Many individuals know that if they continue to work while collecting Social Security benefits before full retirement age, their benefits may be reduced if their earnings exceed an annual limit.
If you need a refresher, watch my video on How Working Affects Your Social Security Benefit.
But what happens if you retire and then receive payments from a former employer in the form of severance pay, bonuses, sick leave or unused vacation days?
In most cases, such payments are considered “special payments” and will not be counted against the Social Security income limit.
The Social Security Administration has a great piece on this titled Special Payments After Retirement. The opening paragraph makes it pretty clear. “After you retire, you may receive payments for work you did before you started getting Social Security benefits. Usually, those payments will not affect your Social Security benefit if they are for work done before you retired.”
The Administration also has great information on their website about special payments. In the POMS Manual they have a page titled How Major Types of Remuneration Are Treated that lists 88 different types of income and whether it should or should not be counted against the Social Security income limit.
Separate Your Earnings
Why do you need to know this? In many cases, when you retire, your former employer may lump your severance pay or other non-countable income in with your regular wages on your Form W2. Without knowing the difference, the Social Security Administration will apply all earnings towards the income limit. This means that a distribution of accumulated sick time may put you over the allowable earnings amount. The result would most likely be an Overpayment Notice from the Social Security Administration.
The key takeaway? Not all earnings are created equal. If you’re facing a reduction in benefits because you made too much, make sure all of the earnings should be counted.