Social Security & Working After Sears Holdings?

65 is the new 55 when it comes to retirement from your Sears Holdings firm, meaning you may have the option to work at the same time you claim Social Security benefits. If you retire from Sears Holdings and get a part-time job or some consulting income, your paycheck can affect the amount you receive monthly, the amount you owe in taxes for the year, and your Medicare premiums.

Reasons abound to keep working, but for most, it simply comes down to math and to emotions.

With a longer lifespan on average, many of our clients from Sears Holdings are concerned they won't have enough savings to last their lifetime, and understandably so.

If you plan to keep working after retiring from your Sears Holdings while collecting Social Security, here is what you need to keep in mind:

Timing Matters

If you start your Social Security benefits before your (FRA), or full retirement age (which is between 66 and 67, depending on the year you were born), you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your full retirement age(FRA). ¹

There will also be an earnings test until you reach that full retirement age(FRA): If you have earned income in excess of $19,560 in 2022, your benefits will be reduced by $1 for every $2 of earned income over the limit.

The year you reach your full retirement age(FRA), the earnings test limit is $51,960 in 2022, and your benefits will be reduced by $1 for every $3 of earned income over the limit.

These reduced benefits do not just 'disappear'. If your benefits have been reduced due to earnings, your monthly Social Security check will be increased after your full retirement age(FRA) to account for benefits withheld earlier due to excess earnings.

Note: Earned Income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of 'unearned' income.

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'Earned Income' includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they're all based upon employment. Once you reach your full retirement age(FRA), there is no earnings test and no benefit reductions based on earned income.

Scenarios: Claiming Social Security at 62 while working

This hypothetical example is calculated by Fidelity Financial Solutions Team, using Social Security and tax tools. The tools are based on data and methodology published by the Social Security Administration (as of March 2022) and Internal Revenue Service (as of March 2022). All benefits are calculated in today’s dollar.(See: Income Taxes And Your Social Security Benefit for more information.). The actual benefit would be adjusted for inflation. State/Local taxes are not considered. All the numbers are rounded to the closest $500. Example assumes an individual turning 62 in 2022, makes $100K/year before retirement, $65K/year expenses in retirement, receives $24K/year Social Security benefits at age 62, single tax filing status, and standard deduction for federal tax purpose. Any additional income needs are covered by withdrawals from tax deferred account, therefore are fully taxable.

Tax Impacts

Separate from the earnings test, Social Security benefits themselves are subject to federal income taxes above certain levels of 'combined income.' Combined income generally consists of your adjusted gross income (AGI), ² nontaxable interest, and one-half of your Social Security benefits.

For individual filers with combined income below $25,000, none of your Social Security is taxed. For joint filers with combined income below $32,000, none of your Social Security is taxed. (See: Income Taxes And Your Social Security Benefit for more information.)
For individual filers with combined income of $25,000 to $34,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.
For joint filers with combined incomes of $32,000 to $44,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $44,000, then up to 85% of your Social Security benefits could be taxed.

Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation.

Additionally, 11 states also tax your Social Security benefits. The rules and exemptions vary widely across this group so it is wise to research the rules for your state or consult with a tax professional if you're one of our Sears Holdings clients that this applies. ³

State Social Security Tax

The eleven states below impose a tax on Social Security benefits to varying degrees.

Colorado

Colorado's pension-subtraction system exempts up to $24,000 in pension and annuity income, including some Social Security benefits. The exemption is based on your age, starting at age 55.

Connecticut

Connecticut partially or fully exempts Social Security benefits, based on a person's filing status and income.

Kansas

Kansas exempts Social Security benefits from state tax, based on the taxpayer's income. Your Social Security benefits are exempt from Kansas income tax if your federal adjusted gross income (AGI) is $75,000 or less, regardless of your filing status.

