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A Warning to FERS Annuitants Who Receive a Ministerial Housing Allowance as Compensation from an Employer

Nov 16, 2020 | Disability Benefits Law, Federal Disability Retirement

By Peter Casciano, Esq.

Over the course of representing hundreds of applicants on FERS disability retirement claims, our firm occasionally comes across cases that serve as cautionary tales for FERS annuitants. One of those cautionary tales involves annuitants who receive a Ministerial Housing Allowance as compensation.

Even though the Internal Revenue Service (IRS) does not consider the housing allowance taxable income, OPM will count the housing allowance as compensation to determine if the annuitant exceeded the 80% earnings limitation for FERS disability retirement annuitants under 5 USC § 8337(d). If you exceed the 80% earning limitation, not only will OPM retroactively terminate your annuity and seek repayment of the overpayment, OPM will also retroactively terminate your Federal Employees Health Benefits (FEHB) coverage, and OPM has no obligation to notify you of the termination in time for you to have an opportunity to convert coverage.

Minister’s Compensation and Housing Allowance Under FERS

Our client was previously awarded a disability retirement from his federal position following a serious medical condition. As with most FERS disability retirements, our client was granted continuous medical and life insurance coverage through the FEHB and Federal Employees’ Group Life Insurance (FEGLI) programs.

After being awarded, our client began work as a chaplain, which paid him both a small salary and a clergyman’s housing allowance. The housing allowance comprised over 70% of our client’s compensation. When the housing allowance was added to his salary, our client’s total income minimally exceeded the 80% earnings limitation for FERS annuitants. However, our client did not know that his ministerial housing allowance would be counted as income towards the 80% earnings limitation. Our client made this mistake because the IRS does not count the allowance as taxable income. As explained in IRS Publication 517 (2019), a person who performs ministerial services as an employee is able to exclude from his gross income a housing allowance provided as compensation by his employer. Moreover, the housing allowance is designated separately from one’s earned wages in a W-2 Wage and Tax Statement, which further misleads employees about whether this allowance would be counted as income by OPM.

Unfortunately, while the IRS excludes a ministerial housing allowance from calculating a taxpayer’s gross income, OPM does not. OPM includes such an allowance when calculating a FERS annuitant’s earnings under 5 USC § 8337(d). In fact, OPM’s decision to terminate benefits pursuant to 5 USC § 8337(d) based on a housing allowance has been challenged and was upheld by both the Merit Systems Protection Board and the Federal Circuit. See Deutsch v OPM, 60 M.S.P.R. 42, MSPB Docket No. DA831M2046711 (November 26, 1993); and Deutsch v OPM, 59 F.3d 182 (1995).

In our client’s case, OPM retroactively terminated our client’s FERS annuity payments and calculated a substantial overpayment for 10 months that he was required to repay. Fortunately, we were successful in convincing OPM to waive the overpayment. Based on our filing, OPM found that our client was without fault in causing the overpayment and that he was not able to repay the overpayment. Thus, OPM found that it was against equity and good conscience to collect the overpayment.

Sadly, the waiver of overpayment did not resolve the retroactive termination of our client’s health insurance coverage as explained in more detail below.

Retroactive Termination of FERS Disability Retirement Benefits and Federal Employees Health Benefits

When OPM notified our client that he exceeded his 80% earnings limitation, OPM also notified our client that his FEHB medical coverage was retroactively terminated. Under federal regulations, to be eligible for conversion, a FERS annuitant who is terminated has only a short period of time to file for conversion. The upshot of the complex regulation is that if an annuitant is prevented by causes beyond his control from submitting a timely request within 91 days after the date his enrollment terminated, the annuitant is allowed to request conversion within 6 months after his group eligibility ends.

In this case, our client’s FEHB medical coverage was terminated close to ten months before OPM notified our client of the termination. Thus it was impossible for our client to request conversion with 6 months of his termination. Thus, OPM retroactively terminated his FEHB medical coverage without giving him any opportunity to file for conversion of coverage. OPM’s retroactive termination of his FEHB medical insurance coverage left him with no medical insurance for those ten months and no opportunity to obtain coverage for that period of time. This created a serious financial hardship for our client because during those ten months our client believed in good faith that he had medical insurance and relied on this coverage for payment of substantial medical bills. In fact, between the date of termination and the date almost 10 months later that OPM notified our client of the termination of his FEHB medical insurance, our client’s insurance carrier paid over $20,000.00 towards medical claims and prescriptions.

Our firm is challenging OPM’s action in federal court, alleging a violation of the Administrative Procedure Act, as well as a violation of our client’s Fifth Amendment Right to Procedural Due Process.

For the reasons set forth above, it is important for FERS annuitants who perform ministerial services to understand that any ministerial housing allowance received will be considered by OPM as earnings in determining whether the annuitant’s wages exceeded the 80% earnings limitation.

We strongly recommend that you contact experienced counsel to help you navigate the FERS disability retirement process. At Andalman & Flynn, we have helped workers and FERS annuitants through this process for over 20 years. We know how to maximize your chances of winning and retaining your disability retirement benefits.

About Andalman & Flynn, P.C.: Founded in 1998 in downtown Silver Spring, Maryland, Andalman & Flynn has forged a distinguished reputation for legal excellence. The firm represents individuals seeking disability benefits throughout the country and practices family law throughout Maryland and the District of Columbia. The firm focuses on cases that impact the rights of everyone, and are there for clients when responsive legal help is most critical. The firm has provided legal analysis on national and local television and radio, and their attorneys often testify before legislative bodies and are routinely invited to contribute to prominent legal publications. For more information about Andalman & Flynn, please visit the website at https://andalmanflynn.com/ or call 301.563.6685.