WEP Overview & Formula
When a client is eligible to collect non-covered pension income and Social Security income, their Social Security benefit amount may be reduced. This reduction is referred to as the Windfall Elimination Provision, or WEP. WEP applies to clients who have both worked jobs where they did not pay into Social Security (since they receive a pension), as well as worked jobs where they did pay into Social Security and are eligible for SS benefits.
For information on the Government Pension Offset (GPO), which reduces spousal benefits as a result of non-covered pension income within a plan, click here.
When a client is subject to WEP, an adjustment is made to the formula that is used to calculate their PIA, or Primary Insurance Amount. The WEP-adjusted PIA formula reduces the percentage of pre-retirement earnings that are replaced by Social Security benefits up to the first income tier, or bend point. The multiplier on the first bend point can reduced from 90% to as little as 40%, depending on how many years the client paid into Social Security (also known as Substantial Covered Earnings):
WEP directly reduces the client’s monthly retirement benefits, but as a result of recalculating that client’s PIA, WEP can also indirectly affect spousal benefits, child benefits, family maximum benefits, and annual earnings test calculations within a financial plan. Survivor benefits will not be impacted by the Windfall Elimination Provision, as per law. RightCapital will also apply the WEP guarantee that restricts SS benefit reduction to half of the client's pension income.
How to Apply WEP in RightCapital
RightCapital will apply the WEP reduction to Social Security benefits when there is a non-covered pension income card entered. This calculation will not impact Social Security income when the ‘Already Receiving’ box is checked, nor will it affect Social Security income when "Based on SS Statement Value" is selected as the estimated benefit amount. The WEP reduction will only impact estimated SS benefits when "Use Simple Estimate" or "Based on Historical Covered Earning" are selected as the estimated benefit amount.
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In the Profile > Income area (or step 2 when creating a client), click Add Income > Pension:
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Fill out the necessary data fields, and then check the "Non-Covered" box in the bottom left. Once checked, the WEP reduction will be automatically calculated and applied:
In the Profile > Income > Social Security card, there are three different options to choose from when calculating future Social Security benefits. WEP calculations will be uniquely impacted by each choice within the ‘estimated benefit amount’ dropdown:
- Use simple estimate – WEP will affect this calculation, as long as "exclude from SS tax" is not checked within the Salary income card.
- Based on SS statement value – WEP will not affect this calculation in RightCapital- when using this option, be mindful to enter a PIA value that is properly WEP adjusted.
- Based on historical covered earning – WEP will affect this calculation based on the number of covered earnings that meet the substantial earnings criteria for each year.
- For clients who are ‘Already Receiving’ no additional WEP reductions will be applied as the benefit amount that the client is receiving should already be WEP adjusted.
Note on the 'Simple Estimate'
When using the ‘Simple Estimate’, be aware that if the client’s Salary card is set to ‘Already Started’, this option assumes the client's earnings began at age 22. For a more accurate WEP calculation based on a client’s past covered earnings, it is recommended to use the ‘Historical Covered Earnings’ option.
The WEP reduced Social Security benefit can be tracked in the Retirement > Cash Flow > Summary tab, within the Income Inflows > Social Security column:
