Are Distributions From a 403(b) Subject to the WEP Provision?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

“Are distributions from a 403(b) plan subject to the Windfall Elimination Provision?”

The answer is—it depends! The Windfall Elimination Provision is a Social Security provision that is designed to keep individuals from “double dipping,” or receiving both a pension from a job where they did not pay Social Security taxes (e.g., positions at certain public sector employers) and a Social Security benefit in connection with a job where they did pay Social Security taxes. Under the WEP, payments from a “pension” at the job where an individual did not pay Social Security taxes may reduce the Social Security benefit from a job where the individual did pay Social Security taxes.


Now, when most people think about a pension, they typically think of a traditional defined benefit pension plan, such as that offered by a state retirement system. However, the Social Security Program Operations Manual defines a pension more broadly for WEP purposes, as follows:


A. Determining If Payments Are a Pension

3. Payment from primary retirement plans and optional savings plans

a. Payments received from defined contribution plans (e.g., 401(k), 403(b) or 457 plans) based on non-covered employment are considered a pension subject to WEP regardless of the source of contributions (employer only, employee only or a combination of both), if the plan is the primary retirement plan. If the plan is a supplemental plan, the payments   are subject to WEP when the plan payments contain employer or both employer and   employee contributions.


As such, distributions from 403(b) plans are generally subject to the WEP. However, it would appear that the only 403(b) distributions that would not be considered to be from a pension plan for WEP purposes would be distributions that consist solely of employee contributions from a 403(b) plan that is supplemental to the primary retirement plan of the employer.


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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