiums, doctor bills, prescription bills, required medical equipment or supplies, and transportation costs you incur to obtain medical services. Because income and expenses are compared, you should be careful to provide documentation and verification in order to obtain the maximum amount of food stamp benefits. However, do not delay applying if you do not have all of these pieces of verification.
The application process starts the day you apply, even if you do not have all of the verifying information. The agency has 30 days to process the application. However, if you have less than $150 in monthly gross income, or your rent and utilities exceed your income and resources, you are eligible for “expedited” food stamps, which means that FSD must give you food stamps within seven days of your application. The only piece of information required for expedited food stamps is verification of your identity.
At initial application and when there is a break in the food stamps certification period, applicants will be screened for expedited (emergency) food stamp benefits. Expedited food stamp benefits are prorated, from the date of application through the end of the application month. If a household applies at the end of the month and the benefit amount is less than $10, no benefits will be issued for that month. However, the caseworker may screen the household to determine if the criteria for expedited benefits is met for the following month.
Income Requirements
Eligibility is determined on a “household” income basis. A “household” is a person living alone or people living together who meet two tests: (1) they buy food together and (2) they prepare food together. If you share a residence and buy and store your food separately from that of your companions, you will not be considered part of the household for food stamps purposes. Certain household members are mandatory food stamps household members, regardless of how they purchase and prepare meals. These household members are as follows: (1) spouses; (2) parents and children under 22 years old; and (3) children, except foster children, under 18 years old who are under the parental control of a person other than their parents and that individual is exercising parental control (i.e. grandparents may apply for grandchildren in their care, even if they do not have “legal” custody).
NOTE: Foster children may be included in the food stamps household, but their income must also be included in determining the household income.
However, if you are at least 60 years old, living with others, and unable to purchase and prepare food because of a permanent disability, you can be your own household as long as the others with whom you live do not have an income greater than 165% of the poverty level. The burden is on you to show that situation exists if you want to be considered for food stamps apart from other household members.
The income that counts for persons 60 years or older is net monthly income, which means all money received minus the following deductions: 20% of gross earned income; the standard deduction, which varies based on the number of eligible members in the household; a portion of child care expenses; shelter and utility costs that exceed 50% of income; and allowable medical expenses over $35 a month. It is important for you to tell your caseworker about all your medical expenses, including over the counter medications you take at your doctor’s directions and transportation costs for getting medical care.
Many people mistakenly believe that the Food Stamp Program is designed to help only the desperately poor or non-working people. However, elderly and disabled households are often eligible for a $10 minimum benefit. In addition, households with an elderly or disabled member have no gross income limit.
Resource limits
Households with at least one member 60 years old or older may have resources up to $3,000.
The following assets do not count as resources in determining food stamp eligibility: your home and surrounding property; income producing property; personal belongings and household goods; burial plots; the cash value of life insurance policies and pension plans; rental property if rented at fair market value; property and equipment used for self-employment; resources such as trust funds or security deposits not readily available as cash; and the value of all vehicles.
Food Stamp Exclusions
Food Stamps may be used only to purchase food. However, hot food, that has already been prepared cannot be purchased with Food Stamp benefits (i.e. food prepared at grocery store salad bars, buffets, and meat departments, and the purchase of meals at restaurants). In addition, you may not use Food Stamp benefits to purchase non-food items, and the regulations explicitly exclude the purchase of tobacco, pet food, alcoholic beverages, and paper products with Food Stamp benefits.
Denial: Right to Appeal
If your application for food stamp benefits is denied, you may appeal the denial through the fair hearing process. To request a hearing, you may visit the FSD office, contact your caseworker by telephone, or send a written request. A fair hearing must be requested within
ninety (90) days of the date of denial. Just as with Social Security and SSI, you may want the help of an attorney. FSD can provide information to you regarding free legal assistance available in your area.
