Social Security Changes You Need To Know
The Bipartisan Budget Act of 2015 signed into law November 2, 2015 effectively eliminates two popular Social Security claiming strategies: file and suspend and file restricted. These two strategies have been used by married couples to increase lifetime Social Security income. There is some good news, especially for those nearing retirement, but it may require immediate action.
Those who are already receiving benefits are not impacted at all. The second positive is that people who are age 66 by April 30 can still file and suspend benefits if they do so by that date. In addition, the file restricted strategy continues to be available to those who are age 62 or older by December 31, 2015. Each individual strategy, or a combination of the two, can add tens of thousands of dollars in spousal benefits.
File-and-Suspend: Old Rules
The idea behind file-and-suspend was to permit one spouse at full retirement age (usually the higher earning spouse) to file for retirement benefits and immediately suspend them. This action resulted in the other spouse being able to file for spousal benefits. Remember, spousal benefits are not available until the primary worker files. The higher earning spouse then earns eight percent delayed retirement credits until age 70 resulting in 132 percent increase in monthly benefits.
Paul is age 65 and still working. He plans to retire in the next year but he wants to let his Social Security benefits grow until age 70 to ensure the largest monthly and survivor benefit. His wife Joan, age 61, has worked less than 10 years and does not qualify for her own retirement benefit.
Joan would like to start receiving her spousal benefit at age 62 even though her check would be reduced by claiming early. Paul goes on-line to the Social Security website at his full retirement age (FRA) and completes a file-and-suspend application in order for Joan to be able to file for a spousal benefit.
File-and-Suspend: New Rules
Under the new rules in Section 831 of the Bipartisan Budget Act of 2015, when the higher earner suspends benefits, this also suspends any benefits payable to the spouse or children.
Unfortunately for this couple, Paul is not FRA until after the April 30, 2016, file-and-suspend deadline. Therefore, Joan will not receive any benefits until Paul starts collecting his Social Security. This effectively eliminates the strategy.
In addition, there will no longer be an option to retroactively claim suspended benefits. Before the tax law change, a person who filed and suspended benefits could request a lump sum payment of the amount deferred. This caveat was used when the retiree became ill or had a change in financial circumstances. This too ends on April 30, 2016.
Deemed Filing Rule
The “deemed filing” rule has also changed. This was the rule that said when a spouse files early (before their FRA-full retirement age), he or she was deemed to file for their own retirement benefit first. It did not apply to those who filed for benefits after their FRA. This was the door opener for many couples’ strategies. Now, “deemed filing” applies regardless of what age benefits are claimed. This door has closed except for those who are 62 or older by the end of 2015.
File Restricted: Old Rules
The purpose of the restricted application was for someone to get spousal benefits while delaying their own Social Security retirement benefit. This allowed their own benefit to grow from age 66 to age 70 with the eight percent per year delayed retirement benefits.
Frank and Louise, both age 60, met with their financial advisor last year to review their retirement income goals. At FRA, it is anticipated that Frank’s annual Social Security benefit will be $12,000 and Louise’s benefit $8,000. The plan is for Louise to claim her benefit first and Frank to file a restricted application in order to receive a spousal benefit from Louise of $4,000 a year. Frank’s own benefit will continue to grow, and at 70, he will notify Social Security that he is turning on his own benefit. At that point, Frank will receive $16,000 annually due to delayed retirement credits, not counting COLAs.
File Restricted: New Rules
Under the new rules, a spouse born in 1954 or later who files for Social Security will be deemed to have filed for both their own and spousal benefits, and will receive whichever benefit is higher. In effect, this kills the strategy. As a young Baby Boomer, Frank can no longer choose to collect a restricted spousal benefit at FRA and let his retirement benefit grow until age 70.
Good news. Surviving spouses are not impacted by the tax law change. The survivor is eligible for a widow or widower’s benefit equal to 100 percent of the decease spouse’s benefit. The rule also applies to a divorcee whose former spouse has died, as long as the couple was married for 10 years and the divorcee remained unmarried until age 60.
Deemed filing never applied to survivor benefits, and it doesn’t now. The surviving spouse has a choice about when to claim for each benefit. Widows and widowers can file a restricted application for survivor benefits and let their own retirement benefit grow.
Rebecca is age 60 when her husband dies. She has worked and will be eligible for her own retirement benefit. She can take a reduced widow’s benefit now based on her deceased spouse and then switch to her own benefit later, if it is higher.
Alternatively, she can start with her own retirement benefit at age 62 and switch to a full survivor benefit when she reaches full retirement age.
Divorced parties did not fare so well in these changes. Under the old rules, an ex-spouse can collect a benefit based on the former spouse’s work record, even if the ex-spouse isn’t collecting benefits, as long as that ex-spouse is age 62 or older.
Divorced spouses who are younger than 62 by the end of 2015 will not be able to collect spousal benefits while delaying their own retirement benefits. Under the new rules, when the divorcee makes a claim, they either receive their own benefit or a spousal benefit, whichever is higher.
In addition, it is not clear what happens to the spousal benefit if the ex-spouse suspends his or her own benefit. According to the new Social Security Act section 202(z)(3)(B), when someone suspends a benefit “no monthly benefit shall be payable to any other individual on the basis on the (worker’s) wages and self-employment income.” This unintended consequence will hopefully be fixed.
Talk to your appropriate professional if you think any of these social security changes might apply to you. In fact, if you are nearing retirement age, it’s probably a great opportunity to meet with your advisor and revisit your overall retirement strategy.