Last Updated August 2023
States typically disregard a portion of a TANF recipient’s earned income before counting the remainder of the earnings in determining the family’s monthly benefit amount. These state earnings disregard policies help to make work pay by allowing working TANF families to “keep” more of their earnings and not cutting off benefits immediately when parents go to work or increase their earnings.
While nearly all states have used their flexibility under TANF to expand on the limited disregard of earnings allowed under TANF’s predecessor program, Aid to Dependent Children (AFDC), there may be new opportunities to improve upon or redesign state approaches. In considering changes to your state’s treatment of earnings of TANF recipients, first and foremost, is the question of how an earnings disregard policy change fits into your goals for TANF program improvements and your spending priorities. Disregarding more earnings has a fiscal cost and can represent spending more dollars on families that have earnings, by allowing them to stay on cash assistance longer and by getting more benefits each month. While this approach supports working families, it can compete with other spending priorities such as increasing benefit levels or expanding access to cash assistance to help to families with no other income. As with all policies with fiscal impacts, there are trade-offs to consider depending on funding availability and other policy priorities.
Key Points Summarized:
- What your policy looks like now may guide whether and how you would propose to shape an expansion to or change from your current approach. For example, if you already disregard a portion for work expenses or 100% of the first several months of earnings, you would not want to take a less generous approach to those aspects as part of a redesign.
- How does your earnings disregard interact with other eligibility computation policies such as net or gross income limits and budgeting methodology to lead to an eligibility exit level?
- What do you want the eligibility exit level to be and what are your investment priorities? A higher disregard can represent spending more dollars on families that have earnings at the expense of increasing benefit levels or providing more help to families with no other income.
- Keeping the design simple delivers the clearest message that work pays and allows for greater ease of administration. There may be an opportunity to tweak and improve more complicated earnings disregard structures while generally maintaining the same approach.
Background:
Earnings disregard policies and how they relate to eligibility exit levels
A state’s earnings disregard policy plays a key role in shaping eligibility income cut-off or exit levels, that is, the amount of earnings that lead to a TANF family being over-income and losing benefits. Other factors shaping exit levels include the state’s benefit levels and the state’s approach to ongoing eligibility and budgeting of income (which sometimes includes various net or gross eligibility standard tests). These factors interact with the earnings disregards to result in a state’s eligibility cut-off level. This means that states using the same earnings disregard policy – for example, disregarding half of all earnings – could have very different eligibility exit levels because of these other factors
What level of earnings should result in loss of eligibility, that is, the TANF earnings exit level, is a key consideration in designing earnings disregard policies.
A state’s earning disregard policy and budgeting methodology also shapes the amount of the benefit that a working TANF family receives. The design also controls how benefits ramp down over time or due to increases in earnings, that is, whether there is a smooth glide path of benefit reductions, gradual steps down, or a cliff.
Understanding your state’s earnings disregard and eligibility limit policies
The best way to understand how your state treats earnings of TANF recipients (or applicants) is to look at your state policies, typically in the TANF eligibility manual. Information on earnings disregards and benefit computation may also be in the state TANF plan or in state information materials.
You can also look up the information for your state and compare to other states using the Welfare Rules Database (WRD) which compiles 50-state information on a range of TANF eligibility policies: The Welfare Rules Database (urban.org). These include earnings disregards, state approaches to budgeting of countable income, relevant standards used for eligibility, and resulting eligibility exit levels. The key WRD tables to understand your state’s approaches here, and how they compare to other states are:
- Table II.A.1. Earned Income Disregards for Benefit Computation
- Table IV.A.6. Maximum Income for Ongoing Eligibility for a Family of Three
- Table II.A.2. Benefit Determination Policies
- Table II.A.3. Standards for Determining Benefits
The WRD also includes other tables about various aspects of financial eligibility determinations including ones relevant to disregards and eligibility standards for applicants.
The document link in the right column includes a summary of various state approaches to earned income disregards.
