Deferred compensation shouldn't affect Social Security benefits. Generally, the Social Security Administration isn't worried about payments that aren't for work in the current period. Because deferred compensation typically is subject to Social Security tax withholding, choosing to defer pay shouldn't reduce the benefits that eventually will be available when a person goes to collect benefits, either.
Nonqualified Deferred Compensation Basics
Nonqualified deferred compensation plans, usually aimed at executives, allow a limited number of highly compensated employees to set aside a portion of their pay. Money goes into the deferred compensation plan on a pretax basis, so they benefit from tax deferral. These plans don't have the same contribution limitations as a qualified plan such as a 401(k). But they pose additional risks for the employee because they don't have the legal protections of qualified plans.
Social Security Tax Withholding
Money typically flows into a deferred compensation plan free of withheld taxes. Income taxes come out when the income is eventually withdrawn. Taxation for Social Security and Medicare generally has to be paid either when the money comes out or when it has become vested and is available for the employee to use. However, because the tax gets paid, the income will be applied to the account holder's eligibility for Social Security and will be used to calculate his eventual benefit amount.
Social Security Earning Limits
Social Security limits how much money a benefit recipient can earn from working while collecting benefits. At the time of publication, recipients of Social Security benefits who are younger than their full retirement age of 66 can earn up to $15,480 without having their benefits reduced. Those receiving benefits in the year they turn 66 can earn up to $41,400 without having their benefits cut, and those who are older than their full retirement age have no caps on their earnings. These limits can change yearly; check with the IRS for current income caps.
Deferred Compensation and Benefits
Although earnings from working can affect your Social Security Benefits, other types of income shouldn't. The Social Security Administration excludes special payments from the earnings cap. As long as a deferred compensation plan's payments are compensation for work that was done before the recipient started to collect Social Security, they are classified as special payments and won't hurt the recipient's benefits.
Some workers can choose which year they'll take some of their income. For instance, someone who knows he'd be receiving a large enough bonus in a later year that he'd earn more than the threshold for Social Security taxation ($117,000 at publication) may choose to delay taking income from the previous year until that next year. He'd pay less Social Security tax in the first year, and he'd earn more in the second year without paying taxes on it. This could reduce his benefits because he'd pay less total tax. Shifting income in the opposite direction, so that he paid more Social Security tax, could have the opposite impact and lead to slightly higher benefits.
- Inc.: Nonqualified Deferred Compensation Plans
- Benefits Notes: This Time the Employer is Responsible for the Withholding Error
- Social Security Administration: OASDI and SSI Program Rates & Limits, 2014
- Social Security Administration: Special Payments After Retirement
- LarsonAllen: Earnings Tests for Nonqualified Deferred Compensation Plans
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