Sunday, February 24, 2008

Stock Options


I have stock options that were awarded while I was still working. I am retired now and drawing social security but am not yet at full retirement age. I would like to exercise these options but am concerned over whether they will count toward the earnings limit. The handbook indicates options are considered as wages "at the time of payment". Is this when they were awarded or when they were exercised?
Charles from Texas

The fair market value of stock options when granted is counted as wages at that time. If the options are exercised, then the increase in value is wages when exercised. However, if this exercise occurs after retirement, the "wage" is attributed to the last day of employment for purposes of the earnings limit test, so it will not be counted against you if received after the year you retired.

Dual Entitlement-- Spouse Benefit & Retirement Benefit


Mr. Tomkiel,
I bought your book. Thanks for writing it. I'm nearing retirement and trying to figure out SS planning. Excepting your book, I cannot believe how little clear and accurate info there is about how SS works. Especially from SSA.
I have one question:
In Sec 302 you say: "The general rules are: 1) you must file on your own account if you have enough quarters ..; and 2) you must file on your spouses account as a wife or husband if your spouse is then entitled to benefits and. " This appears to say you must do both. My question is: is it really correct that you cannot file for spousal benefits without filing on you own work record at the same time?
My wife will file for her benefits at 66/FRA, I plan to wait until age 70. Can I file for and receive spousal benefits on her account starting at my FRA, while I wait until age 70 to file on mine to get the maximum monthly amount? Any downside to this?
I have seen on a couple of SS discussion boards that people are doing exactly that. Are they really? There must be a catch.
Bill from California

While the general rule is that a spouse filing for benefits is "deemed" to file on his or her own account as well, an exception exists where the claimant is over FRA (Full Retirement Age). As long as the benefits are not reduced for age, you may file on your spouse's account and defer entitlement on your own account by restricting the application. Thank you Bill for bringing this to my attention. I have included this exception in my Social Security Benefits Handbook, Online Edition in Section 302.

Your plan will work because you won't apply until you are at FRA. However, you may want to re-think this strategy. The only reason to defer benefits on your own account would be to get the Delayed Retirement Credits (DRC's) which would add 32% to your primary insurance amount if you waited to age 70 to file on your own account. But if your own benefit at FRA is greater than the husband's benefit, which is most likely, then you are paying for this advantage by losing the differntial for 48 months. You must calculate how long it will take to recover those benefits with the DRC credit.

Let's run an example. For the sake of discussion let's say your wife's PIA (primary insurance amount) is $1,500. You would collect an unreduced husband's benefit of $750 for 48 months ($36,000). Your own PIA is $2,000. So you forego your own benefit. You lose the difference: $1,250 a month ($60,000). This is a high price to pay. So what is the DRC advantage? 32% of your PIA, or $640 a month more beginning at age 70. So you paid $60,000 to get $640 a month. It will take 94 months to make it back, or 7 years, 10 months after age 70. So if you are pretty sure you will live past 78, your plan will show an advantage, not considering the interest you lose on the $60,000. And if you should die before reaching 70, you lose all the benefits that would have been paid on your own account.

An alternate plan might be to take your own benefit, but bank the difference if you have the discipline. If you die your estate will get what was received (if you deferred your own benefit your estate would lose out). If you live to 70, you could invest the $60,000 in an annuity that may pay more than $640 month to make up for the loss of the full DRC.

Each couple must consider the specifics of their situation. What are their respective PIA's, what is the state of health and life expectancy of each, how risk-averse or tolerant they are, how disciplined to save, how much would an annuity pay, and what their retirement needs are.

Divorce & Children's Benefits

If a disabled parent is receiving monthly checks for minor children and they become divorced and the children remain with the other parent, do the children still receive the monthly benefit or does it stop? What if the Court orders it to be paid to the custodial parent--is that possible?-- Charlotte from Florida

ANSWER: The children's benefits continue. The custodial parent will most likely be the Representative Payee for their social security benefits. The state court will not be able to order the federal agency who to pay, but the SSA will pay the parent who the court orders to have custody.

Sunday, February 3, 2008

Workers Comp Medicare Set-Aside

Question from William from North Carolina:

I am on total disabilaty from an injury on the job. My company was required to set up an annuity to pay for future medical expences for my injury. I was told I had to keep records of all expenses the money was spent on and file a report every year. Where could I find this information and forms on the internet? IF you have the information I would real like it sent to me so I want have any problems with Social Secuity.


