The Social Security Administration’s definition of a “pension” benefit is a broad term that is focused more on the retirement income being received than the technical benefit design provisions. That means the WEP could affect more people than just those public employees enrolled in traditional defined benefit plans.
In 25 states plus the District of Columbia there are public employees who are automatically enrolled in or have the option to join a primary defined contribution plan, guaranteed return plan, or a hybrid retirement plan. Workers enrolled in any of these may be subject to the WEP if their employer does not participate in Social Security.
The government classifies any primary retirement plan as a “pension” for WEP purposes if:
- The retirement plan receives contributions from both the employer and the employee, or
- The retirement plan is considered the employer’s primary retirement plan, whether or not the only contributions into the plan are from the employee or employer alone.
If an employee is enrolled in a supplemental defined contribution plan to which the employer does not contribute, such as a 457 deferred compensation plan, it is not considered a pension.
Importantly, neither the WEP nor GPO applies until the employee withdrawals money from the plan. The amount used to calculate the maximum WEP is pro-rated based on the employee’s age and the date of the withdrawal.