In the right circumstances, federal employees can qualify for disability retirement benefits through the U.S. Office of Personnel Management (OPM).
OPM retirement disability provides regular payments to those who qualify, leading to a natural question come tax season: is OPM disability retirement considered earned income? If so, for what purposes is retirement earned income?
OPM disability retirement is generally not considered earned income. However, your retirement disability benefits may qualify as earned income if you receive them before the relevant minimum retirement age.
Working for the federal government places you in the heart of bureaucracy. If you need assistance determining whether you qualify for OPM disability, applying for benefits, or understanding your obligations, the Federal Employment Law Firm of Aaron D. Wersing PLLC can help.
Our practice focuses on federal employment, making us proficient in guiding our clients through layers of bureaucracy.
How Does OPM Disability Retirement Work?
You can qualify for OPM’s disability retirement at almost any age if:
- You have completed at least 18 months of work in a covered federal position;
- You became disabled in a way that prevents you from useful and efficient work performance;
- You expect your disability to last at least one year;
- Your agency certifies it cannot accommodate your disability or transfer you to a comparable position;
- You apply within one year of separating from the federal service; and
- You also apply for Social Security disability.
If you apply for benefits and are approved, your payments follow the OPM disability retirement pay schedule.
If you are under 62 for the first year, your benefits are calculated based on 60% of your high-3 average salary minus 100% of your Social Security benefits. Until your 62 birthday, if you continue to qualify for benefits, you follow an alternative calculation—40% of your high-3 average salary minus 60% of your Social Security benefits.
If you are under 60, your OPM disability retirement benefits can terminate if you:
- Medically recover,
- Are restored to earning capacity, or
- Resume working for the federal service in an equivalent position.
You are restored to earning capacity if your income meets or exceeds 80% of your pre-disability earnings.
If you lose your benefits because you exceed the income limits, they can be reinstated if you dip below $80,000. If you lose your benefits because you medically recover, you may reinstate your benefits if your disability recurs and you do not exceed the earnings limitations.
Is OPM Disability Retirement Considered Earned Income?
Whether your OPM disability retirement benefits are treated as earned income depends on context. Generally, earned income comes up in the context of taxes and continuing to qualify for benefits.
What Is Earned Income for Tax Purposes?
Earned income is a tax-related term, particularly related to the Earned Income Tax Credit (EITC). Individuals with low to moderate income can claim the EITC to reduce their tax burden.
Earned income generally includes:
- Wages, salaries, or tips when your employer withheld taxes,
- Work when your employer did not withhold taxes, like gig work or freelancing,
- Money earned through self-employment,
- Benefits from a union strike,
- Nontaxable combat pay, and
- Disability benefits you receive before you reach the minimum retirement age.
This last category comes into play for federal disability retirement.
When Is OPM Disability Earned Income for Tax Purposes?
Disability benefits are considered earned income if you receive them before you reach the minimum retirement age set by your employer. The federal service sets many different ages related to retirement, including what OPM refers to as the minimum retirement age (MRA). Despite OPM using the same term, your MRA for OPM voluntary or deferred retirement benefits is not the minimum retirement age for disability benefits.
Instead, the IRS defines the minimum retirement age as the youngest you could be and still receive disability benefits if you were not disabled. For OPM disability benefits, this age is 62. Before you turn 62, OPM disability benefits count as earned income.
What Is Earned Income for the Disability Earnings Survey?
OPM regularly checks to see if those receiving disability retirement benefits continue to qualify by sending out a Disability Earnings Survey. If you are under 60, you must show you have not earned 80% or more of your pre-disability earnings.
OPM does not consider disability retirement benefits earned income. If you are required to complete a Disability Earnings Survey, do not report your disability retirement benefits as income.
We Can Help
If you are struggling to understand your options and responsibilities under OPM federal disability, the Federal Employment Law Firm of Aaron D. Wersing PLLC can help. We have years of experience cutting through and simplifying the federal bureaucracy.
Aaron Wersing, Attorney at Law
Aaron Wersing is the founder of the Law Office of Aaron D. Wersing. Mr. Wersing graduated from the Georgia State University College of Law with a Doctorate in Jurisprudence and was the recipient of the CALI Excellence for the Future Award. Mr. Wersing previously attended the University of Georgia, where he received a Bachelor of Business Administration degree in Accounting. Mr. Wersing is an active member of his local community. Mr. Wersing acts as a volunteer attorney with Houston Volunteer Lawyers, the pro bono legal aid organization of the Houston Bar Association. He is also a member of professional legal organizations such as the National Employment Lawyers Association and the American Inns of Court. To reach Aaron for a consultation, please call him at (833) 833-3529.
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