Earnings Test

[m412078h]

I'm retiring at 62 in October.  I have an 8 year old and the increased amounts to be gained from retiring earlier make this a no brainer, since it also will allow me to go back to school to become a Psych ARNP, which is a lucrative part time career up until the day I die.   

I will still work part time as I'm in a high demand health care sector.   I am going to work part time about 6 months a year to stay under the roughly $19,000 limit.  

My question is what are the earnings that are measured into the earnings limit?  Obviously, my salary would be.  But lets say I'm getting health insurance, and with the plan terms the premium amounts are not included in my social security earnings for FICA tax purposes.  Would these amounts also be exempt from the earnings test?

[GailL1]

@m412078h 

The only income that counts is earned income —the income you earn by working either for someone or as a self-employed person.

Per the IRS:  Health Plans

If an employer pays the cost of an accident or health insurance plan for his/her employees, including an employee’s spouse and dependents, the employer’s payments are not wages and are not subject to Social Security, Medicare, and FUTA taxes, or federal income tax withholding.  

IRS - Employer Benefits - 

But read the link under the heading Health Plans (bottom of page) - there were a few exceptions noted as to the type of business structure and employee you might be. 

[m412078h]

What about cafeteria plans? 

Section 125 of the of the IRC specifies that cafeteria plans are exempt from the calculation of gross income for federal income tax purposes. No federal or Social Security taxes are deducted. 

The question is, do these earnings also qualify as earnings for the social security earnings test?

The battle of early retirement is about insurance.  If I can earn $700 a week and have extremely good insurance and max that out, at least we'd be covered 6 months a year and my earnings wouldn't be that high.

[Tonster521]

@m412078h I am familiar with Cafeteria Plans and Premium Only Plans pursuant to Section 125 of the IRC. With regard to a Cafeteria Plan (aka Full Flexible Benefits), most employers provide an annual amount (i.e., $1,000, etc.) for employees to use to contribute toward the cost of various benefits (i.e., medical, dental, vision, group life insurance, dependent care and health care spending accounts, etc.) that they elect for the calendar year. If an employee does not use the annual company amount (i.e., $1,000, etc.), any remaining amount is paid to the employee and that amount is treated as wages (salary) subject to all employment taxes (i.e., federal income tax, social security tax, etc.). That amount, if any, would be considered for the Social Security Earnings Test. Generally, the amounts of employee contributions for Cafeteria benefits exceed the annual amount that the company provides. So, it would be a rare case for an employee to opt out of Cafeteria benefits and receive cash instead of benefits. Each employee/employer situation is different. So, you need to review the Cafeteria Plan's Summary Plan Description (SPD) to determine if you are eligible to participate as a retiree or part time worker ( W2 versus 1099 worker). Second, why are you retiring late in the calendar year (October)? You indicated that you attain age 62 in October which may not be an optimal time to retire. You may become ineligible for next year's vacation pay, annual profit sharing and/or bonus (if any), and company contribution to retirement plan (i.e., 401 K, 403 B, 457, Thrift Plan, etc.) at year end (December).