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How is my widows benefits from social security effected by

my 414(h) 2 plan? JA: These...
How is my widows benefits from social security effected by my 414(h) 2 plan?
JA: These retirement benefits are supposed to help us but they can be so complicated! The Retirement Expert will help you get the most benefits propertly. Please tell me more, so we can help you best.
Customer: Should f
JA: Is there anything else the Retirement Accountant should be aware of?
Customer: Should the funds from a 414(h)2 plan be treated as a government pension?My widows benefits have been illuminated because of it.
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Answered in 8 minutes by:
11/20/2017
Lane
Lane, JD,CFP, MBA, CRPS
Category: Social Security
Satisfied Customers: 13,005
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial, Social Security & Tax advice since 1986
Verified

In a series of first revenue rulings and then private letter rulings beginning in the early 1980s, the IRS has held that I.R.C. § 414(h)(2) applies to a broad range of arrangements that most people initially would not have thought of pickup arrangements.

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Without going into ALL the details, I.R.C. § 414(h) was a Congressional response to a well publicized case in which an individual argued that because he never received, and never had the right to receive, the amounts taken from his paycheck to make mandatory contributions to his retirement plan, he was not taxable on such contributions.

...

To avert this sort of argument, Congress passed I.R.C. § 414(h), which says in general that a mandatory contributions is treated as an employee contribution (and therefore as taxable to the employee) if the plan refers to it as an employee contribution.

However, an exception was carved out for governmental plans.

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For this reason, Congress included I.R.C. § 414(h)(2), which says that if a governmental employer picks up contributions which are designated by a plan as employee contributions, and if the employee has no choice about whether to make such contributions or to get the cash instead, the contributions will be treated as employer contributions (i.e. not taxable when made to the plan, but only when paid out in the form of benefits).

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If this is being referred to as 414(h)(2) plan then it's likely a government pension. The REAL indicator is whether or not you paid into social security . If not, then this is what SSA calls a non-covered pension. THe WEP (and GPO - Government Pension Offset) applies to ANY pension (government or otherwise) that was earned while working in a system that didn't pay into Social Security.

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I'm so sorry to have to be the messenger here is that's the case.

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So again, the way to get to the bottom of this is to look to see whether you or your employer paid into Social Security while this pension was being earned. Doesn't ave to be a government pension (the most common culprit). Can also be a pension from another country, etc.

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Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating, using the stars on your screen, and then clicking “submit" – That’s the only way I’ll be credited for the work.

I hope you’ll rate me based on my accuracy and thoroughness (as opposed to any good news/bad news content). Thank you!

...

But again, if you need more on this, please let me know.

Lane

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, on three continents, since 1986.

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Customer reply replied 27 days ago
It seems then that it would've considered a government pension even though three people in the accounting office where I worked said it was not. How does social security figure the amount of offset from my benefits because of this pension? They say 2/3 of it is more than my monthly social security benefits were. My pension amount of was take n in a lump sum of $ 65,000. And my benefits had been about $1100. A month. I can not understand how they figured it
Customer reply replied 27 days ago
Can you tell me the formula they use when a person receives a lump sum payout?

The lump sum is converted into what's called a monthly equivalent.

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It's likely easier, first, to see how this works on a regular monthly pension.

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If hour "government pension" were 2000/mo then they will reduce your social security benefit by 2/3 of 2000 = 1332

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So if your Social Security benefit were, say, 1000 per month, the GPO would completely eliminate it.

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Bear with me a sec and I'll pull up the regs on the lump sum conversion. It gets complicated.

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But if you know what the monthly amount would have been, had you not taken the lump sum, then you can essentially use that to see whether it would have eliminated everything on the SOcial Security sido

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"See this, from https://www.ssa.gov/pubs/EN-05-10007.pdf:

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How much will my Social Security benefits be reduced?

We’ll reduce your Social Security benefits by two-thirds of your government pension. In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, must be deducted from your Social Security benefits. For example, if you’re eligible for a $500 spouses, widows, or widowers benefit from Social Security, you’ll get $100 a month from Social Security ($500 – $400 = $100).

If two-thirds of your government pension is more than your Social Security benefit, your benefit could be reduced to zero.

If you take your government pension annuity in a lump sum, Social Security will calculate the reduction as if you chose to get monthly benefit payments from your government work."

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Customer reply replied 27 days ago
I understand how that and knew it was so, but how do they determine what a monthly payment would be for me out of a $65,000. Lump sum payout? I am 70 years old.

They use the mortality tables and solve for the payments that the 65000 would generate for your life expectancy at the Applicable Federal Rate (AFR)

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The AFR (Applicable Federal Rate) is 2.64%

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65000 paid in installments for 15 years at 2.64% would generate a payment of 5304 ... 2/3 of 5304 is 3532.

...

If your social security is less than 3532 the GPO would wipe it all out.

...

Again, so sorry to be the messenger

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Customer reply replied 27 days ago
Is That amount is per year? They said my Monthly social security payment of about $1100. Would be wiped out by my pension security benefit. Its that right for them to do it?

You're right ... although I've never seen them to be wrong on this. I could be off on the assumptions. ... Tell me, when did you take the lump sum?

...

Also, do you have your pension information (regarding what the monthly amount would have been had you taken as a monthly amount)?

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Customer reply replied 27 days ago
I took a lump sum payout when I was 70 receiving it
Last February and the company..plan. did not offer a monthly payout so I rolled it over to a different company and I
chose my monthly payout amount.

What could be going on here is that they may have converted based n what you would HAVE received ... As an example, The traditional (Texas Retirement System) TRS plan provides a benefit amount paid under a DB plan. TRS bases the retirement benefit on length of employment, amount earned, and the worker’s age at retirement. Under this plan, the retiring worker usually receives a monthly annuity. If a retiring worker takes a lump sum payment in lieu of a monthly annuity, the retiree may withdraw only the employee contributions plus five percent interest.

