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U.S. DEPARTMENT OF LABOR
Employment and Training Administration
Washington, D. C. 20210

CLASSIFICATION

UI

CORRESPONDENCE SYMBOL

TURL

ISSUE DATE

March 17, 1980

RESCISSIONS

None

EXPIRATION DATE

February 28, 1981

DIRECTIVE

:

UNEMPLOYMENT INSURANCE PROGRAM LETTER NO. 24-80

 

TO

:

ALL STATE EMPLOYMENT SECURITY AGENCIES

 

FROM

:

Roberts T. Jones
Administrator
Office of the Deputy Assistant Secretary
Office of Management Assistance

 

SUBJECT

:

Pension Deduction Provisions, FUTA

 

  1. Purpose. To inform State Employment Security Agencies (SESAs) of the requirements of the pension deduction provision of Section 3304(a) (15), FUTA, the Federal law provision that will become effective for weeks of unemployment beginning after March 31, 1980.

  2. Reference. UIPL 10-77 and 37-79; Draft Language and Commentary to Implement the UC Amendments of 1976, page 61, and Supplement #1, Q and A's 3 and 4, pages 29-30.

  3. Background. Public Law 94-566 added Section 3304 (a) (15) to the Federal Unemployment Tax Act (FUTA) requiring States, for weeks of unemployment beginning after September 30, 1979, to reduce an individual's weekly benefit amount by the weekly amount of a "governmental or other pension, retirement or retired pay, annuity, or any other similar periodic payment which is based on the previous work of such individual. . . ." The effective date of this provision was extended by P.L. 95-19 to March 31, 1980. Although Congress is currently considering bills that would amend this provision of Federal law, as the SESAs were informed by the Regional Administrators following our telegram to them on January 14, 1980, there is no assurance that final Congressional action will occur before the current provision in Section 3304(a) (15) takes effect.

    As we indicated in that telegram, both the Senate Finance Committee and the House Ways and Means Committee have reported out pension deduction provisions (H.R. 4612 and H.R. 5507, respectively) which differ only in effective dates. Under both bills, the present FUTA provision would be retained with provisos to: (a) require States to apply the provision to payments made under a plan maintained or contributed to by a base-period or chargeable employer (although States would be permitted to apply the deduction to payments made by any employer); and (b) permit States to reduce benefits on less than a dollar-for-dollar basis to take into account the contributions made by the worker to the plan from which payments are made. The Senate version would be effective for weeks of unemployment beginning after January 1, 1980; the House version for weeks of unemployment beginning after January 1, 1982.

    We recommended in the telegram the following provisions to provide for maximum flexibility consistent with the proposals now under consideration in Congress:

    "The amount of benefits payable to an individual for any week which begins after the effective date of the applicable provision in the Federal Unemployment Tax Act and which begins in a period with respect to which such individual is receiving a governmental or other pension, retirement or retired pay, annuity, or other similar periodic payment which is based on the previous work of such individual shall be reduced (but not below zero) by an amount equal to the amount of such pension, retirement or retired pay, annuity, or other payment, which is reasonably attributable to such week; provided that, if the provisions of the Federal Unemployment Tax Act permit, the executive director may prescribe in regulations which are consistent with the Federal Unemployment Tax Act that--(a) the requirements of this paragraph shall only apply in the case of a pension, retirement or retired pay, annuity, or other similar periodic payment under a plan maintained (or contributed to) by a base period or chargeable employer (as determined under this Act), and/or that (b) the amount of any such reduction shall be determined taking into account contributions made by the individual for the pension, retirement or retired pay, annuity or other similar periodic payment."

  4. Discussion. Many questions have been received as to the scope of the language now in the Federal law--specifically, what kinds of payments are required to be deducted, how are lump-sum retirement payments handled, how does retroactive payment of pensions effect benefits already received, how is the pension deduction applied when only one of several employers provided a pension?

