Question 36 - Handling the Social Security Income Threshold

Q. A school district is considering hiring a retiree who is currently 62+ years old and collecting Social Security. The income this new hire (retiree) would receive would exceed the income threshold ($15,480) so that his Social Security benefit would be reduced. The retiree and the district are trying to avoid this through W-2 wages that would be under the income threshold (for purposes of Social Security) and instead make a larger employer contribution to his 403(b) account (i.e. $30,000). The 403(b) plan document does allow for employer non-elective contributions. Will this arrangement work?

A. It appears that the district is giving this individual a choice between additional wages and an employer contribution in order to avoid moving above the earnings limit. Anytime that choice is given, the contribution is considered an elective deferral which does not reduce wages for purposes of the earnings test. If no choice is given, then the employer contribution would not be counted as wages, which is very clear in the Internal Revenue Code.