Substantial Gainful Activity (SGA) Reviews: Using Income Averaging to Avoid an SGA Determination
Updated: Jul 1
Description: This article outlines how the Social Security Administration's (SSA) income averaging policy can be used to prevent a beneficiary from losing their benefits due to an apparent, temporary spike in earnings.
Introduction
A key part of the disability definition for the Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) programs is the inability to perform substantial gainful activity (SGA) due to one or more medical conditions.1 In disability determinations, the Social Security Administration (SSA) has long used an SGA monthly earnings test as a presumed showing that the applicant or beneficiary has demonstrated the ability to perform SGA and is not or is no longer disabled. For 2023, the monthly SGA figure is $2,460 for persons who are statutorily blind and $1,470 for all other disabilities. When “countable monthly earnings” exceed the SGA amount for the year being reviewed, SSA will ordinarily deny a Social Security disability application or an SSI application for an adult age 18 or older. The SGA test will not be applied to SSI applications for persons who are statutorily blind.
The SGA earnings test does not apply to SSI beneficiaries, as SSI payments will be gradually reduced as earnings increase. The SGA test, however, will apply to SSDI beneficiaries, including those receiving Childhood Disability Benefits (CDB) (also known as Disabled Adult Child or DAC benefits), and Widow’s or Widower’s disability benefits at key points as they pursue work goals:
It will apply during the 36-month Extended Period of Eligibility (EPE), first to determine when a “benefit cessation month” has occurred and, after a three-month grace period, to determine if a month will be an SSDI payment or nonpayment month.
It will apply after the EPE to determine whether SSDI payments will be terminated due to SGA-level earnings.
For those terminated after the EPE, the SGA earnings test will be used to determine whether the person qualifies for Expedited Reinstatement (EXR) because they are no longer working or are earning at less than the SGA level.
After an EXR application is approved, the SGA earnings test will be used each month of the 24-month Initial Reinstatement Period to determine whether the beneficiary will be entitled to a monthly payment.
Even when countable earnings appear to be more than the SGA level, income averaging can allow an SSA decision maker to find that the person did not perform SGA. The Income Averaging policy requires SSA to use “average countable earnings” in two key instances: at the application stage,2 and, in the case of SSDI beneficiaries, during or after the EPE3 to determine if a “benefit cessation month” has occurred.
This article will focus solely on income averaging and on how it can be used during a review of work activity to avoid the otherwise apparent performance of work at the SGA level. We will describe the criteria for when income averaging can be used and provide examples of how the policy can be applied to SSDI beneficiaries. We will explain how income averaging applies to persons who are employees involved with “wage employment,” with a later reference to the limited circumstances in which averaging applies in self-employment situations. The heart of our discussion, below, and our examples will focus on SSDI beneficiaries with a very limited discussion of issues unique to SSDI and SSI applications. For simplicity’s sake we will use the term SSDI to include those getting CDB or Widow’s/Widower’s disability benefits, as the policies described will be the same for each benefit category.
Monthly Income Averaging is Required, in Some Cases, to Determine if a Work Effort is SGA
The policies governing income averaging are laid out in Social Security’s Program Operations Manual System, POMS DI 10505.015. When averaging applies, all countable monthly earnings within the review period are added up and divided by the number of months within the period. The average countable monthly earnings figure is then compared to the SGA level for the year in question to determine if the person was performing SGA.
Remember: For persons involved in wage employment as employees, when SSA compares earnings to the SGA level for the year being reviewed, it must consider three categories of exclusions to subtract from gross earnings: paid time off (PTO, such as paid vacation, personal, sick, and holiday time),4 impairment related work expenses (IRWEs), and subsidies/special conditions.
When Will Income Averaging Apply?
SSA decision makers will potentially apply income averaging at two key times:
When reviewing an application for SSDI or SSI disability benefits. If an applicant is working and has countable earnings above the SGA-level at this stage, benefits will be denied without considering the person’s medical condition.
During or after the 36-month Extended Period of Eligibility to determine whether an SSDI beneficiary has had a Benefit Cessation Month. Once a benefit cessation month occurs, by virtue of SGA-level countable earnings, benefits continue for that month and the following two months (the grace period). During the remainder of the EPE, countable earnings are reviewed month-by-month (i.e., without averaging) to determine eligibility for an SSDI payment. However, other work incentives (i.e., IRWE, subsidies/special conditions) and PTO can still reduce countable earnings during the remainder of the EPE.
