A recent column discussed how some Federal Employee Retirement System (FERS) annuitants younger than age 62 and who are receiving the Special Retirement Supplement (SRS) annuity may lose part or all of their SRS annuity due to excess earning. The Office of Personnel Management (OPM) determines the amount of the annuitant’s SRS annuity reduction using an “earnings” test that is the same earnings test that the Social Security Administration (SSA) uses to reduce – sometimes entirely – the monthly benefits of some Social Security beneficiaries.
This column discusses the SSA earnings test, including how it is used and which Social Security beneficiaries are affected by it.
Social Security benefits are meant to replace part of the earnings an individual loses because of retirement, disability or death. This means that the amount of Social Security benefits received each year depends in part on whether the individual is fully or partially retired.
In order to determine whether an individual is fully or partially retired, the Social Security Administration (SSA) uses an earnings test (also referred to as the “retirement” test) to:
(1) Measure the extent of an individual’s retirement;
(2) determine the amount, if any, to deducted from the individual’s monthly benefit; and
(3) measure the work activity of family members entitled to benefits on the record of benefits payable to them.
The earnings test applies strictly to earned income. Earned income includes salary/wages and/or net self-employment income. The earnings test does not apply to investment income (interest, dividends, and capital gains), rental income, retirement income (for example, CSRS and FERS annuities, TSP and IRA withdrawals and Social Security retirement benefits) and other income (for example, gambling income and lottery winnings).
The earnings test does not apply if a Social Security beneficiary:
(1) Has reached full retirement age (FRA). FRA depends on the year an individual was born and is summarized in the following table:
Full Retirement Age (FRA) by Year of Birth
(2) Is entitled to benefits because of a disability; (3) lives outside the U.S. and his or her work is not covered by Social Security. In that case, the “foreign work test” applies; and (4) is a divorced spouse of a wage earner whose month of eligibility is prior to the month of divorce.
A limit on earned income from current work also applies to beneficiaries who are younger than FRA. If a beneficiary earns more than the annual exempt amount, then the beneficiary’s Social Security benefits and family member benefits (including spousal and children’s benefits) that are based on the beneficiary’s work record will also be reduced. But if only a family member himself or herself earns more than the exempt amount, only that family member’s benefit is reduced.
What are “excess” earnings?
Each year, the SSA sets a limit (the “exempt” amount) as to much an individual between age 62 and the month he or she becomes FRA can have in earned income without losing any of the Social Security monthly benefit they are currently receiving. If an individual is between age 62 and the year he or she becomes FRA, the individual during 2020 can have in earned income up to $18,240 without losing any of his or her Social Security monthly benefit. For every $2 such an individual has in earned income during 2020 above $18,240, the SSA will withhold $1 of monthly benefits. If an individual reaches his or her FRA during 2020, then between January 1 and the month an individual becomes FRA, the individual can have in earned income up to $48,600 without losing any of his or her Social Security monthly benefit. For every $3 such an individual has in earned income above $48,600 during 2020, the SSA will withhold $1 of benefits. These “exempt” earned income amounts increase somewhat from year to year, and are shown for 2019 and 2020 in the following table:
Maximum Earned Income and Still Receive Full Social Security Benefits
The following example illustrates:
Anthony worked throughout 2019 and continues to work during 2020. He started receiving his Social Security retirement benefit in early 2019 and will reaches FRA on Aug. 18, 2020. The lower exempt amount ($17,240) applied to Anthony’s earned income during 2019. The higher exempt amount ($48,600) applies to Anthony’s earned income from January through July 2020 for calendar year 2020. Starting in August 2020, Anthony’s monthly Social Security retirement benefit is not subject to any “earnings” test.
Note that the SSA gets information about a Social Security beneficiary’s earned income (salary/wages) from his or her Form W-2 (Box 3 – “Social Security wages”) and/or the beneficiary’s net self-employment earnings reported on the individual’s federal income tax return (Schedule SE).
What is the impact of excess earnings?
