The Windfall Elimination Provision (WEP) is a formula that is used to adjust Social Security
worker benefits for people who are receiving “non-covered pensions” and qualify for Social Security benefits based on other Social Security-covered earnings. A non-covered pension is a pension that is paid by an employer that does not withhold Social Security taxes from your salary, which is typically state and local governments or non-U.S. employers.
The Windfall Elimination Provision can affect how financial advisors or other wealth management advisors calculate your retirement or disability benefit. You can apply this if you’re above the age of 62 after the year of 1985 or if you’ve become disabled after that year. However, you first become eligible for a monthly pension based on work where you had not paid Social Security taxes after 1985. This rule applies even if you’re still working. This provision also affects Social Security benefits for people who have performed federal service under the Civil Service Retirement System after 1956.
Basically, how it works is that your Social Security benefits are intended to replace only some of a worker’s pre-retirement earnings. So your benefits are based on your average monthly earnings and are adjusted for average wage growth. Your average earnings are then separated into three amounts and the amounts are multiplied using three different factors to compute your full Primary Insurance Amount. For example, for a worker who turns 62 in 2019, the first $926 of average monthly earnings is multiplied by 90 %, then earnings between $926 and $5,583 by 32% and the balance by 15%. The sum of the three amounts equals the Primary Insurance Amount, which is then decreased or increased depending on whether the worker starts benefits before or after full retirement age. This formula produces the monthly payment amount. When the formula is applied, the percentage of career average earnings paid to lower-paid workers is greater than higher-paid workers.
There are some exceptions that you should be aware of though. The Windfall Elimination Provision doesn’t apply if you’re a federal worker that was first hired after December 31, 1983 orf you’re an employee of a non-profit organization who was first hired after December 31, 1983. Pensions are also inapplicable to those whose only pension is for railroad employment. It won’t apply if you’ve only worked or performed where you didn’t have to pay Social Security taxes before 1957 or you have 30 or more years of substantial earnings under Social Security.
The Windfall Elimination Provision doesn’t apply to survivors’ benefits. They may be able to reduce spouses, widows or widowers benefits because of another law.
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Virtue Capital Management, LLC and Integrity Wealth Management & Insurance Services, LLC are not affiliated with or endorsed by the Social Security Administration or any other government agency.