If FSD sends a notice to terminate or reduce your food stamp benefits, you may also request a fair hearing. If the request is made within ten (10) days of the date of the notice, you may request to continue to receive benefits, at the current benefit amount, until the decision from the fair hearing is received. If the hearing decision is in your favor, you will continue to receive benefits. However, if the hearing decision is not in your favor, you may be required to pay back the benefits that you received.
If you are not satisfied with the decision from the fair hearing, you may appeal to the circuit court in your county. This appeal must be made within ninety (90) days of the date of the fair hearing decision.
Tax Relief For The Elderly
By Harry Charles, attorney at law and CPA. Mr. Charles is a sole practitioner concentrating in tax disputes. He also is an adjunct tax professor at Washington University School of Law.
The Missouri Property Tax Credit
Property tax and rent increases are especially painful for persons on fixed incomes. A Missouri tax provision — the property tax credit — provides relief in the form of state income tax credits and cash refunds to homeowners and renters who are 65 and older. Veterans with 100 percent disability and disabled Social Security recipients, regardless of age, are also eligible for the property tax credit. A taxpayer is eligible for the credit as a renter if he pays rent for a nursing home, apartment, hotel, house or mobile home.
If a taxpayer qualifies, filing for the property tax credit is advantageous. An older adult who rents may claim a credit of up to 20% of the rent paid for occupancy, even if he lives in a nursing home. However, charges for furnishings, utilities paid by a landlord, food or nursing care cannot be claimed as “rent paid for occupancy.” An eligible person who owns a home and pays real property taxes can also receive a substantial credit against any state income tax liability.
The Basic Requirements
These are the qualifications for the property tax credit:
(1) The taxpayer or spouse must be age 65 or older on December 31 of the tax year.
(2) The taxpayer or spouse must be a Missouri resident for the entire calendar year to claim the credit.
(3) The total household income for the 2007 tax year must be less than $25,000 for an individual or $27,000 for a married couple. Household income generally includes all taxable income, but excludes certain benefit payments to a service connected disabled veteran or spouse. The amount of allowable household income increases periodically, based on inflation.
(4) The taxpayer must pay property tax, or rent for a house or an apartment occupied during the tax year.
Qualifying taxpayers who are not required to file a federal tax return should file Form MO-PTC. Those who are required to file a federal tax return and who claim a pension exemption but no modifications to income, should file Form MO-1040P and Form MO-PTS. Those who must file a federal tax return and do have modifications to income or claim other tax credits, should file both Form MO-1040 and MO-PTS. These forms are available at any local Missouri Department of Revenue branch office or by mail from:
Missouri Department of Revenue
Division of Taxation and Collection
P.O. Box 3022
Jefferson City, MO 65105-3022
The deadline for filing is April 15 following the tax year’s end. The completed form should be attached to the state tax return or, if a Missouri tax return is not required, sent directly to the Missouri Department of Revenue, P.O. Box 2800, Jefferson City, MO 65105-2800. If the taxpayer meets eligibility requirements, he will receive a direct cash refund. For information and current figures, contact the local Department of Revenue branch office or check under the “Missouri-State of” listings in the blue pages of the telephone
directory.
Pharmaceutical Tax Credit
Effective for 1999 through and including 2001, a pharmaceutical tax credit of up to $200 was provided for each resident taxpayer who was 65 years of age or older on or before December 31, 1999, for the purpose of offsetting the cost of prescription drugs. If your Missouri adjusted gross
income did not exceed $25,000 for one of these years, you may have qualified for the credit. You may need to reduce the credit if you file a Form MO-1040 with your Form MO-PTC C. If filing Form MO-1040, you must take the pharmaceutical tax credit on Form MO-1040. If you are not required to file a Form MO-1040, you may take the pharmaceutical tax credit on Form MO-PTC. The deadline for filing is April l5 following the tax year-end.
To claim the credit for one of these years, you may file an original or amended return within three years of the return’s due date, including extensions.