Related issues to consider:
There are a number of relevant considerations in making policy design choices:
- Interaction with other eligibility cut-off policies: Some states use one or more gross or net income limits as part of determining initial or even ongoing eligibility. These complex eligibility schemes may be holdovers from a pre-TANF era, having not been revisited. Sometimes a state’s gross income standard is so high that it would not make a difference as someone with earnings at that level would never be eligible for benefits after the budgeting process and thus could be easily eliminated. Other states may have net or gross income limits that can block initial or ongoing eligibility for a family that would otherwise qualify for a benefit but for failing this preliminary step. A state’s net or gross income limit can thus undercut a state’s approach to treatment of earnings by making families ineligible at a lower level of earnings than would otherwise result from the benefit computation playing out. All to say, any redesign of the earnings disregard policy should also consider how other cut-offs interact with it, and whether there is an opportunity to simplify and eliminate unnecessary or unreasonably low eligibility standards.
- Intersection with time limits: Allowing a working family to continue to receive reduced TANF benefits until income reaches a higher level, such as the federal poverty level, can mean that a family is likely using months of the TANF time clock at a time when the family has earnings. A few states address this by “stopping the clock” when a family is working a certain number of hours; for example, Illinois stops the clock when a parent is working 30 hours a week, an approach that pairs well with the state’s relatively high earnings disregard and eligibility exit level.[1] But most states, even with high disregards, have not chosen this clock stopping approach, and you may not be able to get it included as part of an earnings disregard package.
- Intersection with work participation rate: Keeping working families on cash assistance longer, by disregarding more earnings, can help a state achieve a higher work participation rate as these families would be counted as participating in work (if they work sufficient hours). In the wake of the Deficit Reduction Act of 2005, which made work rates harder for states to meet, a number of states expanded their earnings disregard policies, or added some initial period of disregarding 100% earnings largely for this reason. TANF caseloads have declined so significantly since 2005, that most states already have very low target work rates and are not in need of a work rate boost. In 2020, no state failed to meet the work rate that applies to all families and more than 20 states have a WPR target rate of zero.
- State’s approach to a post-TANF transitional benefits: By expanding earnings disregardsand ramping benefits down gradually, states are in effect bolstering a gradual transition off cash assistance. In addition, about a quarter of states provide a transitional cash assistance benefit for a period after families leave TANF due to earnings. State approaches for types of post-TANF transitional benefits vary in both amount and duration. For example, Utah provides a full monthly benefit for 2 months after exit and a half of a monthly benefit for the third month as its approach to transitional benefits. For another example, Kansas provides $50 a month for five months. Earnings disregard policies and post-TANF transitional benefits designs should be considered in relation to each other. For example, a state that uses an earnings disregard approach that ramps benefits down and does not end TANF until earnings reach the federal poverty line may choose not to provide an additional cash transitional benefit. But for a state that cuts benefits off at a much lower level of earnings, an additional post-TANF transitional cash benefit may be an important part of supporting stability upon TANF exit.
Note on policies for applicants: Some states use the same eligibility and disregard policies for applicants that the state uses for recipients. Many states, however, use different policies for those who are applying for TANF; these may include a different earnings disregard policy for determining initial eligibility or net or gross income standards that applicants must meet. The result can be that an applicant is denied benefits based on a level of earnings that would not result in ineligibility for a recipient. However, once an applicant with earnings is determined eligible, then the benefit amounts would be computed using recipient earnings disregards.
Advocates promoting improved earnings disregard policies should consider how their state treats earnings of applicants and whether to seek changes in those policies as well. A state might choose to use lower eligibility thresholds or more limited earnings disregards for new applicants, particularly a state that disregards a large share of earnings and may not want to open access to broad numbers of working families. Even so, a state with low eligibility limits for applicants may want to consider expanding its earnings disregards and initial eligibility standards so as to open access at least to very poor families with earnings.
[1] For more information, see John M. Bouman, Margaret Stapleton, and Deb McKee, “Time Limits, Employment, and State Flexibility in TANF Programming: How States Can Use Time Limits and Earnings Disregards to Support Employment Goals, Preserve Flexibility, and Meet Stricter Federal Participation Requirements,” Clearinghouse Review, National Center on Poverty Law, September 2003.