Attachment III Contd.

commodities on his land. This provision applies to all type of farm rental arrangements including cash rent, standing rent (e.g., a stipulated number of bushels of corn per acre), share rental, and share-farming arrangements.

1551.2. For rental income to be included in net earnings from selfemployment, it must be derived under an arrangement (agreement or understanding) which contemplates that the landlord will materially participate. Where a written agreement specifically provides for the landlord's participation, this requirement of the law is met. (In the absence of a specific provision in the witten agreement, rules are provided for determining if an understanding exists.)

1551.3. What Constitutes Material Participation. The legislative history of the material participation provision clearly indicates that it was intended to include under social security coverage those farm owners, who pursuant to an agreement, either engage to a material degree in physical work relating to farming activities or participate to a material degree in the management of the farm. Special emphasis was given to the impurtance in this regard of the farm owner's advice, consultation and inspection of the activities related to production. The furnishing of equipment and the payment of expenses of production also were stated to be indicative of participation.

Where any of these tests is met, the landlord is materially participating:

Test No. 1---Where at least two of the following elements (including at least one nonfinancial element) exist: periodic advice, periodic inspection, furnishing a substantial portion of machinery, equipment and livestock; and assuming responsibility for a substantial portion of production expenses.

Test No. 2---Making management decisions which may be expected to significantly affect or contribute to the success of the enterprise.

Test No. 3---Performing physical work in the production or management of the production of the commodities raised.

Test No. 4---Doing things which, when considered in their total effect, show a material involvement in activities related to crop production. Any activity of the landlord, or assumption of financial responsibility by him, is counted if it is reasonably related to the production of a crop.

SUMMARY

The passage of H. R. 5295 would rectify two major problems presented by the 1977 Amendments to the Social Security Act by:

(1) Providing that income attributable to
services performed before retirement may
not be taken into account for purposes of
applying the annual earnings limitation; and
(2) Making it clear that every Social
Security beneficiary is entitled to apply
the monthly earnings test in the first year
after 1977, in which he or she has at least
one non-work month.

Currently, because of certain amendments to the Social Security Act passed in 1977, income received after retirement by the self-employed from work performed in years prior to retirement is treated under the earnings test as income in the year received--with the result that many retired self-employed professionals are disqualified from old age insurance benefits despite the fact they render no substantial services after

retirement. Retired employees, on the other hand, do not face the same treatment; if they can establish that wages were earned in a different period than received, the earnings are counted for the period earned. This discrepancy between the treatment of retired employees and the retired self-employed is inequitable and must be eliminated.

Further, it should be provided that the monthly earnings test be applicable in the first year following 1977 in which a "non-work" month occurs, to provide equitable treatment of beneficiaries who used the monthly earnings test in a year prior to 1978 and thereby, without notice of future detriment, were precluded by the 1977 amendments from using the test again.

H. R. 5295 rectifies both of these inequities and should be enacted.

Mr. Chairman and members of the Subcommittee:

We appreciate the opportunity to present this testimony

to you on behalf of the American Bar Association.

We are

E. Charles Eichenbaum, Chairman of the Standing Committee on Retirement of Lawyers, and James T. O'Hara, Chairman of the Subcommittee on Legislation of the Standing Committee on Retirement of Lawyers. We are here at the request of the President of the American Bar Association, Leonard S. Janofsky, to urge the enactment of H.R. 5295. This bill, which passed the House by a vote of 383 to 0, provides for equal treatment of both the employed and the self-employed in determining eligibility for Social Security benefits under the earnings test.

An earnings test, whereby old age insurance benefits are lost to the extent of personal services earnings attributable to the continuation of work after age 65, at least until age 72, has been a feature of the Social Security program since its inception and is, in theory, unobjectionable. This test exists because the Social Security system is an insurance or "earnings replacement" program; if an individual continues to work after age 65 and realizes personal services earnings then no earnings need be replaced and insurance benefits are unnecessary. Income after age 65 not attributable to personal services actually performed after age 65, such as income from interest, dividends, or pension plans, however, is not included in the earnings test and thus does not result in a loss of benefits.

In its application, however, the earnings test can become
It is common, among professional firms,

quite objectionable.

for retired persons such as lawyers, doctors, or accountants to receive, following retirement, payments of income for services which have been rendered in years prior to retirement. These sums may represent normal fees paid late, contingency fees, returns of capital, or some form of retirement payment. Since many professional firms utilize the cash method of accounting, the receipt of these funds after retirement constitutes selfemployment income when they are received. The ABA believes that the receipt of income under these circumstances should not cause a reduction in the Social Security benefits of the retired indi

vidual.

Until 1978 it did not. Before the enactment of the Social Security Amendments of 1977, Public Law 95-216, a retired beneficiary could receive full benefits for every month in which he did not render "substantial services", even if he received payments for work done in prior years (usually in the nature of retirement payments) which brought his earnings over the annual exempt amount. This method of determining whether earnings disqualified the retiree from receiving old age benefits was known as the monthly earnings test. As part of the 1977 Amendments, however, Congress eliminated the monthly earnings test and required that only the annual earnings test be used in determining whether benefits are lost. Under the annual earnings test, a person may earn annual amounts up to a specified level without loss of benefits. If a person earns more than the annual exempt