The credit expired on December 31, 2001.
Income Taxes
By Harry Charles, attorney at law and CPA. Mr. Charles is a sole practitioner concentrating in tax disputes. He also is an adjunct tax professor at Washington University School of Law.
Editor’s Note: This information on income taxes is designed to give the reader a brief idea of tax advantages available to senior citizens. All figures referenced are current as of January 2007. For more detailed information, call the Internal Revenue Service tollfree, 1-800-829-1040, and ask for Publication 554 –Older Americans’ Tax Guide. Taxpayers may also use this toll-free number to ask specific questions. The publication is also available at www.irs.gov.
Taxable Income
Not all income is subject to federal and state income taxes. For example, most Social Security payments, veterans’ benefits, gifts and benefits from insurance are all non-taxable income. If one or more of these is a sole source of income, then the taxpayer may not have to file income tax returns. Other income, such as wages from employment or annuity payments from a pension plan, is subject to income tax. In addition, under the current tax law, up to 85% of Social Security payments may now be taxed if modified adjusted gross income exceeds certain levels.
Deductions from Income Taxpayers are allowed to deduct from their adjusted gross income the greater of either their standard or itemized deductions. The standard deduction for 2006 is $10,300 for married individuals filing jointly, $5,150 for married individuals filing separately or for a single individual, and $7,550 for a head of household. Additional deductions are available for attaining the age of 65 and for being blind. For 2006, there are additional deductions for married or surviving spouse. The standard deduction increases for taxpayers born before January 2, 1942, per IRS Pub. 501. A taxpayer may no longer deduct personal interest. The only interest still deductible for many taxpayers is the interest paid on loans made to acquire or improve a residence, or on home equity loans. In addition, taxpayers who pay interest on loans used to make investments may be eligible to deduct such investment interest, generally to the extent of the related investment income. Interest paid on qualifying education expenses is deductible, within limits, depending on the level of adjusted gross income. Such interest is deductible whether or not the taxpayer itemizes deductions.
Medical expenses that are not compensated for by insurance or otherwise are only deductible to the extent that they exceed 7.5% of adjusted gross income.
Personal Exemptions Anyone who files an income tax return is allowed a personal exemption in addition to the standard or itemized deduction. In 2006, a taxpayer is generally allowed a “personal exemption” of $3,300 for himself, a spouse – if filing a joint return – and any dependents claimed. This includes a person claimed under a multiple support agreement, in which two or more taxpayers combine to provide at least 50% of the claimed dependent’s support and certain other criteria are met.
Selling a Home If a taxpayer decides to sell his/her home and receives more for the home than was paid, including improvements, the taxpayer has realized a “capital gain,” which may be taxable.
For sales on or after May 7, 1997, a taxpayer may exclude from gross income a gain of up to $250,000 - $500,000 for married couples filing jointly. This exclusion is generally available for each such gain, but not more often than every two years. If the residence has been used for a tax-deductible home office, rental property or other business purposes, the proportionate share of the gain may not be excludible. Apart from the exclusion, depreciation claimed is subject to tax. The law now requires that the taxpayer own and use the home as a principal residence for at least two of the five years prior to the sale. There is a limited exclusion available if the taxpayer is required to sell the house and move for employment or certain other qualifying purposes.
Credit for the Elderly or Disabled
A person who has earned income from employment or otherwise, and is over 65 (or retired on disability and, at the time of retirement, was permanently and totally disabled) may be eligible for a 15% tax credit. A tax credit reduces income tax dollar for dollar, unlike a deduction, which reduces taxes based on the applicable tax bracket. The credit is obtained by completing and attaching Schedule R to the federal Form 1040.
A taxpayer is allowed this 15% credit if he did not receive $5,000 or more of non-taxable Social Security or other nontaxable pensions and meets the criteria discussed below.
