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Windfall Elimination Provision

What is WEP?

Social secruity

Social secruity (Photo credit: SalFalko)

WEP, in Social Security parlance, is the Windfall Elimination Provision.  So, if that’s all you wanted to know, you’re good to go.

You wanted more though, right?  Okay, here we go:

WEP is the provision of the Social Security rules that provides for reduction of your Social Security benefit when you are receiving a pension from a job that was not covered by Social Security.  Usually these jobs are government-related, including state and federal government employees, teachers, and the like.  In addition, pensions from work done in other countries would also fit into this category, as long as the work was not covered by US Social Security.

How it Works

When your Social Security benefit is calculated, if you’ll recall from this earlier article on benefit calculation, your Average Indexed Monthly Earnings (AIME) factor is divided into three portions, bounded by bend points.  The first bend point is multiplied by 90% – but if WEP applies, the 90% multiplier is reduced by as much as 50%.  The reduction amount can be reduced or eliminated by two additional factors – the amount of your pension from non-covered work, and the number of years of substantial earnings you’ve accrued in your career in jobs covered by Social Security.

If your benefit is fully impacted by WEP, this means that for 2013 your benefit will be reduced by 50% of the first bend point, which is $791 – so the maximum reduction via WEP in 2013 is $395.50.

The reductions apply to your own PIA which then applies to your own retirement benefit, as well as to any beneficiary or spousal benefits that are calculated on your PIA.  If you’re receiving a Spousal or Survivor Benefit based on someone else’s record, WEP does not apply.  Additionally, if the pension you’re receiving is from someone else’s work – as in, if you’re receiving a survivor’s pension based upon your spouse’s government-related job – WEP does not apply to your Social Security benefits.

Now let’s review the ways that the WEP reduction can be reduced or eliminated from the maximum 50%.

Substantial Earnings

When you have worked in a Social Security-covered job for more than 20 years and the earnings are considered “substantial” by Social Security definition, these earnings can begin to reduce the WEP reduction factor from the maximum.  For each year greater than 20 that you’ve had substantial earnings, the 50% factor is reduced by 5%.  So if you have had substantial earnings for 30 or more years, the WEP reduction factor is completely eliminated.

Amount of Your non-SS Pension

The other way that WEP impact can be reduced from the maximum is based on the amount of your pension from the non-Social Security-covered job.  The total dollar amount of WEP reduction is limited to 50% of the total dollars being received from the non-SS-covered job.  So if your pension from this non-SS-covered job is less than $791 (in 2013), then the reduction for WEP will not be at the maximum.

Let’s say your pension from non-SS-covered work is $400 per month.  As a result of the maximum cap, your Social Security benefit will only be reduced by $200 (50% of your pension amount).

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How to Reduce or Eliminate Windfall Elimination Provision Impact to Your Social Security Benefit

Basic WEP encryption mechanism

In prior articles we have discussed the Windfall Elimination Provision (WEP) which has the effect of reducing a portion of your Social Security retirement benefit if you’ve worked in a job that was not covered by Social Security which also provides a pension.  This article deals with two ways that you can remove the impact of the WEP from your benefit – neither of which is simple, and neither of which can be done after you’ve retired.

The two methods are:

  1. Add years of “substantial earnings” to your record
  2. Take a lump sum distribution from your pension before you are eligible to receive the pension.

Adding Substantial Earnings Years

If you have the opportunity to work in a job that is covered by Social Security withholding and you have “substantial earnings” from that job, each year that you work in this SS-covered job adds to your ability to begin eliminating the WEP impact.

This is not an insignificant undertaking.  Substantial earnings for 2013 is defined as $21,075 or more in earnings covered by Social Security, and this figure is adjusted annually by the Cost-of-Living increases.  Plus, it doesn’t make a difference on your WEP impact until you’ve added 21 or more years of substantial covered earnings to your record.

The good news is that if you have 30 or more years of substantial earnings in a Social Security-covered job, you’ll eliminate the WEP impact altogether.