Income averaging will not apply to Expedited Reinstatement (EXR) eligibility determinations (i.e., based on the beneficiary either no longer working or earning at or below the SGA level). Under EXR policy, income averaging will only apply once the person has been reinstated, used up their 24 months of the Initial Reinstatement Period, used up their new Trial Work Period, and are now in a new EPE. Then and only then will income averaging apply to determine if there is a benefit cessation month within or after this new EPE.
Even within each of these two periods (i.e., at application, during the EPE), income averaging only occurs if additional criteria are met:
The employee or self-employed person’s work was continuous, without significant change in work patterns or earnings;
There has not been a change in the SGA level; and
Monthly earnings fluctuate from above to below the SGA threshold.”5
Significant change in work patterns or earnings (POMS DI 10505.015 C):
SSA acknowledges that “there is not an established monetary earnings amount that represents a significant change in earnings or work activity …” It then lists five work issues to help to decide if there was a significant change:
Was there a change in job duties or hours (i.e., changing from part-time to full-time work)?
Did the person change his or her position?
Is this person no longer working at the job?
Did the person have any non-work months?
Did the person have a month with zero countable earnings?
A yes to one or more of these questions will result in SSA looking at two distinct periods of work activity and may prevent SSA from averaging during the former or latter period.
Example of Eleanora – no significant change in work patterns or earnings:
Eleanora, age 22, receives Childhood Disability Benefits based on a learning disability and an anxiety diagnosis. She qualified for CDB at age 19. During 2020 through early 2022, she worked sporadically and managed to work her ninth Trial Work Period month in August 2022. She starts work for the County Mental Health Association in September 2022 as a part-time Janitor’s Assistant employee.
During the last four months of 2022 her countable earnings are as follows (SGA level was $1,350 per month in 2022):
Month | Countable Earnings |
Sept. 2022 | $1,250 |
Oct. 2022 | $1,420 |
Nov. 2022 | $1,300 |
Dec. 2022 | $1,370 |
SSA should be required to average the monthly wages for this work effort because: Eleanora’s work effort was continuous and without significant change in the work patterns or earnings; the SGA level during the period did not change; and her earnings fluctuated from above to below the SGA level.
Her average countable monthly wage during this period was $1,335 which was below the $1,350 SGA level. This means that no benefit cessation month occurred during this period.
Using Trial Work Period months in Eleanora’s averaging period. As noted in POMS DI 10505.015 B.2, averaging is not used to determine if a TWP month occurred, since as a general rule other work incentives do not apply during the TWP. However, if the criteria for a continuous work effort are met, SSA will likely use the TWP months as part of the averaging period. In Eleanora’s case, let’s assume she was hired in May and had countable earnings in the May through August period as follows:
Month | Countable Earnings |
May 2022 | $1,340 |
June 2022 | $1,450 |
July 2022 | $1,380 |
August 2022 | $1,370 |
Using these revised facts, since these months were clearly part of a continuous work effort, with no significant change in the work patterns or earnings, SSA will include these four TWP months in an eight-month averaging period (May through December 2022). Now, the average for this eight-month period is $1,360, just more than the SGA level. While SSA will not consider any of these four TWP months a cessation month, we can expect that SSA will, using averaging principles, treat September 2022 as a cessation month even though her countable earnings were below the SGA level that month. See POMS DI 10505.015 B.2 and C.1.a & b.6
Avoiding this SGA finding with just a few exclusions from earnings. Like the examples in the referenced POMS, we have Eleanora subject to an SGA finding and a benefit cessation month with average countable earnings just above the SGA level for 2022. If, for example, we could come up with just $15 per month of exclusions during the averaging period, we would negate the SGA finding by bringing the average countable income below the SGA level. Let’s look at how we could easily decrease Eleanora’s countable income.
Paid time off (PTO) exclusions: Always start with this often overlooked category of exclusion. It was the focus of our last Deeper Dive article.7
Eleanora has a learning disability: If she received job coaching services during any part of this work effort this could be the basis of a subsidy or special condition.
Eleanora has an anxiety diagnosis: This could also support the need for a job coach. Also, if she incurs any out-of-pocket expenses for therapy sessions or for medication, including co-pays, this could qualify as an impairment related work expense (IRWE).
Note: PTO, IRWEs, and subsidies/special conditions cannot be used to reduce countable earnings when determining whether a beneficiary has worked a TWP month. However, when TWP months are used as part of a continuous period of work, as above, to determine whether a benefit cessation month occurred those exclusions from earnings will be applied to the TWP months used for averaging.
