On August 16, 2006, the Massachusetts Appeals Court issued a decision that makes it harder for public employees who had to retire because of a job-related disability to earn income during retirement. In essence, the Court decided that all monies listed on a W-2 form may be considered “income” for purposes of the earnings limitation placed on disability retirees from public employment.
Massachusetts law allows public employees who are disabled because of an on-the-job injury to retire with 72% of their pay at the time of injury or average from most recent 12 months (whichever amount is greater). The 72% amount is non-taxable. (Compare this amount with the 80% taxable benefit they public employees may received if they work until regular retirement age.) Massachusetts law also limits how much money disability retirees can earn from any other employer, whether in the public or private sector. Disability retirees may receive no more than $5,000 beyond the current salary of their position. Disability payments count toward this cap, too.

The question in Gorman vs. Contributory Retirement Appeal Board was how to calculate the income that counts toward the cap. Gorman, a disability retiree, had been working at a job that required him to incur certain job-related expenses. He did not file a submit receipts for expenses so as to receive a check from his employer for these claims. Instead, Gorman received, in addition to his earnings, payments for ‘nonreimbursed expenses’ in his paychecks. The employer included these payments in his W-2 Form. When Gorman did his taxes, he listed the W-2 amount, which included the reimbursements. Hethen properly claimed these job-related expenses as deductible, which reduced his adjusted gross income to reflect his actual earnings. Here’s why the method of reimbursement payments matters to Gorman’s case: the amount of income with the reimbursements was lower than the maximum set by statute; the amount with the reimbursements was over the limit.

The Appeals Court’s decision relied upon a memo by the Public Employee Retirement Administration Commission, which oversees all public employer retirement systems in the Commonwealth. The memo (called PERAC Memo #64/1998) said that income for purposes of the statutory earnings limit included: (1) earned income, which implied some labor, manufacturing or supervision; or (2) profits from the operation of a business, regardless of how the retiree categorizes such income for income tax or other purposes.

Gorman argued that the memo didn’t apply to him Because the reimbursements for his business expenses are not earnings from labor, manufacturing or supervisionand they also are not profits from operating a business. Still, the Appeals Court agreed with the Contributory Retirement Appeal Board it may count all monies listed on a W-2 form, no matter how Gorman categorized some of the money for income tax purposes.

NOTE: The Contributory Retirement Appeal Board did agree that, if Gorman had documentation that he had incurred expenses, provided receipts to the employer and received reimbursements, those payments would not be counted as income. The bottom line of Gorman v. CRAB is that disability retirees who incur work-related expenses should submit receipts to their employers and receive a separate reimbursement check that reflects actual expenses.

— John M. Becker