Taking a Lump Sum Distribution of Your Pension

If you don’t have enough years with substantial earnings, there is another way that you can eliminate the impact of WEP, which again isn’t an insignificant thing to do.  If you have the ability to take a lump-sum distribution of your non-covered pension before you are eligible to receive the pension, you can eliminate WEP impact altogether.  By doing this you’ll forfeit any future pension that you might have received from the non-covered employer.

The timing on this has to be right – if you are eligible for the pension when you take the lump sum distribution, you’ll still have WEP impact.

For example, John is a teacher in a state in which teachers are not covered by Social Security and he works there long enough to build up a pension.  He decides to leave that state and go to another state where teachers are covered by Social Security.  He’s young enough that he is not yet eligible for the pension in the first state.  If he withdraws the entire pension from the first state and thereby forfeits all future claim to that pension, he will no longer have future WEP impact on his Social Security.  That is, unless he goes back to another non-Social-Security-covered job at a later point in his life.

Important points

It’s important to note that WEP impact only occurs if the pension is considered to be the primary retirement plan.  This is regardless of whether the pension is funded by the employee only, by a combination of employer and employee contributions, or solely by the employer.

If the plan is considered to be a supplemental plan (for example, as a 403(b) plan might be to a regular pension plan), then if the source of funds is solely from the employee, this plan will not produce a WEP impact.  In a case like this, the primary plan would likely produce the WEP impact anyhow, unless one of the options listed above is used to eliminate the impact.

In addition, payments from optional savings plans, such as the TSP (Thrift Savings Plan) for CSRS employees, are not considered as WEP-impacting pension payments.

If there are multiple sources of pension from the non-covered employer, only the applicable pension for WEP impact is considered when calculating the maximum WEP impact. This is because WEP impact can’t be more than 1/2 of the applicable pension amount.

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Substantial Earnings With Regard to WEP

Windfall

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If you’re subject to the Windfall Elimination Provision (WEP), your Social Security retirement benefit can be reduced in the first bend point to as little as 40% from the normal 90% rate.  The WEP applies if you worked in a job that did not require Social Security withholding in addition to a job that was subject to Social Security withholding.

However, if you’ve worked in the Social Security-covered job for a significant amount of time and the amount of earnings you received there was substantial, it is possible that the reduction due to WEP could be lessened and possibly eliminated.

According to the Social Security Administration, substantial earnings is defined as an amount equal or above the amounts shown in the table below:

Year Substantial Earnings
1937-1954 $900
1955-1958 $1,050
1959-1965 $1,200
1966-1967 $1,650
1968-1971 $1,950
1972 $2,250
1973 $2,700
1974 $3,300
1975 $3,525
1976 $3,825
1977 $4,125
1978 $4,425
1979 $4,725
1980 $5,100
1981 $5,550
1982 $6,075
1983 $6,675
1984 $7,050
1985 $7,425
1986 $7,825
1987 $8,175
1988 $8,400
1989 $8,925
1990 $9,525
1991 $9,900
1992 $10,350
1993 $10,725
1994 $11,250
1995 $11,325
1996 $11,625
1997 $12,150
1998 $12,675
1999 $13,425
2000 $14,175
2001 $14,925
2002 $15,750
2003 $16,125
2004 $16,275
2005 $16,725
2006 $17,475
2007 $18,150
2008 $18,975
2009-2011 $19,800

So, if your earnings from your Social Security-covered job are substantial according to the table above, it is possible to change the reduction factor, increasing it from the standard 45% – and even possibly eliminating it, depending upon how many years you’ve earned those substantial earnings.

As long as you’ve had those substantial earnings for more than 20 years, follow the table below to determine what your first bend point factor would be.

Years First Bend Point
Percentage Factor
30 or more 90%
29 85%
28 80%
27 75%
26 70%
25 65%
24 60%
23 55%
22 50%
21 45%
20 or less 40%

What this means is that if you had 20 or fewer years in a Social Security-covered job with substantial earnings, your WEP-reduced factor on the first bend point is 40%.  For each year more than 20 of substantial earnings, your WEP-reduced factor increases by 5%, and if you have 30 or more years of substantial earnings, the WEP doesn’t impact your first bend point factor at all.

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