Excess earnings are charged against the individual’s Social Security benefits. The benefits are deducted starting with the first chargeable month of the tax year and continue for that year until all excess earnings have been charged. If the individual’s retirement benefits are reduced, then the excess earnings reduce the total family benefit. The reduction to family benefits includes the monthly benefit (other than the disability benefit) payable to the individual’s spouse, child or parent, based on the earnings record of the individual. The following examples illustrate:
Example 1. (Under FRA throughout 2020)
Alma applied for her Social Security retirement benefit in January 2020. March 2020 was the first full month that Alma is age 62. Alma, a federal employee, works throughout 2020 and her gross salary is $27,240. Alma’s monthly Social Security retirement benefit is $900. Earnings test result:
($27,240 – $18,240)/2 = $4,500
In this example, $4,500 of Alma’s benefits are withheld for Alma’s first five months of retirement benefits during 2020 (5 months x $900/month = $4,500), meaning that Alma will not receive a Social Security check for the months of March through July, inclusive. Her monthly benefit of $900 is payable for August through December of 2020.
Example 2. (Under FRA throughout 2020 and family benefits are also affected by excess earnings)
Jason is entitled to a Social Security retirement monthly benefit of $2,000. Both Jason’s spouse and son are each entitled to an auxiliary benefit of $1,000 per month. During 2020, Jason (age 64) worked throughout the year and had “excess” earnings of $16,000. These earnings are charged against the total monthly family benefit of $4,000 [$2,000 + (2 x $1,000)]. Therefore, no benefits are payable to Jason, his wife and his son for the period January through April (4 months x $4,000/month = $16,000).
Example 3. (Other family member has excess earnings)
Same facts as Example 2 except Jason is not working during 2020. Rather, Jason’s wife is working. She is receiving a Social Security spousal benefit of $1,000 per month based on Jason’s Social Security record, but has “excess” earnings of $5,000. She therefore will not receive any Social Security benefit for the period January through May (5 months x $1,000/month = $5,000).
Example 4. Attaining FRA in 2020.
Geraldine applied for her Social Security in January 2020 and will attain FRA in July 2020. She is working throughout 2020, earning $103,200. Her earnings for the period January through June 30 are $103,200/2 = $151,600.
($51,600 – $48,600)/3 = $1,000
In this example, $1,000 of Geraldine’s benefits are withheld for the period January through July 2020. If her monthly benefit is over $1,000, then a partial benefit is payable for January and the full benefit would be paid starting in February.
Special monthly test during first year of retirement if under FRA
Many individuals who retire in mid-year or later have already earned more than the annual earnings limit. In the first year of retirement, the “monthly” earnings test can be used so that earnings prior to the month of retirement are not counted toward the annual earnings limit. If there is a month in which an individual is entitled to Social Security benefits and does not earn more than 1/12 of the annual earnings limit, a monthly earnings test is used if that test gives better results than the annual earnings test (illustrated in the four examples above). This means that beginning with the month an individual entitled to a Social Security benefit, the individual can have monthly earned income that does not exceed 1/12 of the annual earnings limit. If the monthly earned income exceeds 1/12 of the annual limit, then benefits are not payable that month unless they are payable under the regular annual earnings test.
The following example illustrates:
Bruce retires from federal service at age 62 on May 31, 2020. He earned $45,000 from January 1 through May 31, 2020 and took on a part-time job starting in June, paying him $1,500 per month. Even though Bruce’s earnings for the year ($45,000 plus (7 months x $1,500/month or) $10,500 equals $55,500 exceeds the $18,240, Bruce will receive his full Social Security benefit for June through December 2020. This is because his $1,500/month earnings in the months after Bruce retired are less than 1/12 of $18,240, or $1,520/month for individuals under FRA throughout 2020. If Bruce earns more than $1,520 per month in June through December, he will not receive a benefit for that month unless it is payable under the regular annual test. Starting in January 2021 and afterwards until the month he reaches his FRA, only the annual earnings limit will apply to Bruce.
Special payments after retirement
After an individual retires, the individual may receive special payments for work he or she performed before the individual started receiving Social Security benefits. Usually these special payments will not affect the individual’s Social Security benefits if they are compensation for work performed before the individual retired.
For federal employees, the following special payments are not counted towards the earnings limit: (1) CSRS and FERS annuity payments; (2) Military retirement pay and private retirement income such as 401(k) retirement plan distributions; (3) Lump-sum payment for unused annual leave; (4) TSP withdrawals; (5) the final one or two paychecks for the last pay periods worked; (6) Voluntary Separation Incentive Pay; and (7) Health care and dependent care FSA reimbursements.