Example of Teoscar – significant change in work patterns or earnings
Teoscar, age 42, qualified for SSDI in 2017 due to his multiple sclerosis disability. Since he could no longer do his past carpentry work, he went to college to pursue a degree in accounting, graduating with a four-year degree in May 2021. Based on summer jobs at an accounting firm and some additional part-time work at that firm following graduation, all as an employee, he completed his Trial Work Period in December 2021. He continued to work at the firm during 2022, increasing his hours and pay slightly during the first half of the year and taking on more responsibilities and more hours with a pay increase in the second half of 2022. His countable earnings for 2022 were as follows (SGA level was $1,350 for 2022):
Month | Countable Earnings |
Jan 2022 | $1,200 |
Feb. 2022 | $1,250 |
March 2022 | $1,180 |
April 2022 | $1,300 |
May 2022 | $1,270 |
June 2022 | $1,340 |
July 2022 | $2,000 |
Aug. 2022 | $2,000 |
Sept. 2022 | $2,000 |
Oct. 2022 | $2,400 |
Nov. 2022 | $2,400 |
Dec. 2022 | $2,400 |
The average monthly earnings for the year were $1,728. At first glance, we might conclude this was SGA for the entire period as he continued to work for the same employer and did similar work, with earnings fluctuating from below to above the SGA level. This would be inaccurate as Teoscar had a significant change in work patterns and earnings.
Taking a closer look at the changes that occurred in July, SSA should treat January to June and July to December as two distinct periods when evaluating earnings against the SGA level for 2022. Looking at the POMS criteria for significant change in work patterns or earnings, the following key changes dictate that SSA not treat the first six months and second six months as a continuous period for averaging purposes: Teoscar took on more duties, worked more hours, and had a higher pay rate during the last six months of the year. POMS DI 10505.015 C.
Technically, neither of these six-month periods qualifies for averaging when we treat them separately since averaging is only used when earnings fluctuate, with some months above SGA and some at the SGA level or below. The first six months are all below, the last six months are all above the SGA level. July 2022 will be the benefit cessation month with benefits paid during July, August, and September (the three-month grace period). October, November, and December 2022 will be the 10th, 11th, and 12th months of Teoscar’s 36-month EPE and will be nonpayment months since he is clearly earning above the SGA level in those months.
The Same Principles Apply When Averaging is Used to Make an SGA Determination at the Application Stage
All the discussion above will be relevant to an evaluation of countable earnings that occurs when a person applies for benefits. Keep in mind that at the application stage SGA is a factor for both SSDI and SSI applications (other than SSI applications involving statutory blindness). And, as explained in the next section, averaging will be a factor for self-employed applicants who are subject to the three alternative tests for SGA determinations. Since we understand that very few of our readers are likely to be involved in applications or appeals following the denial of an application, our discussion of disability applications and SGA will be limited.
Here are just a few examples of how an SGA determination and averaging can play out differently at the application stage:
If averaging is appropriate and it results in a finding of non SGA-level work during relevant months leading up to a decision on disability, then the SSA decision maker must decide the case based on the medical and, in some cases, vocational evidence.
Even if there is a finding of earnings above the SGA level, if that work ceased prior to the final decision, it might only mean that SSA will consider whether to grant a later onset of disability if it awards benefits.
However, if there is a finding of SGA-level earnings and those earnings are ongoing, at the time the application is reviewed, that would be the basis for an outright denial subject of course to appeal rights.
The co-authors believe there is tremendous value to advocacy at the application level and at the administrative hearing level when SGA determinations are involved. In fact, both of us dedicated significant portions of our time during the late 1980s and throughout the 1990s working on these issues. If any of our readers can dedicate time assisting with applications or appeals when SGA is a deciding issue, we believe this article can provide a foundation for your advocacy as it relates to income averaging.
Similarly, our previous article on the use of paid time off to reduce countable earnings can be a tool to support that work.
A Brief Comment on Income Averaging and Self-Employment
In our discussion, above, we have not discussed income averaging in the context of self-employment as we believe doing so may very likely confuse the reader. When an individual, who is not statutorily blind, has received 24 or fewer monthly SSDI payments following approval of an SSDI application, SSA uses three tests to make a self-employment SGA determination, POMS DI 10510.010 B:
Significant services and substantial income – SSA will determine the individual’s work activity is SGA if the individual renders services that are significant to the operation of the business and if the individual receives from it substantial income; or
Comparability of work activity – SSA will determine the individual's work activity is SGA if, in terms of all relevant factors such as hours, skills, energy output, efficiency, duties, and responsibilities, it is comparable to that of unimpaired individuals in the same community engaged in the same or similar businesses as their means of livelihood; or
Worth of work activity – SSA will determine the individual's work activity is SGA if, although not comparable to that of unimpaired individuals, it is clearly worth more than the SGA amount for the year in question when considered in terms of its effect on the business, or when compared to the salary an owner would pay to an employee for such duties in that business setting.
