Upon retiring, many of us are able to cash out accrued sick and vacation time. Although these are non pensionable earnings and are received after separating from service, Social Security may think these are work earnings.
Example: If someone retired near the end of the year and started collecting social security, if not at full retirement age they would be subject to an earnings cap. The lump sum may come early in the next calendar year and will generate a W2 report for the IRS. When Social Security receives this earnings report and it shows income that exceeded the cap, they will recalculate your benefit.
Payments such as sick, commissions, bonuses, severance pay, and vacation are deemed as Special Payments by the Social Security Administration. Because a W2 doesn’t indicate what the pay was for, it is up to the individual to bring proof to Social Security to not have their benefit reduced. See the booklet below by clicking on the link.