A beneficiary's initial grace year is the first year that they have at least one Non Service Month (NSM), i.e. a month in which they do not earn more than the monthly exempt amount, in or after their month of entitlement to a retirement, survivor, or auxiliary benefit, and before the month of their FRA.

The Monthly Earnings Test (MET), which applies when an entitled beneficiary has one or more non-service months (NSM) in a grace year, allows payment of benefits to a beneficiary even if they have substantial earnings prior to the month of entitlement. Apply the MET only to months in the grace year in which earnings exceed the monthly exempt amount. For beneficiaries under FRA, use the entire yearâ€™s earnings to calculate the amount of excess earnings and deduct \$1 for every \$2 in excess earnings. In the year a beneficiary reaches FRA, use the earnings for all months up to but not including the month of FRA to calculate excess earnings and deduct \$1 for every \$3 in excess earnings.

For example in 2015 with the low exempt amount of \$15,720:

1. Joe earned \$5,000 per month from Jan through Apr, he filed for retirement benefits of \$2,000 per month, at age 63, in May, he will not have any earnings from May through Dec. This is his grace year and there will be no earnings deductions.
2. Same as 1) except Joe earns \$1,311 in Jul and \$2,500 dollars in Aug. This is his grace year and he will have earnings deductions of \$2,000 in both Jul and Aug since the monthly exempt amount is \$1,310 = \$15,720 / 12.
3. Same as 1) except Joe earns \$1,311 per month in every month from May through Nov. This is his grace year and he will have earnings deductions of \$2,000 in May through Jul and of \$728.50 in Aug since his earnings deduction is \$6,728.50 = (\$29,177 - \$15,720) / 2.

See POMS Sections RS02501.021: https://secure.ssa.gov/apps10/poms.nsf/lnx/0302501021, and RS02501.030: https://secure.ssa.gov/apps10/poms.nsf/lnx/0302501030.