The credit is equal to 15% of a calculated threshold for each tax year. Generally, the tax credit for an individual or a married couple filing jointly where only one spouse meets the eligibility requirement is equal to 15% of $5,000. The $5,000 is reduced by any amount received by the individual or, in the case of a joint return, by either spouse, of certain pension or disability benefits that were received and excluded from gross income. The dollar amount, which is multiplied by 15% to obtain the credit, is $10,000 for joint returns where both spouses meet the eligibility requirements and $5,000 for married individuals filing separate returns. These amounts are also reduced by certain pension and disability benefits as described above. If adjusted gross income exceeds specified amounts, the amount of the available credit is reduced accordingly.
2005 Tax Act: Qualifying Child
The 2005 Tax Act established a generally uniform definition of “qualifying child” for purposes of the dependant exemption, head of household filing status, earned income credit, child tax credits and credit for child and dependant care expenses. See IRS Pub. 553.
The 2005 act also increased the limit on the exclusion for payments made on a per diem or other periodic basis under a long term care insurance contract.
There are special tax rules for taxpayer affected by hurricanes. They should see IRS Pub. 4492.
Private Pensions
By Pam Coffin of Mercer Human Resource Consulting. Ms. Coffin specializes in pension work. She is also a long term participant in the Legal Services, Inc., Volunteer Lawyers Program.
Eligibility Many retired and disabled workers who are receiving Social Security benefits have worked in one or more jobs that were covered by an employer-sponsored retirement plan, such as a pension plan or a “401(k)” plan. This chapter describes plans subject to a federal law called ERISA, which covers many retirement investment plans. Those plans that are not subject to ERISA (primarily plans for employees of government and church-related organizations) are subject to different rules. If the plan requires employees to contribute in order to participate, employees have a 100% “vested” right to the benefits for which they have paid. Employer-paid benefits are usually subject to a “vesting” schedule, which may require employees to work for as long as 5 years in order to “vest” in all or part of the employer-paid benefits. Employees who last worked for a company before 1989 may not have a vested right to employer-paid benefits if they worked for less than 10 years.
Vesting is based on “service” with the employer. Service usually means a calendar year or other 12-month period during which an employee is credited with 1,000 hours. However, some plans simply require 12 months of work and do not count hours. If an employee terminates employment before that person has a vested right to any part of the benefit and does not return to work for the employer for 5 or more years, prior service will be lost. Once the employee becomes vested, however, that employee will always be vested in the benefits earned under that plan. Slightly different rules apply if an employee last worked for a company before 1989.
Payment of Benefits Upon Termination or Retirement
Many plans automatically “cash out” employees whose vested benefit is worth $5,000 or less by paying the entire benefit in a lump sum. (The limit was $3,500 for payments made before 1998; it was $1,750 for payments made before 1985.) An employee who was cashed out is not entitled to a pension from the plan at retirement because that employee has already received the benefit.
Employees (and surviving spouses) who receive taxable lump sums must be allowed to elect whether to take a lump sum in cash (less 20% federal income tax withholding) or to have it directly rolled over to a traditional IRA or an eligible retirement plan that accepts rollovers. For distributions made after 2001, eligible retirement plans include tax-qualified retirement plans, tax-sheltered annuities and certain eligible state or local government deferred compensation plans. Taxable amounts that are rolled over are not taxed until they are actually paid out. Beginning in 2002, lump sums that include after-tax employee contributions can be rolled over to a traditional IRA or a tax-qualified defined contribution plan that accepts after tax amounts. Distributions that are required to be made because the employee is over age 70-1/2 cannot be rolled over.
Beginning March 28, 2005, new rules apply to automatic cash outs of vested benefits worth between $1,000 and $5,000. If an employee who has not reached the plan’s normal retirement age does not make an affirmative election to have the benefit directly rolled over or to receive cash, the plan sponsor must establish an IRA for the employee and deposit the benefit in the IRA. The employee can withdraw the money from the IRA at any time (subject to a 10% penalty unless the employee is at least age 59-1/2 or meets certain other requirements). Many plans – especially pension plans – have been amended to either (1) eliminate cash outs for benefits worth more than $1,000 or (2) require the employee’s consent to pay lump sums in excess of $1,000. This avoids the need to set up an IRA..
