When a "pension" from India may affect your expected USA Social Security benefit.
OK, this is worth posting for my native India associates, friends and colleagues who were not able to make this Q&A session last week but have repeatedly inquired. It would generally be pertinent to those of you who have both USA SS retirement insured status AND expected receipts from India. The question is, what kinds of “pensions” or pension “like” payments from India would implicate WEP (Windfall Elimination Provision) and cause a correction/reduction of the individuals estimated USA SS benefit once he applies for it? This is what we came up with, but we do welcome any contrary information, because as many of you know, finding accurate information is incredibly difficult when we are dealing with two different countries. (Of note, India and USA do not have a totalization agreement yet, although that really shouldn’t have a bearing on WEP application.)
So here is what was being considered:
Which of the following lump sum payments made from India would be considered a lump sum pension payment in lieu of pension, for WEP purpose.
There are three types of payments a person may receive in India (at least 3 under consideration): EPF, PPF and Gratuity. And here is my take on all three.
1. Employee Provident Fund (EPF): -- this seems absolutely implicative in the WEP process, and so one would expect it to cause a USA SS correction to the benefit amount (reduction).
2. Public Provident Fund (PPF)*: -- my read is that this would NOT count as a pension for WEP purposes, and here is my thinking:
RS 00605.364 Determining Pension Applicability, Eligibility Date, and Monthly Amount
A. Determining if payments are a pension
1. Pension contains employee and employer contributions
If employer contributions or employer and employee contributions are used to determine the payment, it is generally a pension subject to the windfall elimination provision (WEP).
If only employee contributions are involved and the payment amount is based on employee contributions plus interest, i.e., a savings plan, it is subject to WEP, .
I do NOT find this to be a pension, as there is no work related component, there are not employee contributions from employee paycheck. There is no payments made by foreign country or government for work related activity. (If it WERE done through employment, however and "only employee contributions are involved", it would have to be the primary retirement plan in any event -- but again, I am not seeing a work component or "employee" contribution). This conclusion is based on a reliance on the following:
*PPF is a voluntary personal savings scheme available to all in India. The following are its characteristics:
a) Anybody, employed, unemployed, earner, non-earner can open the account and contribute up to a certain amount per annum defined by the government periodically. Currently, an account holder can deposit/contribute up to INR 150,000 (US$ 2240 approx.) per annum to his/her PPF account.
b) This is a personal account and no government agency or employer or any other agency contributes to this fund (PPF)
c) A person must contribute to his/her PPF for 15 years at least once a year. The fund matures in the 16th year and can be withdrawn. So it’s like saying that the fund has a lock in period of 15 years
d) The contribution made to the PPF account is from the pre-tax income, or the contribution is deducted from the taxable income of the person in case he/she is a taxpayer
e) The fund earns interest at a rate decided by the government once a year. The interest rate is similar to term deposit rate.
f) The principal and interest earned is paid to the depositor/account holder in lump sum after the maturity (15 years)
g) The payment is tax exempt.
3. Gratuity: -- This is a tax free amount paid entirely by an employer to an employee at the end of the employment and it is proportionate to the number of years of employment (particularly after 5+). The amount of gratuity is limited by law. This can be seen as deferred wages, loyalty bonus, or may be a lump sum pension. Payment of gratuity is governed by government labor law. My take: I think it is likely a pension yes. It is paid by employer contributions only; it is not required to be the primary retirement plan, is my understanding, to be considered a WEP implicating pension. As such, until the SSA decides to specifically put a word out on this, I’d report it and expect it to be implicating.
OK, so if anyone has contrary information OR interpretation of these rules, as pertains to those collecting moneys that may be pension from India, please email me at Stephaniejoy@joydisability.com or PM me. This research is tentative pending further word from the SSA.