At 64, He Took an $85,000 ESOP Distribution. Social Security’s $24,480 Earnings Test Ignored It

Congress recently passed the Retire through Ownership Act. That put employee ownership, and the way ESOP shares get valued, back at the forefront, though for one hypothetical worker, the more pressing question is about his own Social Security check.

Picture a man who retires at 64, claims Social Security and picks up a part-time job. He also takes an $85,000 distribution from his company’s employee stock ownership plan (ESOP). That check is roughly 3.5 times the $24,480 earnings limit, and he assumes Social Security will claw back most of his benefit.

A common concern is whether pension and 401(k) withdrawals would count against the retirement checks being collected.

Everything hinges on how the payment is classified, because retirement-plan money can land in his bank account without ever turning into wages.

His Company Stock Became Retirement Money Long Ago

An employee stock ownership plan is a retirement plan that invests mainly in the employer’s own stock, and his shares built up inside that plan over decades. When he retires and the plan pays him, the check is a retirement-plan distribution. That puts it in the same family as a 401(k) withdrawal. A bonus, a final paycheck or a stock award handed out as pay belongs in a different category entirely.

The legislation addresses ESOP valuations and does not change Social Security’s earnings test.

An $85,000 Check That Adds Zero to the Earnings Test

In 2026, someone under full retirement age (FRA) all year can earn up to $24,480 without having Social Security benefits withheld. Above that, Social Security withholds $1 for every $2 earned. Only wages and net self-employment earnings count. Social Security’s own guidance says it leaves out pensions, annuities, investment income and interest.

Here’s a full-year example. He earns $18,000 in part-time wages and receives the $85,000 distribution, with no other work income. His countable earnings come to $18,000. That keeps him $6,480 below the cap, so nothing gets withheld.

If the distribution counted, the formula would call for $39,260 in withholding, potentially wiping out his entire year’s benefits. Fear of that number keeps people from collecting money they’re entitled to.

If he retires midyear after earning more than the annual limit, a special monthly rule may help. In 2026, it can protect benefits for whole months when his wages are $2,040 or less and he performs no substantial work in self-employment. The ESOP distribution stays outside that test, too.

Off the Earnings Test, Still on the Tax Return

A taxable distribution still lands on his federal return, and it can make more of those benefits taxable. For a single filer, up to 50% of benefits become taxable once provisional income passes $25,000. Above $34,000, up to 85% can be taxed. A payout this size clears both thresholds easily.

Claiming early carries a permanent cost. With a FRA of 67, starting at 64 cuts the monthly check by about 20% for life.

If his benefit at full retirement age would be $2,000, claiming at exactly 64 would reduce it to $1,600 a month. At FRA, Social Security adjusts that decrease to credit months when benefits were withheld because of earnings. His monthly check still reflects the months he collected benefits early.

Three Paperwork Checks Before the Money Moves

1. Confirm the source. The payment should come from the qualified plan. It should arrive with a Form 1099-R, the form that reports pension and retirement-plan distributions. Wages are reported on a W-2, and Social Security reads that difference.
2. Keep it separate from final pay. Bonuses, unused vacation payouts and severance may appear on a W-2, but payments for work completed before retirement can qualify for special-payment treatment. He should document when those amounts were earned and report them separately from the ESOP distribution.
3. Look at the tax treatment before choosing how to take the money. A direct rollover of eligible pretax money to a traditional IRA or another eligible pretax retirement plan generally postpones income tax. Moving it to a Roth account generally creates taxable income. If an eligible cash distribution is paid directly to him, the plan generally must withhold 20% of the taxable amount.

He Already Earned This Money

His real decisions come down to two things. He must decide when to claim and how to handle the tax bill, because those two choices will shape his income for decades.

He spent years helping build the company. Cashing out his retirement stake does not put him back on its payroll.

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