Minnesota

Minnesota partially taxes Social Security benefits. The state allows a subtraction from benefits ranging from $2,725 for married taxpayers who file separately, to $4,260 for single taxpayers, to $5,450 for married taxpayers who file jointly. The rule is subject to phaseouts starting at incomes of $82,770 for joint married filers, $41,385 for married taxpayers filing separately, and $64,670 for heads of household and single filers. The subtraction is less for these incomes and eventually phases out entirely as you earn more.

Missouri

Missouri exempts Social Security benefits from state tax, provided that the individual is age 62 or older and has adjusted gross income of less than $100,000 if married and filing jointly, or $85,000 for all other filing statuses. Those who earn more than that might qualify for the exemption if they're disabled.

Montana

Montana asks residents to use the Montana Individual Income Tax Return to determine the portion of Social Security benefits that's taxable by the state (page 5 and page 6). That might be different from the federal amount.

Nebraska

Starting in 2022, Nebraska began phasing out taxation of social security benefits. The state allows a deduction for Social Security income that's included in your federal adjusted gross income if your federal Adjusted Gross Income(AGI) is less than or equal to $61,760 for married couples filing jointly, or $45,790 for all other filers.

New Mexico

Starting in 2022, the state of New Mexico changed rules that would exempt most seniors from paying tax on social security benefits. This exemption is available to taxpayers with the following income thresholds — $100,000 for single filers, $150,000 for married filers filing jointly, and $75,000 for married filers filing separately.

Rhode Island

Rhode Island has an exemption on Social Security taxation for those who have reached full retirement age as defined by the IRS. Eligible taxpayers must have federal Adjusted Gross Income(AGI)s of $88,950 if single, or $111,200 if married and filing jointly.

Utah

In late 2019, Utah adopted a sweeping tax bill that includes a tax credit for Social Security benefits that are included in a taxpayer's federal adjusted gross income. The Adjusted Gross Income(AGI) thresholds are $25,000 for married filing separately, $50,000 for married filing jointly, and $30,000 for single filers.

Vermont

Vermont previously followed the federal rules for determining the taxable portion of Social Security benefits, and then it adopted exemptions for taxpayers with incomes below $25,000 for single filers and $32,000 for other statuses. Benefits for those with higher incomes are taxed at incremental levels, with no exemption available for Adjusted Gross Income(AGI) of over $55,000 if single or over $70,000 if you're married and file jointly.

Medicare & Social Security

In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. There is no age limit on these withholdings, nor any exemption for any sort of Social Security benefits status.

These earnings can also count toward the calculation of your benefits. The Social Security Administration checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.

If you are making much less in retirement than before, could it hurt your benefits?

No. This is because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.

Note: Your earnings may not only push you into a higher tax bracket, but also into a higher threshold for your Medicare premiums once you are over 65. Medicare sets the cost (premium) for Part B each year at a fixed rate for most participants ($170.10 a month for 2022), but it increases for individuals with an annual income over $91,000 and married couples with an annual income above $182,000. The cost for these higher-earning participants can range from $238.10 to $578.30 per month in 2022.

If your income is above a certain level, you may have to pay IRMAA (Income-Related Monthly Adjusted Amount) in addition to your Part B or Part D premium. We recommend you consult with a tax professional for more details on whether or not you are affected.

Can I Contribute to a Retirement Account?

Another key advantage of ongoing earned income even after you collect Social Security is that you can keep contributing to your retirement savings accounts like traditional IRAs, health savings accounts (HSAs), Roth IRAs, and 401(k)s.

Note: If you are over 72, you will have to take the required minimum distribution (RMD) from your traditional IRA, except for during the 2020 pause because of COVID-19.

Your traditional 401(k), or similar Sears Holdings retirement plan, is a different story. In general, you can continue stashing away money in your current Sears Holdings-provided plan as long as you're still working, even part-time, and you can delay taking your RMD until after you retire.

These additional savings can help, especially if your savings are running a bit behind your goals. The combination of the added savings, tax-deferred growth potential, and the ability to defer tapping into your savings can be powerful, even at the end of your working career.