If the plan does not cash out small benefits – or if the employee’s pension was too large to cash out – the employee will be entitled to receive a benefit upon reaching the plan’s “normal retirement age” – usually age 65. Many plans permit payment to begin earlier – at the “early retirement date” if the employee meets the plan’s eligibility rules. Early retirement eligibility rules typically require the employee to be 55 or 60 years old with 10 or 15 years of service. Monthly payments under early retirement pensions are normally smaller than monthly payments beginning at normal retirement because the employee has fewer years of service and because the payment period will be longer.
Pension plans must pay benefits in the form of an annuity, although they can offer other optional forms. An annuity means that periodic payments are made (usually monthly) as long as the employee lives. Married employees are entitled to receive a form of payment called a “qualified joint and survivor annuity.” A qualified joint and survivor annuity usually pays a reduced monthly benefit during the employee’s life in order to provide periodic payments to the surviving spouse after the employee’s death. Under this form of payment, the spouse to whom the employee was married at retirement is entitled to the survivor benefit even if they are later divorced. A married employee can elect to receive a different form of payment only if the spouse consents.
Monthly benefit payments – or installment payments made over a period of 10 or more years -- are generally subject to federal income tax withholding like wages. However, the recipient may elect not to have tax withheld. Plan distributions are not subject to Social Security (FICA) tax.
Usually, 401(k) plans pay benefits in the form of a lump sum or in installments.
Plan distributions generally must begin after the employee reaches age 70-1/2 or, if later, after the employee stops working for the company that sponsors the plan.
Disability Benefits
Some pension plans pay disability pensions to employees who must quit working for the company because they become disabled. Some plans require the employee to qualify for Social Security disability; others have different standards. Most pay disability benefits only to employees who become disabled after completing a minimum period of service – such as 10 or 15 years.
Pre-Retirement Death Benefits
If the employee dies after becoming vested and
before receiving any benefits under the plan and if the employee was married at death, the surviving spouse will be entitled to a surviving spouse benefit under a pension plan. However, some plans permit the employee to waive the coverage (with the spouse’s consent). The survivor benefit is usually payable at death or, if later, when the employee could have elected to begin receiving benefits had the employee survived. Most pension plans do not pay pre-retirement death benefits to nonspouse beneficiaries, although this is becoming more common, especially in a type of pension plan called a “cash balance” plan.
In a 401(k) plan, the surviving spouse is entitled to receive the employee’s vested account balance unless the employee designated a non-spouse beneficiary (with spousal consent). An unmarried employee can also name a nonspouse beneficiary for the account.
A lump sum distribution paid to a non-spouse beneficiary in 2007 or later can be directly rolled over to an IRA. Income tax will be withheld from a distribution paid directly to the beneficiary unless the beneficiary elects otherwise.
Post-Retirement Death Benefits Once payment begins under a plan, a death benefit will be payable only if a death benefit is provided under the form of payment in effect at retirement. If the employee was married and if payment was made in the form of a joint and survivor annuity, the surviving spouse will receive payments (usually 50% of the employee’s payment) for life. If payment was being made for the life of the employee only, no death benefit will be payable.
Common Problems
The employee or survivor fails to notify the employer of changes in address after the employee leaves employment (or dies).
The employee or survivor fails to apply for benefits when eligible.
The employer’s or the plan’s records are incomplete or incorrect with respect to the employee’s eligibility for plan benefits.
The employee does not work for an employer long enough to become “vested.”
The employee does not work in an eligible classification long enough to earn a benefit.
Union membership does not guarantee coverage under a pension plan – the employee must also work for employers who contribute to the plan.
