SSR 73-30: SECTION 209 (42 U.S.C. 409). -- WAGES -- DEFERRED COMPENSATION PAYMENTS -- EFFECT ON BENEFIT COMPUTATION AND RETIREMENT TEST
20 CFR 404.1026
- Where worker became entitled to retirement insurance benefits upon expiration of employment contract but had, prior to termination of employment relationship, executed deferred compensation agreement requiring annual payment of specified sum for fixed number of post-retirement years, from which payments employer deducted contributions for social security, held, amount worker received each year pursuant to terms of agreement constitute wages to extent limit on crediting of earnings under Social Security Act is not exceeded, and such amounts are reportable as wages for years in which paid and may be basis for later recomputation and increase in worker's retirement insurance benefits. Further held, since such wages were earned prior to retirement, they are no; subject to the post-retirement work test and thus will not reduce worker's retirement insurance benefits.
R. a fully insured worker, became entitled to a monthly retirement insurance benefit of $163.60 based on earnings through 1970. His wife, B. also became entitled to monthly benefits. In connection with his application for benefits. R submitted a copy of his employment contract with X Company which indicated that his employment terminated November 30, 1970. The contract also showed that R had entered into a deferred compensation agreement with his employer. Under this agreement he is, after his retirement, to receive $15,000 annually as a deferment of a portion of previously earned salary, the compensation to be payable in January of each year through 1981.
Maximum deductions for social security purposes were withheld by X Company from R's check of January 1971. He was advised by the company that under its interpretation of the law, similar deductions would be made for the entire period of the deferred payments, with the corresponding liability of the company for making employer's contributions.
R questioned the propriety of his receipt of retirement benefits while at the same time being credited with additional earnings. The issue thus to be decided is the status of these payments for social security purposes, including their effect on receipt of retirement benefits.
Section 209 of the Social Security Act, as amended (42 U.S.C. 409), defines wages as remuneration for employment, with certain specified exceptions including one (42 U.S.C. 409(i)) excepting payments made after an individual attains retirement age if he did not work for the employer in the period for which the payment was made. Here, R worked for X Company in the period (prior to December 1979) for which the payments in question were made. Based on a review of the contracts submitted by R, the Social Security Administration concluded that the payments being made to R represent remuneration for his employment with X Company, and that none of the exceptions to the definition of wages was applicable.
Under the provisions of the post-retirement work test, section 203(b) of the Act (42 U.S.C. 403(b)), a beneficiary under age 72 may, prior to January 1, 1973, earn $1,680 in a taxable year without any loss of benefits. If earnings exceed that amount, $1 in benefits may be withheld for each $2 of earning between $1,680 and $2,880, and $1 for $1 thereafter. However, even if earnings exceed $1,680 in a year, benefits are still payable for any month in which the beneficiary neither has earnings as an employee in excess of $140 nor performs substantial services in self-employment.
The 1972 Amendments to the Social Security Act (P.L. 92-603), effective for taxable years ending after 1972, provide for a new monthly exempt amount of $175. The annual exempt amount of earnings is increased from $1,680 to $2,100. Benefits are reduced by $1 for each $2 of all earnings above $2,100. The retirement test annual exempt amount and the monthly test will be increased automatically in the future according to the rise in general earnings levels.
For an individual attaining age 72 in a taxable year ending after December 1972, his earnings in and after the month of attainment of age 72 will not be included in determining his total earnings for the year.
In applying the post-retirement work test, the factor to keep in mind is that benefits are withheld on the basis of "when earned." For example, wage payments earned in years prior to 1971 but not actually paid until some later year or years (i.e., deferred wage payments) will not cause a loss of social security benefits for 1971 or later years.
Accordingly, it is held that the amounts received by R each year pursuant to the terms of the deferred compensation agreement with X Company constitute and must be reported as, wages for the years in which such amounts were paid (to the extent such amounts do not exceed the limitation on crediting of earnings specified in the Social Security Act) and such wages may be the basis for a later recomputation and increase in retirement insurance benefits. Further held, such wages, since wages, since earned prior to retirement, are not subject to the post-retirement work test and thus may not reduce the worker's retirement insurance benefits.