See also, POMS DI 10510.015 and DI 10510.020 for additional details on how these three tests are implemented by SSA. Within those first 24 months, a beneficiary could exhaust their nine-month TWP, begin the EPE, and have a cessation month.
After an individual receives 24 monthly SSDI payments, the regular countable income provisions apply, “if the purpose of the evaluation is to determine whether disability has ceased due to SGA [i.e., the beneficiary had a cessation month].” POMS DI 10510.010 A and C.1. This will be the only time SSA uses the countable income test for the non-blind self-employed person. SSA instructs its reviewers to determine whether monthly countable earnings average more than the SGA level (requiring an SGA finding), or if average monthly countable earnings are equal to or below the SGA level (requiring a finding of no SGA). POMS DI 10510.010 C.2; 20 CFR 404.1574a(e)(3).
Averaging is also used for test one of the three alternative tests (“significant services and substantial income”) when determining if income is “substantial,” POMS DI 10510.015 C.1, except in two circumstances:
Averaging will not be used during the EPE, after the benefit cessation month and grace period, to determine month-by-month whether the person will be eligible or not for an SSDI payment; and
Averaging will not be used during the EXR’s 24-month Initial Reinstatement Period (IRP) to determine month-by-month eligibility for an SSDI payment.
The three tests will apply to SGA determinations during the EPE and IRP, but averaging cannot be used as SGA determinations must be made for each separate month.
For self-employed beneficiaries who are statutorily blind, SSA will never use the three alternative tests to determine SGA. Rather, SSA will use the countable income test to determine SGA at every decision point discussed above where SGA is a factor.
Averaging, however, will only apply to the statutorily blind when SSA is reviewing an application for benefits or determining whether a benefits cessation month occurred during or after the EPE. POMS DI 13010.135 C.
Conclusion
For many of the beneficiaries served by our readers, the movement from dependence on benefits to financial independence through work frequently involves one or multiple work efforts. Often, the beneficiary goes through periods where wages go up and down rather than remaining the same for months on end. For SSDI beneficiaries (the focus of this article), the principles of income averaging provide just one tool in the benefits counselor’s toolkit to help beneficiaries avoid an SGA-based loss of SSDI payments until the beneficiary is in a better position to move forward without that source of income.
Of course, any individual benefits counseling case involves the need for multiple tools and strategies as you seek to help the beneficiary toward their goal – the maximum amount of financial independence possible. Knowing that, we continue to provide our readers with additional tools to help support the goals of the beneficiaries on your caseloads. As always, we continue to look for issues where a more in-depth analysis than is presently available (i.e., a “deeper dive”) would best serve our readers. For that reason, we plan to devote our next Deeper Dive to the issue of Unsuccessful Work Attempts as a policy that allows SSA to ignore SGA-level earnings when work stops or is reduced to a non-SGA level in six months or less for reasons related to the beneficiary’s disability.
As always, please let us know of your successes or challenges as you seek to use the information in these articles in your day-to-day work.
Dated: February 23, 2023
Authors: James R. Sheldon, JD (Board Member), Disability Consultant and Edwin J. Lopez-Soto, JD (NABWIS member), Extension Faculty, Cornell’s Yan Tan Institute (YTI)
Footnotes:
1 42 US Code 423(d). For information on how disability is determined, see Disability, SSA Pub. No. 05-10029 (August 2022).
2 As we note below, if self-employment is involved at the application stage SSA will use one of three alternative tests to determine whether the applicant has performed SGA, with income averaging relevant to one of those tests.
3 Some SSDI beneficiaries will not experience a benefit cessation month during the 36-month EPE. For them, averaging principles will apply after the EPE to determine if a cessation month has occurred.
4 See Deeper Dive Article #5, Substantial Gainful Activity Determinations Using Paid Time Off as Exclusions When Determining Countable Earnings.
6 A retired SSA employee told us that the outcome in Eleanor’s case (treating a non-SGA month as a cessation month based on averaging) is something she never saw happen after an SSA work review and doubts that it would happen. However, since the two examples in the referenced POMS do just that, our example reaches the same result.
7 See link in note 4, above.
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