A young widow contacted me recently to ask about what would happen to her Social Security survivor benefits now that she has returned to work full time.
"I know that I qualify for monthly benefits because my child is under the age of 16, but I assumed that once I returned to work full time, those benefits would stop," Jeana wrote in an e-mail.
She had recently received notification from the Social Security Administration that because of the gross pay that she told it she would earn this year, her monthly survivor benefits would resume next month and continue throughout the rest of this year.
A widow or widower of any age who is caring for the minor dependent child under 16 of a deceased worker is entitled to survivor benefits equal to 75% of the deceased worker's benefit. A surviving spouse who is full retirement age or older is entitled to benefits worth 100% of the deceased worker's benefit.
"I do not want to accept these payments if I am going to have to turn around and pay them back," Jeana wrote. "Can you clarify my situation?"
No worries, Jeana.
You can continue to work and collect Social Security benefits for the remainder of the year based on your estimated earnings for 2013. Once your child turns 16, your survivor benefits will stop.
You can resume collecting survivor benefits as early as 60, but you will still be subject to earnings restrictions if you continue to work while collecting benefits. Earning restrictions disappear once you reach your full retirement age.
Let me explain about the earnings cap restrictions that can reduce Social Security benefits for recipients who are younger than full retirement age and how those reductions are applied
Although we usually think of these restrictions as they pertain to retirees who claim benefits before their full retirement age, which is 66 for anyone born between 1943 and 1954 and 67 for anyone born in 1960 or later, the same earnings formula applies to younger surviving widows, widowers and dependent children.
For those who work and are younger than full retirement age during all this year, Social Security will deduct $1 from their benefits for every $2 they earn above $15,120. Based on an individual's estimated earnings for the year, Social Security will withhold the necessary amount and once the reduction has been satisfied, it will resume sending benefits.
If an individual reaches full retirement age this year, a more lenient earnings test applies. Social Security will deduct $1 in benefits for every $3 earned over $40,080 until the month full retirement age is reached.
The restrictions apply only to earnings from employment. Income from government benefits, investment earnings, interest, pensions, annuities and capital gains don't count against the earnings test.
[More: 7 surprising facts about the Social Security earnings test]
Here is an example taken directly from Social Security's publication "How Work Affects Your Benefits."
Assume that an individual filed for retirement benefits at 62 in January 2013 and the payment will be $600 per month or $7,200 per year. During 2013, the individual plans to work and earn $20,800, which is $5,680 above the $15,120 earnings limit.
Social Security would withhold $2,840 of the retirement benefits, which is $1 for every $2 earned over the limit.
To do that, Social Security would withhold all benefit payments from January 2013 to May 2013 ($600 x 5 = $3,000). Beginning in June 2013, an individual would receive the $600 benefit and for every month throughout the rest of the year.
But the individual is $160 short ($3,000 – $2,840 = $160). The following year, Social Security would pay the individual the additional $160 that was withheld in May 2013.
If you think your earnings for 2013 will differ from what you originally estimated, contact Social Security immediately so they can adjust your benefit reduction. Otherwise, you could find yourself having to repay excess benefits later.
But even if some of the individual's retirement benefits are withheld because of his or her earnings, they aren't gone forever. Once full retirement age is reached, benefits will be increased to reflect those months in which benefits were withheld.
Let's say an individual is entitled to $1,000 per month in retirement benefits at the full retirement age of 66, but that person decides to claim them four years early at 62. He or she will receive a 25% reduction in benefits, reducing monthly Social Security income to $750.
Later the individual decides to return to work. From that time until the person reaches the full retirement age of 66, a total of 12 months of benefits are withheld because of excess earnings. Once the individual reaches 66, Social Security would recalculate the benefits.
The new benefit amount would be increased to account for those 12 months of benefits that were forfeited. It would be as if the benefits were claimed at 63, instead of 62, boosting them to 80% of the full retirement age benefit or $800 per month.
However, in Jenna's case, the benefits she forfeited due to the earnings cap won't increase her survivor benefits. Spouses and survivors who receive benefits because they have minor or disabled children in their care don't received increased benefits at full retirement age if benefits were withheld because of work.