In some cases, the insolvency of the plan or the employer will affect benefits. The PBGC – a federal insurance agency – guarantees some (but not all) benefits under most types of pension plans. Benefits under other types of plans – such as 401(k) plans – are not guaranteed or insured. However, the employer and others who operate plans of all kinds are required by law to use plan assets only for the purpose of paying benefits and expenses.
If a plan is terminated or a former employee who is entitled to a benefit cannot be located, the PGBC or the Social Security Administration may be asked to notify the employee that benefit is due.
Qualified Domestic Relations Orders
As a general rule, an employee’s benefits in a retirement plan cannot be assigned or reached by creditors prior to payment to the employee. However, a court can order a plan to pay benefits to a spouse, former spouse, or child to satisfy the employee’s support obligations or to divide marital property in a divorce. The order will be valid only if it meets certain requirements. In many cases, payment cannot be made to the spouse or other person under the order until the employee is eligible to receive benefits from the plan. A lump sum paid to a spouse or former spouse under a qualified domestic relations order can be directly rolled over to an IRA or other plan (and is subject to 20% federal income tax withholding if it is not directly rolled over).
Information About the Plan
Federal law requires the employer (or the plan administrator) to furnish plan participants and beneficiaries with a summary plan description that contains information about the important provisions of the plan. A copy of the plan document must also be made available upon request. Participants are entitled to request a benefit statement once a year, showing the benefit earned to date and whether it is vested.
Claims for Benefits
If an employee or beneficiary applies for a benefit and is denied (or receives less than the applicant believes said applicant is entitled to receive), the plan must provide a written explanation of the reasons for the denial, a description of any additional information needed to review the claim, and a copy of the plan’s claim review procedures. The employee must make a claim for benefits in writing and retain a copy as a record. An employee’s request for review of a denied claim must be made in writing and must follow the rules set forth in the plan’s claim procedures (including the plan’s time limit for filing the request). The plan must, in turn, provide its decision on the review in writing.
Sometimes a claim is denied because the employer or the plan has incomplete or incorrect information. The employee may use the employee’s own records, Social Security records, or the employer’s records to support the claim. Sometimes a claim is denied because the plan is not being operated in compliance with applicable law (or with the terms of the plan document). In such a case, the employee may be able to get a court to force the employer to comply.
If the claim is denied on review, the employee may have to obtain the assistance of an attorney. Pension cases are seldom easy. Even if the employee wins, no damages are available under ERISA. A court can award the employee the benefit due and attorneys’ fees. In some cases, the court may also order the employer to pay the employee a penalty for failing to provide plan information on a timely basis. If the employee loses, however, the employee may be ordered to pay the opposing side’s attorney’s fees.
Questions about your ERISA rights can be directed to the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory (314-539-2691 in St. Louis) or contact the:
Division of Technical Assistance and Inquiries
Employee Benefits Security Administration
U.S. Department of Labor
200 Constitution Avenue NW
Washington D.C. 20210
You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publication hotline of the Employee Benefits Security Administration at 1-866- 444-3272 or by visiting its Web site at www.dol.gov/ebsa.
Individual Retirement Programs
Individual retirement programs are available to employees and people who are self-employed. The most common is the Individual Retirement Account or “IRA.” Most people who are working can contribute the maximum amount each year to an IRA, even if they are covered under a retirement plan at work. Spouses can also set aside the maximum amount each year, even if they are not working. The annual contribution limit is $4,000 for 2006. The limit increases to $5,000 in 2008. Individuals who are age 50 or over by the end of the calendar year can also make a “catch-up” contribution for the calendar year. The maximum annual “catch-up” contribution is $1,000 per individual for 2006. Most people can choose between making tax-deductible contributions to a traditional IRA or nondeductible contributions to a Roth IRA. Both types of IRA have advantages and disadvantages. Traditional IRA distributions are generally fully taxable and must begin after the individual reaches age 70-1/2. Roth IRA distributions are tax-free if certain requirements are met. An individual who works past age 70-1/2 can contribute to a Roth IRA. Distributions from Roth IRAs are not required to begin after the individual reaches age 70-1/2.
