Chapter 2
Benefit Eligibility
Learning objectives
- Recognize how quarters of coverage (QCs) or Social Security credits determine a worker’s insured status for Social Security benefits.
- Recall what constitutes a quarter of coverage or a Social Security credit.
- Determine whether a worker is currently insured, fully insured, or permanently insured.
- Recognize when a worker is ineligible for benefits.
Overview
A worker must be insured under the Social Security system before retirement, survivors, or disability benefits can be paid to that worker or the worker’s family. All benefits—Social Security retirement, survivors, or disability—have a work requirement that varies with the specific program. A worker is insured when he or she has completed enough FICA-covered work for a given benefit. The amount of work needed is measured by credits, also called quarters of coverage.
Quarters and credits
Before 1978, the Social Security Administration (SSA) determined benefit eligibility using calendar quarters, known as quarters of coverage (QCs), but realizing that certain workers earn virtually all their wages in a few concentrated months, the SSA adopted the system of credits. In other words, if a worker was paid maximum yearly earnings subject to Social Security, (the Federal Insurance Contribution Act or FICA maximum), that worker would be credited for the four quarters of that year, even if the earnings were paid in fewer than four quarters.
A worker can earn a maximum of four quarters per year based on gross wages and net self-employment earnings. In 2019, earnings of $1,360 provide one credit; so, earnings of at least $5,440 during the year provide all four.
The examples illustrate that it does not matter when the wages were earned. The QC or credit is attributable to the quarter in which the wages were paid to the worker. However, if the covered worker was paid maximum yearly earnings subject to Social Security—the FICA maximum—the worker is credited for the four quarters of that year, even if the earnings were paid in less than four quarters.
Becoming permanently insured for retirement benefits
To be eligible to receive the full menu of Social Security retirement benefits (other than disability insurance), an individual needs 40 credits. Becoming insured for retirement can take more than 10 years for a worker with low annual wages. Workers with less than 40 quarters are not eligible for retirement benefits. Once insured status is established, the number of credits has no impact on the amount of the monthly retirement benefit the individual will receive. The individual benefit is computed on actual earnings and is covered in another chapter.
Knowledge check
- What does a worker generally need to be eligible to receive the full menu of Social Security retirement benefits (other than disability insurance)?
- Six credits.
- Thirteen credits.
- Forty credits.
- One hundred-eighty credits.
Special pre-1978 rules
In years before 1978, a worker would receive a QC for each calendar quarter during which he or she was paid at least $50.
There is a special rule that applies to farm workers for years before 1978. Instead of the $50-per-quarter rule, a farm worker received one QC for each $100 in cash wages paid during a year, without regard to the quarter in which the wages were paid. QCs were assigned beginning with the last calendar quarter and then counting backward.
Eligibility for self-employed workers
Rules for determining eligibility for Social Security insured statuses are different for self-employed workers than they are for employees. For 1978 and all later years, a self-employed individual accumulates credits or QCs based on the amount of total yearly earnings in the same manner as an employee does. However, the self-employed individual must still meet a minimum of $400 in net earnings from self-employment to receive any credits or QCs.
Both self-employed and working for another
If a person is both self-employed and an employee, that worker must add total earnings as an employee, and net earnings from self-employment to determine how many credits or QCs will be available.
Reporting earnings subject to FICA
Wages are reported to the SSA using Form W-2. For employees, the employer reports Social Security wages in box 3 of Form W-2. The Social Security tax paid by the employee is reported in box 4. Employers are required to file Form W-2 with the SSA, using transmittal Form W-3, no later than January 31 for the previous calendar year’s earnings.
Self-employment earnings (from working as a sole proprietor, independent contractor, freelancer, and the like) are reported on the taxpayer’s Schedule C of Form 1040. Self-employed farmers use Schedule F to report their business activity.
Only the net earnings reported on Schedules C or F are considered earnings by the SSA.
The Social Security tax due is calculated using Schedule SE for filers of Schedule C or F. Some self-employed people need extra time to gather all the information necessary to file an accurate tax return. If business owner clients file unusually late, for the purpose of obtaining Social Security credits, it is important to file a tax return before the three-year time limit expires (as explained in the following section).
Knowledge check
- Which form is used to report an employee’s Social Security earnings to the Social Security Administration?
- K-1.
- 1099-SSC.
- W-2.
- 1099-Misc.
Time limit for reporting earnings
The reporting of Social Security earnings must be done in a timely fashion to allow the accumulating of credits towards future Social Security benefits. The time period is three years, three months, and 15 days following the end of the calendar year in which the employee or self-employed individual earns the income. If earnings are not reported within this period, Social Security credits are not accumulated for the unreported income.