    First, because the Federal language specifies that the reduction must occur for payments" . . . based on the previous work of such individual . . .," the reduction applies only to pensions or annuities collected by the person who actually earned them. It does not apply to, for example, a survivor's or widow's pension that is payable to a survivor or widow but not based on the previous work of that individual. No exhaustive list of the kinds of payments that are deductible is available; however, based on the broad language of the provision, we believe that the following must be deductible; primary social security old age and disability retirement benefits, including those based on self-employment; State and local government pensions of all types; Federal Civil Service pensions, including disability pensions; private for-profit employer pensions; military retirement pensions and disability retirement pensions; and Railroad Retirement annuities. Also included are benefits derived from IRA and Keogh plans on the basis that these benefits are the result of the individual's previous work, and, while they may be participated in by both employer and employee, are generally payable only because the individual, while employed, was not covered by any other pension plan but, instead, established his or her own pension plan with money set aside and exempt from tax for that purpose. Military service-connected disability compensation payable under 38 U.S.C. Chapter 11 is not deductible because it is based on disability rather than on the previous work of the individual, and bears no direct relationship to the level of prior remuneration or the length of the past service. Other types of disability compensation, such as temporary disability insurance and workers' compensation (including Black lung benefits), which are not payable as a retirement or pension payment, also are not required by Section 3304(a) (15) to be deducted from unemployment compensation.

    Second, as to lump-sum retirement payments, the States have the option as to whether to treat them as "similar periodic payments" which are deductible under their laws, and if they treat them as such periodic payments they have the further option of providing in their laws whether the payments shall apply only to the week in which they were paid, or to the week following the last week worked prior to retirement, or whether they shall be allocated to the weeks or months or other applicable periods following the last week worked prior to retirement. Severance pay and separation payments are not required to be treated as lump sum retirement payments, or as any other form of retirement, pension, or annuity required by Section 3304(a) (15) to be deducted from unemployment compensation.

    Third, retroactive payment of pensions for weeks in which the individual has already received unemployment compensation may be treated as causing overpayments under the provisions of the State law applicable to benefit overpayments, as appropriate under the State law. The reason for this is that, under the Federal law provision, the deduction is required to apply only to weeks in which the individual is receiving the pension. Therefore, unemployment compensation payments made for any week for which pension payments are retroactively made may be recovered by the State agency, subject to waiver of recovery if applicable under the State law, or the State agency may choose not to recover benefits that were paid for weeks with respect to which the claimant receives a retroactive payment of social security or other retirement benefits.

    Fourth, unless the Federal law is amended as described earlier, States will be expected to deduct from the weekly benefit amount the full amount of any pension received from any employer in the claimant's work history. Should the Federal law be amended, the full amount of pension received must be deducted from the weekly benefit amount, but the deduction may be limited to pensions maintained or contributed to by a base-period or chargeable employer. In a survey of current practice in the States with pension deduction provisions, it was found that one State prorates the amount of the pension to be deductd in cases where a claimant has more than one base-period employer but not all of those employers have contributed to the pension being received by the claimant. Under the provisions of Section 3304(a) (15), FUTA, this practice is no longer acceptable. It was found that most States make a dollar-for-dollar reduction by the amount of the pension payment receive regardless of the proportion of base-period wages paid by the pension-providing employer. In any event, States must deduct, dollar-for-dollar, the amount of any pension payment receive without regard to the proportion of base period wages that may have been paid by the employer who contributed to or maintained the pension.

    Absent amendment to Section 3304(a) (15), FUTA, employee contributions to the pension plan, whether OASI, Civil Service, or private, cannot be taken into account in determining the amount of the reduction. The total weekly prorated amount of the pension must be deducted from the weekly benefit amount otherwise payable. Should the Federal law be amended as indicated in the telegram referred to above, States will be free to take into account, in determining the amount of the deduction, the employee's contribution to the retirement plan. In such cases the State can provide for not deducting any part of an employee-contributed pension, or it can provide for deduction of a representative percentage of the pension as determined under the State law.

    SESA's may want to accumulate information on pension recipients in their data base in preparation for implementing this provision.

  5. Action Required. State administrators are requested to: (a) Insure that the State law conforms to the Federal law requirements, and (b) construe their laws to provide for deduction of at least those types of payments discussed above.

  6. Inquiries. Questions should be addressed to the appropriate Regional Office.