Self-employed persons also have the option of setting up a retirement plan – called a “Keough” plan that enables them to set aside more money than an IRA. If the person has employees, they must also be covered under the plan.
Age Discrimination in Employment
By Rebecca Stith of the EEOC. Ms. Stith is a senior trial attorney with the EEOC, and a frequent contributor to this effort. It is increasingly common for senior citizens to delay their retirement or to work in post-retirement jobs to supplement a fixed income. Despite over three decades of laws prohibiting age discrimination, seniors still face such discrimination in the job market.
The federal Age Discrimination in Employment Act of 1967 (ADEA) applies to employer with at least 20 employees and protects individuals age 40 and over from discrimination in hiring, promotions, terminations, and the terms and conditions of employment. This law applies to private employers, employment agencies, labor organizations, state employers, and federal employers. The State of Missouri also prohibits age discrimination against those 40 to 70 years of age under a law known as the Missouri Human Rights Act (MHRA). Missouri’s law applies to private and state (but not federal) employers with at least six employees. Individuals alleging age discrimination at work may file a charge with the Equal Employment Opportunity Commission (EEOC) or the Missouri Commission on Human Rights (MCHR). A charge filed with one agency is considered “dual” filed with the other.
Age Discrimination and RetaliationAge discrimination can take many forms. For example, an advertisement expressly seeking applicants under 40 (e.g., “young faces sought”) could be a violation under the ADEA and the MHRA, unless the job plainly requires a much younger person, such as a job modeling children’s clothing. Most age discrimination is less obvious. An employer may pass over older employees to promote less qualified under-40 employees, or terminate older employees while hiring younger workers to perform the same duties. If you believe that you are experiencing discrimination, then you should report such discrimination to your employer and contact the EEOC or MCHR about filing a charge. Retaliation for reporting possible discrimination is also against the law. If you believe your employer has retaliated against you for making such report or filing a charge, then an allegation of retaliation may be included in or added to your charge.
Federal Older Workers Benefit Protection Act
The ADEA has a special provision known as the Older Workers Benefit Protection Act (OWBPA). Under the OWBPA, if an employer offers an age-protected employee a severance package in return for the employee’s waiver of ADEA rights, the employer first must advise the employee in writing to consult with an attorney. The employer must give the employee at least 21 days to consider the offer. In a large termination program, age-protected employees must be given a minimum of 40 days to consider the offer. In a large reduction, the employer must inform such employees in writing of the group or class of employees offered such exit incentive, eligibility factors required for participation, applicable time limits, job titles and ages of all eligible employees, and ages of those employees in the same job or organizational unit not offered the exit incentive. Even if an age-protected employee signs such waiver, that employee has up to seven days to revoke it. It is highly recommended that an employee timely consult with an experienced attorney before signing a waiver and accepting a severance package.
Important Charge-Filing DeadlinesA victim of possible age discrimination may file a charge with the EEOC or MCHR. To preserve a possible claim under MHRA, the employee must file a charge within 180 days of the last alleged act of age discrimination. To preserve a possible claim under the ADEA, the employee must file a claim within 300 days of the last alleged act of age discrimination. This “last act” is usually the date on which the
employee first learned of the discrimination. For example, if an employer told an employee on January 1 that she would be terminated on February 1 – and there is good reason to believe that the termination is based on age – then the employee must file within 180 days of January 1 under the MHRA and within 300 days of January 1 to preserve under the ADEA.
