Mailbag: Non Typical Pension and The Windfall Elimination Provision

answers to social security questions

Question from a reader on what actually qualifies as a pension for purposes of applying the Windfall Elimination Provision.

QUESTION

Hi Devin,

I just listened to your interview on Radical Personal Finance. I was hoping for a more applied discussion, but Joshua couldn’t get off the politics! Ha. Oh, well. You’ll have to do another sometime.

I had a couple topics in mind where I have not found an answer to, and low and behold, you have a couple blog posts on it. Feel free to add these as addendums to the posts if that adds value/clarity to them.

You’re post entitled “What Illinois Teachers Need To Know About Social Security” hit home with me, as I am in the same situation as teachers in Illinois. I work for our University system here in Alaska, and we do not participate in SS taxes, aside from Medicare. Your explanation of WEP and GPO are the best I’ve seen, although the definition of what is and is not considered a “Pension” is one thing I have not found an answer to. My employer currently pays into 2 separate 401(a) accounts, one of which is actually called a “Pension“, but we manage and bear all investment risks in both accounts, so it’s not a guaranteed monthly income like a traditional pension. Am I correct in saying that the SS administration doesn’t care about the type of account, and that I’ll likely be subject to WEP when the time comes (assuming I meet the other conditions for WEP to become applicable to me)?

Secondly, I actually don’t currently meet all three requirements for WEP below as I have not had enough service credits (I think they are called that) to qualify for SS benefits. I’m about 4 years short in other employment that participates in full SS taxes, but I am only 37, so I may choose to earn those some day to fully qualify. But then if I do, I’d be subject to WEP. See the conundrum? If I choose to make up these additional 4 credits, then my SS income may actually be reduced due to the WEP provision. Perhaps the reduction via WEP would not be as much as the increase in benefits I’d qualify for if I did earn these additional 4 credits some time before I retire. Is the option that gives me the most income when retired to eventually suck it up and earn those 4 credits some time over the next 35 years?

I’m married and my wife does fully qualify for SS benefits, so I assume I’d qualify for spousal benefits at the least.

The WEP affects persons who:

-Work(ed) for a state or local government in non-SS-covered employment (this includes Illinois teachers);
-Are entitled to a government pension from that employment (TRS); and
-Are also entitled to a Social Security retirement or disability benefit from SS-covered work.

Any way, feel free to answer if you have the time. I’m one of those DIYers, so I’m not sure I’d ever call for $59, but I’ll definitely share your site and read it in earnest!

ANSWER

Since your question is somewhat complex, I’d like to break it down piece by piece. 

You’re post entitled “What Illinois Teachers Need To Know About Social Security” hit home with me, as I am in the same situation as teachers in Illinois. I work for our University system here in Alaska, and we do not participate in SS taxes, aside from Medicare. Your explanation of WEP and GPO are the best I’ve seen, although the definition of what is and is not considered a “Pension” is one thing I have not found an answer to. My employer currently pays into 2 separate 401(a) accounts, one of which is actually called a “Pension“, but we manage and bear all investment risks in both accounts, so it’s not a guaranteed monthly income like a traditional pension. Am I correct in saying that the SS administration doesn’t care about the type of account, and that I’ll likely be subject to WEP when the time comes (assuming I meet the other conditions for WEP to become applicable to me)?

You are correct in assuming this would be considered a pension for purposes of applying the Windfall Elimination Provision. In the Social Security’s manual there is a page that specifically addresses the subject of a non typical pension in the section RS 00605.364 Determining Pension Applicability. It has the following language: “If employer contributions or employer and employee contributions are used to determine the payment, it is generally a pension subject to the windfall elimination provision (WEP).”

However, in order for this pension to serve as a trigger for the WEP or GPO, you must be “eligible” for this pension. That’s an important distinction because it could mean a few years of a penalty free Social Security benefit while you defer your “eligibility” for your pension (whether lump sum or series of payments). This is the case with many participants in the Optional Retirement Program.

Here’s the language from the same publication referenced above: 

  1. “An individual becomes eligible for a monthly pension or a lump sum in lieu of a monthly pension the first month he or she meets all requirements for payment except stopping work and applying for the payment.
  2. The pension-paying agency, not SSA, determines pension eligibility and entitlement. Some defined benefit plans and defined contribution plans have specific requirements an individual must satisfy to be considered eligible for or entitled to a pension payout (i.e., periodic or lump sum payment). Review the plan’s requirements to determine whether to apply WEP. See appropriate regional issuances for guidance on specific defined contribution plans.”

I’d recommend thoroughly investigating your individual plan documents to determine the definition of eligibility.  It could make sense to file for SS early (before you become “eligible” for your pension), thus gaining a few years of Social Security benefits with no WEP or GPO applied. It’s just impossible to know without more in-depth information. 

Secondly, I actually don’t currently meet all three requirements for WEP below as I have not had enough service credits (I think they are called that) to qualify for SS benefits. I’m about 4 years short in other employment that participates in full SS taxes, but I am only 37, so I may choose to earn those some day to fully qualify. But then if I do, I’d be subject to WEP. See the conundrum? If I choose to make up these additional 4 credits, then my SS income may actually be reduced due to the WEP provision. Perhaps the reduction via WEP would not be as much as the increase in benefits I’d qualify for if I did earn these additional 4 credits some time before I retire. Is the option that gives me the most income when retired to eventually suck it up and earn those 4 credits some time over the next 35 years?

If you don’t earn enough credits to qualify for a Social Security benefit, your SS benefit will be $0. So it’s impossible that your extra SS covered work will reduce this amount. Whether or not it will make sense to work for another year to earn those additional credits will depend on your prior earnings that you paid SS tax on. Here’s a couple of resources that’ll probably help in figuring this out. 

Social Security Credits: How Many Will You Need?

Checking Your Social Security Earnings Record: A Step-By-Step Guide

How to Calculate Social Security Benefits: Step-By-Step

I’m married and my wife does fully qualify for SS benefits, so I assume I’d qualify for spousal benefits at the least.

You probably will not be eligible for a spousal benefit because of your pension. For spousal and survivor benefits, the WEP is not a factor. Instead, they are offset by the much more heinous Government Pension Offset. This Social Security rule would offset your spousal or survivor benefit by 2/3 of the amount of your pension. Ouch! 

The WEP affects persons who:

-Work(ed) for a state or local government in non-SS-covered employment (this includes Illinois teachers);
-Are entitled to a government pension from that employment (TRS); and
-Are also entitled to a Social Security retirement or disability benefit from SS-covered work.

Any way, feel free to answer if you have the time. I’m one of those DIYers, so I’m not sure I’d ever call for $59, but I’ll definitely share your site and read it in earnest!

Ha! That’s OK with with me. I’ve found that lots of DIYers like yourself are fans of my site. It seems a bit contradictory, but I’ve found that there is a correlation with giving free advice and obtaining new business. Even if I don’t get new business, I love Social Security questions! I try to answer them privately as time allows, but if I think the answer will benefit a wide audience, I’ll also publish them on my blog. Send your questions to devin@socialsecurityintelligence.com.

I really appreciate you sharing my material anytime you feel it is appropriate.

If after reading my site you still need individual and specific help, I’m always available for a consultation.

As a final resource, read my article on other ways to find answers to your Social Security questions.

Thanks for the question!