Special Wage Payments

A special wage payment is an amount paid by an employer to an employee (or former employee) for services performed in a prior year. Special wage payments made to a retired employee receiving social security or to an employee who continues to work while receiving social security benefits may, if not reported to the SSA, reduce the benefits the individual receives. Employers should report to the SSA special wage payments made to employees and former employees who are recipients of social security retirement benefits. Special wage payments may include (but are not limited to):

• Accumulated sick and vacation pay,
• Back pay,
• Bonuses,
• Deferred compensation,
• Payments because of retirement,
• Sales commissions,
• Severance pay, and
• Stock options.

Note. Payments made after retirement that are part of the normal payroll cycle should not be routinely reported as special wage payments.

Earnings Test. Benefits paid to a social security recipient under age 70 may be reduced if the recipient continues to work. The SSA uses the information in boxes 1, 3, and 5 of Form W-2 to determine the beneficiary's current year earnings. Special wage payments, which are for services performed in a prior year, will increase the current year earnings on Form W-2, which in turn may result in a reduction in the recipient's benefits. If a benefit is reduced because of a special wage payment, the beneficiary must get documentation from the employer before the SSA can restore the deducted portion. Therefore, employer reports of special wage payments help prevent incorrect benefit reductions.

Reporting Special Wage Payments

Employers must report special wage payments for income tax purposes and social security and Medicare taxes in the year received. Report income, social security, and/or Medicare taxes for special wage payments on Form W-2.

See below for reporting nonqualified deferred compensation plan deferrals and payments on Form W-2.

In addition, report to the SSA special wage payments made during the reporting year to retired employees and employees who continue to work while receiving social security benefits. Submit reports after the close of the tax year. To avoid delays in processing, submit reports in time to reach the SSA by April 1. Use one of the following reporting methods.

Magnetic media. Special wage payments may be reported on magnetic computer tape or 3480 cartridges. The SSA does not accept special wage payment reports on diskettes. Use the specifications and record layout in Table 2. Include a transmittal using the format shown in Table 3 for each tape or cartridge submission. Mail magnetic media reports to the SSA at the address shown in Table 3.

Tapes or cartridges not meeting the specifications in Table 2 will be rejected. All data must be in capital letters. "Year" refers to the year the payment was reported as wages on Form W-2. Do not use punctuation (periods and/or commas) in the name field.

Do not report payments from nonqualified deferred compensation (or section 457) plans that were reported in box 11 of Form W-2. (Use Form SSA-131 if deferrals to and payments from nonqualified or section 457 plans occurred during the tax year.)

Paper listing. A paper listing can be used to report special wage payments to several employees. Use the format in Table 4. Submit paper listings to the local SSA office nearest your place of business.

Do not report payments from nonqualified deferred compensation (or section 457) plans that were reported in box 11 of Form W-2. (Use Form SSA-131 if deferrals to and payments from nonqualified or section 457 plans occurred during the tax year.)

Form SSA-131. Use Form SSA-131 to report special wage payments made to one employee. Also, use this form to report nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in box 11 of Form W-2. Form SSA-131 and instructions are in Tables 5 and 6.

Form SSA-131 and instructions in Tables 5 and 6 are drafts. The form and instructions are pending Office of Management and Budget final approval. They should be available from the Social Security Administration after October 1997.

Submit Form SSA-131 to the SSA office nearest your place of business. Or, the employee can submit it to the SSA office handling the claim. You or the employee must submit this form before the SSA can exclude the special wage payments for purposes of the earnings test. If reporting on more than one employee complete a separate Form SSA-131 for each or use the paper listing format (except for reporting nonqualified and section 457 plan deferrals and payments), in Table 4.

Reporting Stock Options as Special Wage Payments

An option to purchase stock which is exercised in a year after the year in which the option was earned is a special wage payment. It should not count for the social security earnings test. Options exercised as special wage payments by retired employees or employees who continue to work while receiving social security benefits should be reported by employers using the above reporting methods.