How does the Sears Holdings Pension Plan differentiate between normal retirement, early retirement, and late retirement options for Kmart participants? In what ways do these options influence the retirement planning process for employees of Sears Holdings, and what specific considerations should Kmart employees be aware of when choosing one of these retirement paths, particularly in relation to their vested status?

Differentiation of Retirement Options: The Sears Holdings Pension Plan offers distinct options for normal, early, and late retirement. Normal retirement is available at age 65 or after five years of plan participation, whichever is later. Early retirement can be taken from age 55 but before 65, provided the employee is vested, with benefits subject to actuarial reduction unless certain conditions are met (like having at least 90 points, which is a sum of age and years of credited service). Late retirement pertains to any retirement after the normal retirement age, with pensions recalculated to reflect the delay in benefit commencement.

Considering the frozen status of the Sears Holdings Pension Plan, how does this impact the benefits eligibility for Kmart employees, and what implications does it have for their retirement savings strategies? In what ways should current employees factor in this frozen status when evaluating their overall retirement readiness and potential alternatives outside of the company plan?

Impact of Frozen Status: The freezing of the Sears Holdings Pension Plan on January 31, 1996, means that there have been no new accruals of benefits or participants since that date. For Kmart employees, this impacts their benefits eligibility by capping the pension benefits at levels earned up to the freeze date. Employees need to consider this stagnation in benefits when planning for retirement, potentially seeking additional retirement savings avenues to bridge any shortfall.

What are the essential calculations involved in determining the retirement benefits under the Sears Holdings Pension Plan for Kmart employees? Specifically, how do the Career Average Pay and Final Average Pay formulas come into play, and what factors should employees consider when estimating their future retirement payouts?

Essential Calculations for Retirement Benefits: Pension benefits for Kmart employees under the Sears Holdings Pension Plan are calculated using either the Career Average Pay or the Final Average Pay formulas. These calculations take into account an employee's years of credited service and compensation up to the freeze date. Factors like estimated Social Security benefits and specific formulas (such as a deduction based on Social Security benefits under the Final Average Pay formula) play crucial roles in determining the final pension payout.

How can Sears Holdings employees best navigate the process of applying for benefits under the Pension Plan? What specific steps should participants take to ensure their applications are processed correctly, and what important deadlines should they be aware of to avoid any negative consequences on their retirement benefits?

Navigating the Benefits Application Process: To apply for pension benefits, employees must submit a formal application, ideally 30 to 90 days before the intended commencement date. It is crucial to ensure all personal information, including marital status and spouse details, is up-to-date to avoid delays or inaccuracies in benefit processing. Missing application deadlines can lead to postponed benefit payments or unwanted default options.

In what situations can Kmart employees expect to receive a Deferred Vested Pension, and how is the calculation for this pension affected by their previous employment and vesting service? Employees should be aware of the important factors influencing their eligibility and the steps necessary to maintain their retirement benefits after leaving the company.

Eligibility and Calculation for Deferred Vested Pension: A Deferred Vested Pension is available to employees who leave the company after becoming vested but prior to qualifying for retirement. The calculation mirrors that of a normal retirement pension, with possible early commencement reductions. Understanding the timing of benefit commencement and the potential reductions for early start is vital for planning.

How does the Sears Holdings Pension Plan address tax considerations for employees receiving both monthly payments and lump sum payments upon retirement? What tax implications should Kmart participants be aware of, particularly in relation to IRS rules for distributions and potential penalties for early withdrawal?

Tax Implications of Pension Receipt: Pension payments, whether monthly or lump sum, are subject to federal taxes. Monthly benefits are taxed as ordinary income, while lump sums might be eligible for special tax treatments or rollover options to defer taxes. It’s important for Kmart employees to consider these implications and possibly consult with a tax advisor to optimize tax liability.

What are the rights and protections afforded to Kmart participants under the Employee Retirement Income Security Act (ERISA) as they navigate their retirement benefits with the Sears Holdings Pension Plan? How can employees leverage these rights to ensure they are receiving all the benefits to which they are entitled?

