New Here? Get the Free Newsletter

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning. Join over 16,000 email subscribers:

Articles are published Monday and Friday. You can unsubscribe at any time.

What Types of Pensions Trigger Social Security’s Windfall Elimination Provision (WEP)?

A reader writes in, asking:

“I work in a job where I do not pay social security taxes. I heard second hand through a coworker that our HR department says we’ll be affected by social security’s “windfall elimination provision.” I thought that only applied when you get an actual pension. My employer provides a 401-K plan but not a traditional pension. Is this something I need to be thinking about?”

As a bit of background for those unfamiliar with the topic: the Windfall Elimination Provision (WEP) applies when you receive a pension from employment that was not covered by Social Security (i.e., work for which you didn’t have to pay Social Security tax). The effect of the WEP is to reduce the size of your primary insurance amount, thereby reducing your retirement benefit, as well as the your spouse’s or children’s benefit on your work record.*

So for example if you work 20 years in one profession (in which you do pay Social Security taxes) and 20 years in another profession in which you don’t pay Social Security taxes (and from which you receive a pension), the WEP will reduce the Social Security benefit you’ll ultimately receive from the work you did that was covered by Social Security.

You can find the general rules regarding the Windfall Elimination Provsion here and exceptions to those rules here. But what we’re concerned with at the moment is what is considered to be a pension for WEP purposes.

What Counts as a Pension?

With regard to what, exactly, counts as a pension for WEP purposes, the rules and exceptions can be found here.

The general rule is that:

  • If the amount you ultimately receive from the plan is based only on employee payments (plus interest/dividends) then the plan only counts as a pension subject to WEP if it is the employer’s primary retirement plan.
  • If the amount you ultimately receive from the plan is based on employer payments (or a combination of employee and employer payments), then it will generally be considered a pension subject to WEP.

There are special rules for one-time payments from the plan:

  • Withdrawals of the employee’s own contributions and interest made before the employee is eligible to receive a pension are not pensions for WEP purposes if the employee forfeits all rights to the pension.
  • Withdrawals of the employee’s own contributions and interest made after the employee is eligible to receive a pension are considered a lump-sum pension for WEP purposes.
  • Any separation payment or withdrawal consisting of both employer and employee contributions is a pension for WEP purposes, whether made before or after the employee is eligible to receive a pension.

But again, all of the above is only relevant if the possibly-a-pension-retirement-plan is from employment you did for which you did not pay Social Security tax. If you paid Social Security tax for the work in question, the WEP does not apply.

*The WEP only applies while you’re still alive. When you die, your primary insurance amount is recalculated without the effect of the WEP, so if anybody else is receiving benefits on your work record at that time (e.g., your widow/widower and/or children), their benefit will increase.

Want to Learn More about Social Security? Pick Up a Copy of My Book:

Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less
Topics Covered in the Book:
  • How retirement benefits, spousal benefits, and widow(er) benefits are calculated,
  • How to decide the best age to claim your benefit,
  • How Social Security benefits are taxed and how that affects tax planning,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"An excellent review of various facts and decision-making components associated with the Social Security benefits. The book provides a lot of very useful information within small space."
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. I am not a financial or investment advisor, and the information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2017 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy