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Earnings Test: How the Benefit is Recomputed at FRA

June 07, 2024

As you know, if a client is under Full Retirement Age (FRA) and works, their Social Security benefit will be subject to the earnings test: $1 in benefits will be withheld for every $2 earned over the annual threshold, which is $22.300 in 2024.

Quick Calculation of Withheld Benefits

To quickly calculate how much will be withheld for a particular client:

  1. Take the client’s annual earnings.
  2. Subtract the threshold amount ($22,300 for 2024).
  3. Divide the result by 2.

For example, say a client applied for Social Security at the end of 2023. SSA would ask if they planned to work in 2024 and how much they expected to earn. Let’s say it’s $50,000. SSA would subtract $22,300 to get $27,700 and then divide by 2 to get $13,850. This amount is divided by the monthly benefit amount to determine how many checks should be withheld. If the client is receiving $2,100 per month in benefits, $13,850 divided by $2,100 is a little over 6, which means 6 whole checks will be withheld. From January through July, the client would receive no Social Security checks. The $2,100 benefit would start up again in August. When the client’s actual earnings are reported in January of 2025, any necessary adjustment would be made (such as the overage from that eighth check). Meanwhile, withholding for 2025 would have already begun based on the client's new estimate and the earnings test threshold for 2025.

Advising Clients

The earnings test is a hassle for everyone. If clients are under FRA and work, they want to reduce their working income to stay below the threshold, they can up their contributions to their HSA or their 410k. If their earning is above this applies to retirement benefits, survivor benefits, spousal benefits, and dependent benefits. If the recipient of the benefit is under FRA and works, the earnings test will apply. If the person on whose record the benefit is being paid (in the case of spousal and dependent benefits) is under FRA and works, the earnings test will also apply.

However, because we know you'll never convince everyone who would be subject to the earnings test to refrain from applying, you'll need to understand what will happen when they turn FRA. Some clients have heard that they will “get it all back” at FRA, while others think that those withheld benefits are permanently lost. Still, others believe that even a few checks a year are better than nothing, so they should apply for benefits even if they are under FRA and work.

 What Happens at FRA

When a client subject to the earnings test turns FRA, the SSA will count the number of checks that have been withheld. Then the early-claiming reduction for each of those checks will be removed. This is only fair because the client did not receive those checks. It’s as if the client is applying at FRA with respect to those checks. Then the original reduced amount (for the checks they did receive) and the full Primary Insurance Amount (PIA) amount (for the checks they didn’t receive) will be combined to create a new permanent benefit amount.

Example:

Let’s say Bob has a PIA of $3,000 and his FRA is 67. If he files for Social Security at 62, his benefit will be 70% of $3,000, or $2,100. This will be his permanent benefit except for Cost-of-Living Adjustments (COLAs). Now let’s say that between age 62 and 67 he has seven checks a year withheld for the earnings test. Of the 60 checks that would have been issued over the five-year period from age 62 to 67, he would have received only 25 of them (five a year). Thirty-five of those checks (seven a year) would have been held back. (SSA’s rationale in imposing the earnings test is that if you’re working, you’re not really retired and therefore do not need “retirement income.” This is why someone still working in their main, full-time job would likely have all of their benefits withheld under the earnings test.)

We can help you plan and maximize your Social Security Benefits. Please call your office or click on the schedule consultation button at the top of the page. You may be surprised how much planning and increase your retirement income.