Filing a Charge of DiscriminationIf you contact the EEOC in person or by telephone, you will be interviewed about the alleged discrimination. The EEOC intake investigator typically will draft a charge for your review. MCHR should follow a similar intake procedure. If you decide to file a charge, then your employer will be promptly notified, sent a copy of the charge, and given an opportunity to respond. Occasionally, a charge may be dismissed without investigation because, for example, it does not state a violation or was filed too late, or the employer does not have enough employees. In most instances, however, the charge will be investigated. Never hesitate to contact the investigator about the progress of the investigation or to provide additional information about documents or witnesses.
What Happens After the Charge Investigation?Once the EEOC investigation is over, an employee typically will receive a written “notice of right-to-sue,” which allows that employee to sue regardless of whether the EEOC concluded that discrimination occurred. This notice is required before one can sue under two other federal antidiscrimination laws, Title VII (which covers race, gender, religion, color, and national origin) and the Americans with Disabilities Act. However, an employee may file suit under the ADEA without first receiving the EEOC’s notice as long as at least 60 days have passed since the charge was filed. Once the EEOC has issued a notice of right-to-sue under the ADEA, then suit must be filed within 90 days of receiving such notice.
MCHR’s procedures for issuing a state notice of right-to-sue under the Missouri Human Rights Act are generally more restrictive. For instance, MCHR may close a charge file without notifying the employee or issuing a state notice of right-to-sue. In addition, MCHR generally will not issue such notice until at least 180 days have passed since the charge was filed. If MCHR closes the file without issuing such notice, then in most circumstances the right to sue under state law will be forfeited. If MCHR does issue a state notice of right to sue, then suit alleging age discrimination under state law must be filed within 90 days of date on which MCHR mailed the notice. In addition, under the state law (but not the ADEA), suit must filed within two years of the last alleged discriminatory act. Because some of MCHR’s procedures have faced recent court challenges, employees interested in filing a charge are strongly advised to seek legal advice before doing so. Contact information is listed below.
Extra Guidance for State Government Employees
State government employees – those who work for, e.g., Missouri state government, school districts, municipalities – as a rule cannot sue their employers under the ADEA, the federal law prohibiting age discrimination, but may be able sue such employer in state court under the Missouri Human Rights Act. Despite this restriction on ADEA lawsuits, state employees may file charges of age discrimination with the EEOC or MCHR. The EEOC is permitted to sue both private and state employers for alleged ADEA violations, but rarely does so due to limited resources and staff.
Should I Sue? Words of Caution Before You Decide
Not every person 40 or over who loses a job or promotion, or has some bad work experience, can reasonably claim age discrimination. An employer may discharge or refuse to hire or promote a senior citizen for any reason, as long as it is not based on age or some other basis prohibited by law (e.g., sex, race, national origin, disability). Even if the “real” or main reason for the employer’s decision was age, such discrimination may be very difficult to prove. Lawsuits can be extraordinarily costly in terms of dollars, time, and emotional demands. They may take more than two years to settle or go to trial. Some claims are dismissed without a trial. It is strong advised that an employee contact an experienced attorney if possible before filing a charge or lawsuit. For attorney referral information, please contact the EEOC at the numbers below or the National Employment Lawyers Association/NELA-St. Louis at (314) 872-8420.
More Questions? Agency Contact and Related Information
These federal and state laws, deadlines, and procedures can be very confusing. To find out more information on employees’ rights under the ADEA or MHRA, please contact the EEOC, 1-800-669-4000 or (314) 539-7800, 1222 Spruce Street, 8th Floor, St. Louis, MO 63101, or MCHR, (314) 340-7590 or (314) 340-4717, 111 N. 7th Street, Suite 903, St. Louis, MO 63101. The EEOC’s Web site at http://www.eeoc.gov includes many useful links related to age and other discrimination claims, charge-filing, and chargeprocessing. While this article does not address employees’ rights under Illinois state law, information related to Illinois law and filing charges with the Illinois Human Rights Department may be found at http://www.state.il.us/dhr or by calling (312) 814-6200 (Chicago), (217) 785-5100 (Springfield), or (618) 993-7463 (Marion).