...

If your plan penalizes you in that way, they MAY be calculating this on what the monthly amount would have been. What system is this?

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Customer reply replied 27 days ago
The $65,000. Was both my contributions and what my employer put in. It was a 414 (h) 2 plan with I think One America Life and then I rolled it over to Principal funds.

Looks like they may be only giving you credit for part of the plan (the non-picked up).

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See this from IRS: https://www.irs.gov/government-entities/federal-state-local-governments/employer-pick-up-contributions-to-benefit-plans

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Note, especially the section on whether or not payments were subject to FICA
...

"Treatment of Contributions for Social Security and Medicare Tax

The above applies to the income tax treatment of employer pick-ups. In CCA###-##-####/a>, the IRS addressed the treatment of pick-ups for social security and Medicare tax (FICA) purposes.

Contributions to a retirement plan that come from salary reduction amounts are subject to FICA. IRC 3121(v)(1)(B) indicates that a salary reduction occurs if the amount shown as wages are less than they would have been but for the contribution.
In order for contributions to be considered paid by the employer, and therefore not subject to FICA, the employer contributions:

The amounts that would have been included in wages for FICA tax purposes “but for the employee contribution” are determined based on the facts and circumstances that determine the employee’s compensation under the overall employment relationship. If the circumstances indicate that the wages are equal to what they otherwise would have been, but for the contribution, then the amounts are not included in FICA wages. If the facts and circumstances indicate that the contributions reduced or offset the wages paid, they would not meet the test and the contributions to the plan and would be included in FICA wages.

If the employer pays the contributions in addition to salary increases that are consistent with historical norms, this is an indication that they are not paid in lieu of present or future salary and are not included in wages for FICA purposes."

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Customer reply replied 27 days ago
I do not understand how that really pertains to how they chose to say I don't qualify for any benefits but going back to the response at 7:14 you mentioned $65,000. Paid out over 15 years would be $5304. a year and 2/3 of that would be $3532. Dividing that by 12 months it would be a monthly reduction of my social security benefits of $294. a month. Before my pension payout my benefit amount was I think $1518. How could they rationalize saying I do not qualify for any amount of benefits? And what can I do to he my benefits back?

OK, This is becasue of something called the Government Pension Offset (GPO). Please read that Social Security Publication I gave you.

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Normally for those that have a government pension where no money is paid into Social Security this is very simple SSA is reduced by 2/3 of the government Pension.

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But for a pickup plan such as this i MAY be that not all is subject to the GPO. I tried to show you one of the many ways that SSA converts a lump sum benefit to a monthly amount for this purpose.

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I've also showed you how this could be complicated by the fact that some of your pension may have been represented by you and your employer paying onto FICA becasue of the type of plan.

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Please read this page carefully and run your situation against the many possibilities: https://secure.ssa.gov/poms.nsf/lnx/0202608400 to see where your situation falls.

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If you still believe that GPO should not have applied OR that they have erred in calculating the GPO on your specific plan, then you need to complete this form and begin the appeals process, the first step in that being the reconsideration of decision.

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Here's the form you'll need: https://www.ssa.gov/forms/ssa-561.pdf

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You have every right to force them to tell you how they converted and what portion of the pension, if NOT all of it, is being treated as a non-covered pension.

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Customer reply replied 26 days ago
Thank you. I will re read everything today. Three people i had worked with said their "pension" had not been considered a government pension by social security and their benefits were not effected. I will also contact that pension company for extra information.

I would agree that because of the type plan (at least some FICA being paid) that at the very least a PORTION of it should not be treated as a government plan, (More important, as a non-covered pension)

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Remember that the bot***** *****ne here is whether or not Social Security taxes were paid while the pension was being earned.

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Non-covered pensions can be private pensions from another country, government pensions from another country, OR even private pensions from here that have an agreement not to have to pay into Social Security.

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It's not the "government" part that this turns on, it's whether this is a covered pension (where the employer and employee paid into Social Security along the way) or a non-covered pension where no Social Security and medicare taxes were paid.

...

It's those pensions where the employee and employer never paid into Social Security (government or otherwise) that can serve to reduce and/or eliminate the Social Security benefit.

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I'd appreciate a positive rating, using the stars on your screen, and then clicking “submit" – That’s the only way I’ll be credited for the work.

...

But feel free to come back here. If you bookmark the page, you can come back here for further clarification, etc.

...

Thank you,

Lane

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Customer reply replied 26 days ago
I was paying into FICA and medicaid. I just found some old check stubs. Social security was not paid into.
FICA IS Social Security ... see thishe Federal Insurance Contributions Act (FICA) tax (/ˈfaɪkə/) is a United States federal payroll (or employment) tax imposed on both employees and employers to fund Social Security and Medicare
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Customer reply replied 26 days ago
Great! So maybe with the proof of some old check stubs or W -2 s i can prove they should not take away my social security benefits. I really appreciate your help.. Tears in my eyes.. Appreciate your help.
Yep ... at the very least .. you’ll get credit for some of it .... don’t dally on getting that reconsideration form in
Ask Your Own Social Security Question
Customer reply replied 26 days ago
OK. I'll get it sent in soon. Thank you again.
Your positive rating is thanks enough
Lane
Lane, JD,CFP, MBA, CRPS
Category: Social Security
Satisfied Customers: 13,005
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial, Social Security & Tax advice since 1986
Verified
Lane and 87 other Social Security Specialists are ready to help you
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Lane
Lane
Lane, JD,CFP, MBA, CRPS
Category: Social Security
Satisfied Customers: 13,005
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Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial, Social Security & Tax advice since 1986

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