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Does a 401(k) Rollover Count as a Pension for the Social Security Windfall Elimination Provision (WEP)?

A reader wrote in recently with the following story/question:

For the last several years of my wife’s work before retiring, she had worked for a government agency and no SS had been collected. However, she did have a 401(k) which she contributed to. I knew that she fell under the WEP/GPO provisions.

Subsequent to my wife retiring but before she applied for SS, we rolled her account into an IRA. Two different representatives from SSA told me that if we had not rolled it over, we would NOT have been subject to the WEP. We were allowed by my wife’s plan to keep our funds there and they actually had some very good investment choices. If I had known that and if it was true, I would never have moved the account. And if I understand correctly, the WEP would not come into play and we could have had a considerably higher benefit over the years until we had started to use it.

I had read that the WEP only comes into play when you receive a pension or a lump-sum retirement distribution from a job that was not covered by Social Security. I had taken “distribution” to mean cashing out the 401(k), not rolling it over into an IRA, but I am guessing from what the SSA is saying, that is not the case.

If we had known that we could “let it ride” in the 401(k) and delaying being subject to the WEP, I would have jumped at the chance. This would seem to be another way to significantly increase your benefit if you were in the right circumstances.

So I would appreciate your view of this. I am assuming I can’t do anything for myself, but hopefully for others.

The SSA employees are correct that a rollover does count as a payment/withdrawal from the plan. Therefore, if:

  1. The plan itself counts as a pension, and
  2. The payment counts as a pension payment from that plan…

…then the rollover would trigger the WEP.

And, you are correct that in some cases the effect of the WEP can be delayed as a result of delaying a rollover (and also delaying any other payments, including payments from a defined benefit plan, if any).

So those are the two questions we have to answer:

  1. Does the plan count as a pension at all?
  2. Does this particular payment count as a pension payment? (Sometimes the plan can count as a pension, but this individual payment does not count.)

Does the Plan Count as a Pension?

To determine whether the plan counts as a pension for the sake of triggering the windfall elimination provision, we first have to know whether the worker paid Social Security tax at the job in question. If so, then the plan will not trigger the WEP.

If the worker did not pay Social Security tax (i.e., the job was “noncovered employment”), then we need to know whether the plan includes employer contributions. If it does, then it’s a pension. If it does not include employer contributions, then it’s only a pension if it is the primary retirement plan.

Does the Payment Count as a Pension Payment?

A withdrawal of the employee’s contributions + interest will not count as a pension payment if the employee is not yet eligible to receive a pension and the employee forfeits all rights to the pension.

If the employee is already eligible for the pension, any payment from the plan will count as a pension. Or, if the payment included any amounts that were employer contributions, the payment will count as a pension — regardless of whether the employee is eligible to receive a pension.

What does it mean to be “eligible” for a pension? An individual becomes eligible for a pension the first month he or she meets all requirements for payment except stopping work and applying for the payment. The pension-paying agency, not the SSA, determines pension eligibility and entitlement.

So just to summarize/reiterate the key points here: in some cases a distribution (including a rollover) from a defined contribution plan such as a 401(k) can trigger the windfall elimination provision. And in such cases, delaying taking any distributions (including rollovers) might allow you to delay applicability of the WEP, thereby allowing you to receive a larger Social Security benefit for a period of time.

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