Retirees who receive Social Security benefits might also receive special payments for work done prior to retirement. Special payments encompass bonuses, severance pay, advance vacation or sick pay, back pay, sales commissions, and deferred compensation. It is important that the retirees know how these payments will affect Social Security benefits so that they can plan their finances accordingly.
What are special payments?
Special pay is compensation that an employee earns after retirement for work done before becoming eligible to receive Social Security benefits. Some examples are:
- Bonuses: Rewards for superior performance during work.
- Accumulated leave pay: Payment for accrued sick leave or vacation leave.
- Severance pay: Payment received on leaving service.
- Back pay: Payment for retroactive work completed during previous periods.
- Deferred compensation: Earnings on a W-2 report but earned in a prior year.
These payments are typically in relation to work completed prior to retiring and are not deemed to be Social Security earnings.
Effect on Social Security benefits
Special payments don’t typically reduce Social Security retirement benefits. Since these payments are for prior labor and prior to retirement, they are not subject to the earnings test administered by the Social Security Administration (SSA). It is the earnings test that makes earnings after retirement reduce monthly benefits. Special payments are outside of this measurement because they have nothing to do with post-retirement work.
Reporting special payments
In order not to make special payments out of unfairly cut back Social Security benefits, the retirees have to accurately report them. The employers are also critical to reporting the same by labeling them as earnings on W-2 forms or reports. For instance:
- Deferred pay has to be labeled as earnings in prior years.
- Back pay or bonuses should be labeled clearly so that they do not lead to any confusion while calculating the benefits.
- Retirees must also inform the SSA of the nature of these payments if they are uncertain.
Special payment situation examples
- Deferred compensation: A retiree is paid compensation in 2025 for work he performed in 2023. This compensation is paid on a W-2 form but is not considered earnings for 2025 according to SSA rules.
- Accrued leave pay: An employee retired in December 2024 but is paid accrued vacation in January 2025. Because the leave was accrued prior to retirement, it won’t be added to their Social Security benefits.
- Severance pay: A retiree gets severance pay for leaving the workforce. So long as the payment is for pre-retirement work, the payment is not subject to the earnings test.
Although the majority of special payments are not considered to impact Social Security benefits, the following exceptions are something retirees need to be made aware of:
- Supplemental Security Income (SSI): Contrary to conventional Social Security benefits, SSI is determined based on income limitations. Special payments can be used towards these limits and influence SSI eligibility.
- Self-Employment Income: In the case of special payments that result from self-employment activities undertaken after retirement, there may be separate rules under the SSA’s earnings test.
Efficiently dealing with special payments
Retirees can do something so that special payments do not hurt their financial well-being:
- Talk with employers: Make all special payments properly recorded as pre-retirement income.
- Talk with SSA: Notify the SSA of any special payments received and submit supporting evidence if necessary.
- Talk with experts: Experts in finance can assist retirees in dealing with complicated cases where deferred compensation or other kinds of special payments are involved.
Special payments that are made subsequent to retirement usually do not impact Social Security benefits if they are based on prior pre-retirement work. Filings and documentation in order ensure that retirees benefit from them without undue diminishment or complication. With knowledge of the regulations regarding these payments and professional advice when required, retirees can easily handle their money at this new stage in life.
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