Social security reduction for excess earnings

[Guest Sieve]

Social security benefits received prior to full retirement age are reduced $1 for every $2 of earnings (or is it wages?) above a specific amount. Does anyone know whether elective deferrals are considered wages for this purpsoes?

Example. Employee is age 62 and decides to begin early social security payments while also working part-time. Employee is eligible for employer's 401(k) plan. Employee makes $30,000, and defers $22,000 into the 401(k) plan. Are earnings only considered to be $8,000 for purposes of determining if employee's social security benefits will be reduced? (I assume that earnings will be the full $30,000, whether or not any amounts are deferred into the 401(k) plan, but I can't seem to find a definitive answer.)

[david rigby]

Good Q. Not sure, but my guess is that the test is based on FICA wages.

This Q&A does not address your point exactly: http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/295

[Guest Sieve]

I would agree with your gut feeling, too. You'd think, though, that the question would be answered by soc. sec. in one or the other of its pamphlets, but I cannot find it!

[masteff]

Excess SS benefits are reported on lines 20a and 20b of Form 1040. So, we can look at the worksheet on page 28 of the instructions. On worksheet line 3 we find it uses Form 1040 line 7, which is generally box 1 of Form W-2. So, long story short, the answer is: what appears in box 1 of the W-2, which does not include deferrals. (However if contributions were also made to an IRA, also see Pub 590).

[Guest Sieve]

masteff -- I think this worksheet is to determine how much, if any, of the social security benefits which are paid are subject to income tax, and for that deferrals are not considered (because deferrals are not subject to income tax when deferred). That is a different question than mine, which is the determination of earnings used to calculate the REDUCTION of benefits being paid to those who are not yet full retirement age.

In my example, the question was whether the net of $8,000 will be used to determine if soc. sec. benefits will be reduced, not whether the net of $8,000 will be used to determine if the benefits will be taxed. I don't think the Instructions' worksheet you refer to helps in the former calculation.

[eeyore]

The test is more complicated than just FICA pay, but for an employee with a typical non-governmental job, FICA is what you want. Therefore, the test is on the full $30,000 in your example.

My source is an old Social Security Handbook (circa 2003). This won't have changed, however. The earnings test, with minor exceptions and exceptions for certain governemental cases, is based on "wages for employment covered by Social Security". This in turn is defined as including amounts deferred under a 401(k) plan.

[masteff]

Sorry, totally missed the question.

I agree w/ Eeyore and here's two useful links from the current online version of the Handbook referred to:

http://www.socialsecurity.gov/OP_Home/hand...dbook-1811.html (this is in the section that discusses the earnings test you're referring to)

http://www.socialsecurity.gov/OP_Home/hand...dbook-1313.html (this is in the referenced section that defines wages)

[Guest Sieve]

Thanks for the handbook references. I searched the social security website, but couldn't find the handbook--who'd have thunk I just needed to search for it on Google (duh!) . . .