# How does WEP work for a lump-sum pension payout?

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In other articles we’ve covered how a typical annuitized pension triggers the Windfall Elimination Provision (WEP), but how about a lump-sum pension payout? How does this work? How is the amount of the “pension” determined for the WEP calculation?

This type of lump-sum payment can be either from a defined benefit plan such as the typical annuity pension, or it can be from a defined contribution plan (like a 401(k), 403(b), or 457 plan). For simplicity, since the rules are the same either way, we’ll refer to both defined contribution and defined benefit plans in this article as “pension plans”.

We know from other study of WEP that the maximum WEP reduction can be limited by the monthly amount of your pension benefits. So we need to determine what a lump-sum payment at a particular age is equivalent to in terms of a monthly payment. Social Security has a way to perform this calculation.

In POMS RS 00605.364 Determining Pension Applicability, Eligibility Date, and Monthly Amount(5) is an actuarial table that is used to convert a lump-sum pension payment into a monthly equivalent. To use the table, find the age that you are when you are taking the lump-sum payment in the left column. Then, assuming your lump-sum is received in the current year, go to the next column to the right for the divisor factor. (This is an important number for another reason that we’ll cover later.) If you received the lump-sum at some point in the past, review the various column headings to see if one of those is more appropriate for your circumstances, and use the divisor factor from the applicable column.

Divide the lump-sum payment by the divisor factor for your age when the lump sum is received. This is the monthly equivalent of your lump-sum payment. This can be important to help determine the maximum WEP reduction, since WEP reduction cannot be more than 50% of the monthly pension payment, if that amount is less than the bend point maximum.

To work through an example, let’s say we have a lump-sum pension payment in the amount of \$250,000, and we’re receiving this lump-sum payment in 2022 at the age of 65. Going to the actuarial table, we find that our divisor factor is 180.3. Dividing \$250,000 by 180.3 gives us \$1,386.58 as the monthly equivalent benefit amount.

When we look at the WEP calculation for this individual (age 65 in 2022), we see that the maximum WEP reduction based on bend points is \$463, so the monthly equivalent doesn’t factor into the calculation for this individual.

On the other hand, let’s say the lump-sum payment is \$50,000 (other factors remaining the same). This gives us a monthly equivalent of \$277.32. Since 50% of this amount is far less than the maximum WEP based on bend points, this means that the maximum WEP reduction in this scenario is \$138.66.

Earlier I mentioned that the divisor factor is important for another reason beyond calculating the monthly equivalent pension amount from your lump-sum payment. Here’s the reason: the divisor factor is a determination of your lifespan, in months, from the current year. From our example, the divisor factor was 180.3 – this means the actuarial lifespan of the individual at age 65 is 15 years (180 months and some change).

If our example individual lived more than 15 (and some change) years, then WEP will no longer apply to this individual. Effectively he has lived past the monthly payout equivalent, and so the WEP reduction will be removed from his PIA calculation at that point.