By Donna Clements
How do “special payments” received after starting your Social Security benefits affect the benefit amount? These payments often cause confusion for both the beneficiary and for the Social Security Administration (SSA) regarding their treatment for the retirement earnings limit test. The retirement earnings limit test applies to beneficiaries up to the month they attain full retirement age (FRA), currently age 66.
Retirement Earnings Test Under FRA Throughout 2020
If you are under FRA throughout 2020, the earnings limit is $18,240. If earnings exceed this, then $1 of benefits is withheld for every $2 earned above $18,240.
Retirement Earnings Test if You Attain FRA in 2020
If you reach FRA in 2020, the earnings limit is $48,600 for the time before the month FRA is attained. If earnings exceed this, then $1 of benefits is withheld for every $3 earned above $48,600.
Usually, special payments will not affect Social Security benefits if they are compensation for work done before retirement. The key issue is when the services were performed to earn the payment. The SSA will generally assume that payments are earned when received unless information is provided that shows otherwise. The beneficiary will need to contact the SSA and explain that the payments were earned prior to retirement so they can determine if the payments can be excluded for retirement test purposes. Usually, an explanation from the beneficiary is sufficient for the SSA, but they will sometimes request further explanation or documentation from the employer.
Examples of “special payments” to employees that are excluded from the earnings limit test and may be shown on a W-2 form in the box labeled “Nonqualified Plan” include:
- 401(k) plan and IRA withdrawals
- Accumulated vacation or sick pay
- Capital gains
- Contest or lottery winnings
- Deferred compensation reported on a W-2 form for one year that was earned in a previous year
- Dividends and interest from investments (unless in the brokerage business)
- Payments on account of retirement
- Pensions and retirement pay
- Severance pay
- Sick pay paid more than six months after the month last worked
- Unemployment benefits
- Vacation pay
- Workers’ compensation
Example – Special Payment of Accumulated Vacation Pay
Mr. Jones retired at age 63 and began receiving Social Security retirement benefits in November 2019. In January 2020, he received a check from his employer for $20,000 for accumulated vacation pay he earned prior to November 2019. Since this payment exceeds the earnings limit ($18,240 in 2020), he will need to contact SSA and explain that this is a special payment earned prior to his retirement. The SSA will not count the payment towards the earnings limit for 2020, and he will continue to receive his full Social Security retirement benefit. In this same example, if Mr. Jones did not contact SSA, they would reduce his benefit based on the earnings limitation for people under the full retirement age by $880 ([$20,000 – $18,240] ÷ 2).
Different rules apply to self-employment income. Earnings from self-employment are generally counted when received rather than when earned. A special self-employment exclusion may apply in some cases when self-employment income is received after retirement. Under this exclusion, income from self-employment received after beginning Social Security retirement benefits can be excluded from the retirement earnings limit test if the income was for services performed before retirement. Special rules apply to insurance salespeople and self-employment farm income.
Example — Self-Employed Life Insurance Agent
Mr. Johnson, a self-employed life insurance agent, retired at age 62 in September 2019. In 2020, he receives income from renewal commissions that were sold before September 2019. This service was performed before retirement and would not count as income for the retirement test. If he continues to work and receives renewal commissions related to new sales in 2020, then those commissions do count as income when received for the earnings test. Since Mr. Johnson is under FRA throughout 2020, the earnings limit is $18,240 and his Social Security retirement benefit would only be reduced if his earnings were above this amount.
About the author: Donna Clements
Donna Clements is a Senior Associate at Mercer with over 30 years’ experience in Social Security and Medicare. Mercer’s more than 25,000 employees operate in over 130 countries and help you redefine the world of work, reshape retirement and investment outcomes, and unlock real health and well-being. Visit www.imercer.com/socialsecurity for more information and publications written on these topics.