Hello. I am a retired public safety employee whose employer had a 401K defined compensation retirement program but did not pay Social Security on my earnings. Previously I had 21 yrs of substantial earning giving me a monthly benefit. Initially I when I retired I did not draw against the 401K. The account contained amounts from my employer and from me above the amount that was required by the employer. I have been confused by SS reference to "pension" and "annuity." In my 2018 application for SS, I answered yes to the question that I expected to become entitled to a pension or annuity based whole or in part from non covered earnings. Later they sent me Form 096-0395 with more questions. Based on that, a determination on a monthly benefit was made. Now they have reversed that determination and lowered my benefit by $345 monthly. Any payment from the 401k is solely in amounts determined by me. I took no regular payments in 2018 and irregular amounts in 2019. In 2020 I started taking a regular monthly disbursement.
I did report that I have a 401K in lieu of a pension. In 2020 they sent me the same form to which I made the same answers but now have reduced my benefit because of the Windfall Elimination. I am very confused. How does SS treat a 401K? It is not a pension or annuity. How does SS treat this variation? Why the change in determination? The disbursement amounts are totally in my discretion. What if I decide to discontinue disbursements from that account? They seem confused.

Hi,

In most cases, defined contribution plans are counted as the equivalent of a pension for purposes of the Windfall Elimination Provision (WEP). Therefore, if the defined contribution plan is based on earnings that were exempt from Social Security taxes, receiving payments from the plan can cause a person's Social Security retirement or disability benefits to be reduced due to WEP (https://www.ssa.gov/pubs/EN-05-10045.pdf).

If you're able to choose how much and when to receive payments from your 401k, then Social Security would almost certainly treat it as a lump sum distribution beginning with the point you start taking out payments. The total amount in the account would then be prorated into a monthly rate, and that monthly amount would be used for the WEP calculations. You can find more detailed information in the following section of Social Security's operations manual: https://secure.ssa.gov/apps10/poms.nsf/lnx/0300605364#a.

Best, Jerry