When a WC claimant who is entitled to Medicare settles his WC case, the amount allocated to future medical bills must be set aside in a fund to pay such expenses so Medicare does not have to pay expenses that should be paid by the WC insurance company. When a fund is set aside at time of the WC settlement an administrator is appointed to use the funds for payment of medical bills related to the comp injury. The claimant or the treating doctor/medical provider normally will submit bills to the administrator who then pays them. Only when the fund is exhausted will Medicare cover any further expenses related to the job injury. The law requires an annual accounting to Medicare. Usually the administrator of the fund files the required reports. If your set-aside is self administered then you must pay the bills and file a statement when the fund is exhausted.

You should be able to get forms and more information from:
c/o Coordination of Benefits Contractor
P.O. Box 33849
Detroit, MI 48232-5849

Sorry- I can't find any on-line way to get the forms. You should also speak to your lawyer who handled your comp case for more help with this.

Stanley A. Tomkiel, III

2-Q's--Withdrawal of Application & Medicare Premium Surcharge

Questions from Stephen:

I just have 2 questions I would like for you to address.
Question No.1 -- Fred can wait until age 66 to take full benefits. Instead, he elects reduced benefits at age 62. 100% of those monthly receipts will be accumulated in a savings account. Then at age 66, if Fred survives, they will be repaid, without interest, and then the new benefit at 100% will begin. I asked the SSA if this works. They responded "If you have begun to receive Social Security retirement benefits and decide to stop your benefits, submit Form SSA-521, Request for Withdrawal of Application" . Clearly then, a taxpayer can withdraw and reinstate. And, ignoring the possible adverse tax consequences, it seems like a decision that makes total sense. I just find it a little hard to believe because it violates my "free lunch" rule. If there are no bad tax consequences, then effectively the recipient gets an interest-free loan which can be repaid , or not repaid. And if repaid, 100% of benefits begin at age 66.It would of course be tragic to assume lower benefits can become higher benefits if, for some reason, that option were not available.

Question No. 2 -- Assume Fred has normalized annual income that would not cause the premium surcharge for Medicare premiums to be invoked. But, in 2005 there is a land sale that causes income to balloon, which in turn triggers the surcharge. It's a one-time only event.My understanding is that the SSA has procedures for re-evaluating premiums that result from extraordinary events. I have their "Request for Reconsideration" Form, but it leaves much to be desired. So, my questions is... do seniors who have one-time bumps in income get relief ? Or do they face having the surcharge for, I assume, a 12-month period.



Question 1-- In reviewing the POMS and Regulations for withdrawal of applications, I cannot find any provision that requires interest to be added to the benefits being refunded. However, giving back all that principal of 47 months of benefits means that you will be losing the interest from the capital once you give it back, not to mention the capital itself. Is it really worth giving back $70,000 in capital to get an extra $500 a month (assuming as an example you get a reduced benefit of $1500 vs. an unreduced benefit of $2000)? The break-even point would be over 11 years. So yes, your strategy would get you interest if you didn't touch the benefits before 66, but why not keep the money in the bank. If you die before 77 you will have lost any advantage, as well as the use of the money that you may very well like to put to use. SSA has a great calculator to figure the break-even age for deciding whether to take benefits earlier or later.

If you decide to follow this stategy make sure that when you withdraw the retirement benefits application you restrict the withdrawal so that you do NOT withdraw your Medicare entiltlement. Otherwise you will have to pay back all Medicare benefits received.

Question 2-- You are talking about the the new Medicare Part B premium rules that started in 2007. Under this new law, Part B premiums are increased for people earning over certain thresholds in the year 2 years before the applicable year. They are re-calculated from year to year. One time bumps in income will result in the higher Part B premium. The exceptions you are referring to apply when there has been a life-changing event that causes a lower income in a later year. The rule allows for 7 kinds of these events, which the government refers to as LCE's (Life-Changing Events- am the only one who gets the chills hearing this acronym?) So your friend's premiums for 2007 are based on his 2005 income, unless due to a Life-Changing Event his 2006 income dropped.

The 7 events are:

Death of Spouse (HI 01120.010)
Marriage (HI 01120.015)
Divorce or annulment (HI 01120.020)
Work Reduction (HI 01120.025)
Work Stoppage (HI 01120.030)
Reduction in income due to loss of income-producing property (HI 01120.035)
Reduction in or loss of certain forms of pension income (HI 01120.040).

The links are to SSA's Programs Operations Manual Systems- the so-called POMS.

Stanley A. Tomkiel, III