Exercising Stock Options After Retiring Can Trigger Social Security Earnings Test

Full analysis

A listener who retired in 2016 and started Social Security in 2017 later received a letter demanding repayment of nearly $15,000, and separately discovered his 2017 earnings record showed zero. Chris Stein explained that non-qualified stock options (NQSOs) — a form of employee stock compensation — are treated as wages by Social Security when exercised: they appear on a W-2, are subject to FICA (Social Security and Medicare payroll) withholding, and count against the Social Security earnings test, which reduces benefits for people who claim before their full retirement age and then earn wages above a threshold. The listener's employer apparently reported the options correctly on the year-end W-2 but failed to report them through the separate monthly or quarterly payroll process that actually feeds the Social Security earnings record, which is why the record showed zero. As for whether correcting the record will produce back pay or a higher benefit going forward, Stein said it is unlikely to change much: the corrected income would simply replace one of the 35 years used to calculate average earnings, and unless the stock option income was large enough to displace a low year in the listener's 35 best earning years, the benefit will not shift meaningfully.