The Retirement Earnings Test (“Earnings Test”) applies to individuals who are taking a retirement income benefit, but who have not yet reached Full Retirement Age (FRA). The test is applied with a lower amount of earnings allowed for those that are pre-FRA and not yet in the year they will attain FRA and a higher amount of earnings allowed for those that are pre-FRA and are in the year they will attain FRA. To be clear, the Earnings Test only applies in those cases where the benefit recipient is under FRA and is receiving a benefit.

Earnings is defined to be:

1.Wages, even if not covered by Social Security, including bonuses, monetary awards, payments for sick pay, holiday pay, and vacation pay. While employer contributions to retirement plans are not counted, employee contributions are counted.

2.Special payments made, but not limited to, such as advances, back pay, bonuses, severance pay, accrued vacation pay, holiday pay, when earned in the year they are paid, are countable. When earned in a previous year, these same forms of income are not countable.

3.Self-employed, net earnings only, for those that are self-employed.

The following are not considered income for the purposes of the Earnings Test: All income from sources such as government benefits, investment earnings, interest income, pensions, annuities, withdrawals from 401(k), 403(b), Keough or other tax-deferred pensions, withdrawals from non-qualified tax-deferred annuities or capital gains.

The Earnings Test for those that are pre-FRA for the entire year, is applied differently in two respects than for those that, in a given year, attain FRA.The annual exempt income amount and the forfeiture formula vary for those pre-FRA for the entire year versus for those that, in a given year, attain FRA.

First, the annual income that is considered exempt from the Earnings Test may change each year. For 2020, the annual exempt amount for those who will take a retirement income benefit pre-FRA and will not turn FRA in 2020, is $18,240. For those that will attain FRA in 2020 and will take a retirement income benefit in 2020, the annual exempt amount is $48,600.

Next, the forfeiture formula is applied as follows:

1.If a recipient of retirement income benefits is pre-FRA for the entire year, then the Social Security Administration (SSA) will deduct $1 for every $2 that the recipient has earned above $18,240.

2.If a recipient of retirement income benefits attains FRA in a given year, then the Social Security Administration (SSA) will deduct $1 for every $3that the recipient has earned above $48,600.

Forfeitures are calculated and applied based on a recipient reporting their projected earnings at the time applying for retirement income benefits, or after the SSA is provided with the recipient’s earnings from an employer. These forfeitures do not evenly reduce benefits to distribute the forfeited amount over the course of a year, but rather are collected monthly until the entire forfeited amount is recouped.