ERISA Rights and Protections: Under ERISA, Kmart employees are entitled to certain rights including the ability to appeal denied benefits, access to plan information, and assurances of fair and equitable treatment of their benefits. Leveraging these protections ensures that employees receive all due benefits.

What steps should Kmart employees take to update their personal information to ensure they continue receiving their benefits without interruption, especially in the context of missing participants or uncashed checks? What resources and contacts at Sears Holdings are available to assist with these updates?

Updating Personal Information: Maintaining accurate personal information with the pension plan is crucial for uninterrupted benefit payments. Employees should promptly update changes such as address, marital status, or beneficiaries to prevent issues with benefit distributions or lost checks.

How does the process of transferring between affiliated employers impact pension benefits for Kmart employees under the Sears Holdings Pension Plan? What considerations should be taken into account concerning Credited Service and Vesting Service during such transfers, and how can employees ensure they do not lose any entitled benefits?

Impact of Transfers Between Affiliated Employers: Transferring between Sears Holdings’ affiliated employers can affect pension benefits differently depending on whether the employer participates in the pension plan. It's essential to understand how such transfers impact credited and vesting service accruals.

For Kmart employees seeking more information about their benefits under the Sears Holdings Pension Plan, what is the best way to contact company representatives? How can they effectively communicate their questions or concerns to ensure they receive accurate and timely information regarding their retirement benefits?

Contacting Plan Representatives: Kmart employees seeking clarity on their pension benefits should contact the Sears Holdings Pension Service Center. Effective communication, including prepared questions and necessary documentation, will aid in obtaining accurate and comprehensive information.

With the current political climate we are in it is important to keep up with current news and remain knowledgeable about your benefits.

Sears Holdings Corporation's pension plans were taken over by the Pension Benefit Guaranty Corporation (PBGC) following the company's bankruptcy. The two defined benefit pension plans have been frozen since 2005, meaning no new benefit accruals are added. The plans are underfunded by approximately $1.4 billion, with PBGC assuming responsibility to ensure pension payments continue. These plans cover about 90,000 participants who worked for Sears, Roebuck and Co., and Kmart Corporation. Despite the underfunding, PBGC is expected to cover the vast majority of pension benefits owed under these plans. Participants can manage their benefits and verify information through PBGC's online platform or service center.

Bankruptcy and Store Closures: Sears Holdings emerged from bankruptcy with significant store closures, reducing from nearly 700 stores to less than 25. The company has been liquidating its remaining assets and recently announced more store closures in 2024. The focus is on resolving bankruptcy-related issues and managing the liquidation process effectively (Sources: The Layoff, Yahoo Finance).

Sears Holdings offered both RSUs and stock options before its bankruptcy. RSUs vested over time, providing shares, while stock options allowed employees to buy shares at a fixed price.

Sears Holdings, now part of Transformco, has faced numerous challenges in recent years, impacting its ability to provide comprehensive employee healthcare benefits. The strategic transformations initiated since 2017 aimed to improve operational performance and liquidity, which included measures such as obtaining additional loan proceeds and real estate sales. However, the company's financial struggles and store closures have also led to significant changes in employee benefits, including healthcare. As part of its efforts to stabilize and restructure, Sears has focused on reducing outstanding debt and pension obligations, contributing almost $4 billion to its pension plan since 2005 due to prolonged low interest rates. In 2023, Transformco continued to navigate its financial challenges, which have influenced its healthcare benefits offerings. The company has aimed to maintain basic healthcare coverage for its employees despite ongoing restructuring efforts. This includes providing access to medical, dental, and vision plans, although the specifics of these benefits and any enhancements over the past years have been less prominently highlighted compared to the broader financial strategies and operational changes. The focus on financial stability and cost reduction remains critical for Transformco as it seeks to ensure the viability of its employee benefits programs amid economic uncertainties.