Nonqualified Deferred Compensation and Section 457 Plans

A nonqualified deferred compensation plan is a plan or arrangement established and maintained by an employer for one or more of its employees that provides for the deferral of compensation, but does not meet the requirements for a tax-qualified deferred compensation plan. For social security and Medicare purposes, deferred compensation plans for employees of state and local governments (section 457 plans) are treated the same as nonqualified plans. Nonqualified and section 457 plans are reported differently than other special wage payments. Report them on Form W-2 using the following instructions.

Reporting Amounts Deferred to Nonqualified and Section 457 Plans

Nonqualified deferred compensation is subject to social security and Medicare tax when deferred, i.e., generally, when the related services are performed. However, if nonqualified and section 457 plans contain provisions that delay the employee's right to receive payments from the plan, a period of substantial risk of forfeiture exists. The plan's deferrals, or contributions, are not subject to social security and Medicare taxes until the period of substantial risk of forfeiture ends.

No risk of forfeiture. If there is no risk of forfeiture, report wage amounts deferred to a nonqualified deferred compensation or section 457 plan in box 3 (up to the wage base maximum) and/or box 5 of Form W-2.

Example. Company X's nonqualified deferred compensation plan allows the deferral of up to $20,000 of employee salaries each year. The plan has no risk of forfeiture. Employee A defers $20,000 to the plan from a total salary of $200,000.

Risk of forfeiture lapses before retirement. If the substantial risk of forfeiture lapses before the employee retires, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. The accumulated deferrals are reported along with any other social security and Medicare wages earned during the year.

Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. If the employee continues working, future deferrals are social security and Medicare wages when they are earned.

Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services.

Risk of forfeiture lapses at retirement. When an employee's right to a payment is conditioned upon working until retirement, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, as social security and/or Medicare wages in the year of retirement. Add the amount to other wages paid in that year, and enter in box 3 (up to the wage base maximum) and/or box 5 of Form W-2.

Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture.

Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services.

Example--risk of forfeiture. At the end of the risk-of-forfeiture period for Company Y's nonqualified deferred compensation plan, employee B's accumulated deferrals, plus interest earned by the plan, are $120,000, not including B's $20,000 deferral for this year. B's wages, including this year's deferred amount, are $80,000.

Reporting Payments From Nonqualified and Section 457 Plans

When an employee or former employee retires and begins receiving payments or distributions from a nonqualified or section 457 plan, report the payments in boxes 1 and 11 of Form W-2. Separately identify section 457 plan distributions in box 11 by entering code G followed by a space, and then the dollar amount. However, if reporting a distribution from both a nonqualified plan and section 457 plan, report it as a single amount in box 11 and do not enter code G.

Example. Employee D retired from the XYZ company and began receiving social security benefits. XYZ paid D a $12,000 bonus upon retirement for sales made in a prior year, and D received $25,000 in payments from XYZ's nonqualified deferred compensation plan. In addition, D agreed to continue performing services for XYZ, but on a part-time basis for wages of $15,000 per year. D made no deferrals to the nonqualified plan this year.

Reporting Payments and Deferrals In the Same Year

Do not complete box 11 when payments are made from a nonqualified plan and deferrals are reported in boxes 3 and/or 5 of Form W-2 (including current year deferrals). Report to the SSA on Form SSA-131 the total amount the employee earned during the tax year. Normally, the amount earned is the amount reported in box 1 of Form W-2 less payments from a nonqualified (section 457) plan, but including any amounts deferred under the plan during the tax year. See Form SSA-131 and instructions in Tables 5 and 6. Form SSA-131 should be available from the SSA after October 1997.

Example. Employee K retired this year from Company XYZ and began receiving social security benefits. During the year he earned wages of $50,000 and deferred $35,000 of the wages into the company's nonqualified deferred compensation plan. K also received $75,000 in payments from the company's nonqualified plan.

Table 2. Specifications for Magnetic Media Reporting of Special Wage Payments

Table 3. Sample Transmittal Form for Submission of Special Wage Payment Data

Table 4. Sample Format - Paper Listing

Table 5. Form SSA-131 Social Security Administration

Table 6. Instructions for Form SSA-131

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