Verifying the credits
The SSA no longer mails out a Social Security Statement automatically every year. However, one can obtain a personal Social Security Statement online by using the “my Social Security” feature available at SSA.gov. my Social Security began in May of 2012 and in June of 2017 a second method of verification became required to access your account in the interest of cybersecurity. The easiest and most convenient way for most people to get instant benefit verification is by creating an account at www.socialsecurity.gov/myaccount. The online statement offers secure access to earnings records. It also shows estimates for retirement, disability, and survivors’ benefits. Covered workers and their advisers should check this statement to ensure that the individual’s wages and net self-employment earnings are reported accurately. Beginning in 2014, the SSA began sending paper statements every five years to individuals who are age 25, 30, 35, 40, 45, 50, 55, and 60. An annual statement will be mailed to individuals for each year after age 60. The paper statements will be sent to those individuals who have not established a “my Social Security” account.
Insured statuses
“Fully insured” status is required for most benefits. “Currently insured” status is required for young widows or widowers and surviving children. A special “disability-insured” status is required for disability insurance benefits.
Dependents and survivors are eligible based on their relationship to an insured worker. They are not subject to a work requirement. However, the worker on whose account their benefits are based must have satisfied a specific insured status requirement.
Fully insured status
To be fully insured, a worker turning age 21 after 1950 generally needs at least one QC for each calendar year after attaining age 21 and the earliest of
- the year before attaining age 62,
- the year before death, or
- the year before becoming disabled.
An exception is available for workers born before 1930. Their requirement is at least one QC for each year after 1950. Other exceptions may apply.
The minimum number of credits or QCs needed is six. All (or part) of a year that was included in a period of disability is not included in determining the number of QCs needed.
Permanently insured
A worker is permanently insured after accumulating 40 QCs. If the worker is fully insured, he or she will not lose fully insured status when he or she stops working under FICA-covered employment.
Credits required to be fully insured
The age and number of credits required for deemed fully insured status is provided in the following chart.
| If one was the following age on January 1, 1984, . . . | . . . then the following number of credits is required: |
| 60 or over | 6 |
| 59 or over, but less than 60 | 8 |
| 58 or over, but less than 59 | 12 |
| 57 or over, but less than 58 | 16 |
| 55 or over, but less than 57 | 20 |
Note: Credits earned before January 1, 1984 may not be used for deemed fully insured status. They may be used in addition to credits earned after 1983 to establish regular fully insured status.
Disability-insured status
A FICA-covered worker has obtained disability-insured status if he or she
- earned at least 20 QCs during the last 10 years, and
- has attained fully insured status.
Exceptions apply for those younger than age 31 and in certain other cases.
Workers who have not yet turned 31 will be fully insured if they have credits in at least one-half of the calendar quarters during the period beginning with the quarter after the quarter they turned 21 and ending with the quarter during which they became disabled.
The credits must be earned in this period. If the number of elapsing calendar quarters is an odd number, the next lower even number is used.
Currently insured status
Currently insured status requires fewer QCs than fully insured status. The currently insured worker is eligible for a smaller menu of benefits than a fully insured worker. Benefits available to a worker who is currently insured include
- Surviving child’s benefits, mother’s/father’s (young widow’s or widower’s benefits), lump-sum death benefit, and
- Medicare for end-stage renal disease (kidney failure) patients.
To be currently insured, a worker must accumulate at least six QCs within the 13 calendar quarter periods ending with the calendar quarter of death.
The calendar quarters are
- first quarter—January, February, March;
- second quarter—April, May, June;
- third quarter—July, August, September; and
- fourth quarter—October, November, December.
To determine this period, take the quarter and year of death, then go back three years from that year. The period begins with the quarter of that year (three years earlier) that corresponds to the quarter of death.
What the benefits do
When Social Security was enacted in the 1930s, it was not the intention that older Americans rely entirely on Social Security benefits for retirement income. The program has long been regarded as one “leg” of a “three-legged stool” of retirement security that includes the following:
- Personal savings
- Distributions from retirement plans such as pensions, IRAs, and other qualified plans
- Social Security benefits
However, that is not always the case. Today, Social Security alone provides the majority of income for nearly two-thirds of older Americans who receive its benefits. Savings and pensions have been inadequate. As a result, and in light of microscopic interest rates on personal savings, many Americans—particularly low-and middle-income earners—are facing an economically challenging retirement.
Knowledge check
- A worker younger than age 31 needs how many quarters of coverage to be eligible for full Social Security disability benefits?
- 100% of worked quarters to age of disability.
- 75% of worked quarters.
- 50% of worked quarters from age 21 to age of disability before age 31.
- 20% of worked quarters from age 21 to age of disability before age 31.
Summary
We discussed how Social Security credits or QCs determine a worker’s eligibility for specific Social Security benefits. We learned that credits, or QCs, are based on a specific dollar amount of FICA-covered earnings. A worker is permanently insured after 40 credits or QCs even if he or she stops working after obtaining the 40 quarters. Although fully insured workers are eligible for Social Security retirement (old age) benefits, currently insured workers are not. Special rules determine eligibility for Social Security disability insurance benefits.