On November 2, 2015, the Bipartisan budget act of 2015 was signed into law in order to prevent a government shutdown and help the sustainability of the Social Security program. The act contains some rule changes that will affect two key Social Security planning strategies: The file and suspend strategy and the filing of a restricted application for spousal benefits strategy.
While the way Social Security credits are earned has not changed, the way they can be collected certainly has. The loss of the two key planning strategies can have major impacts on your expected retirement income.
File & Suspend
A file and suspend strategy would involve the higher earning spouse filing for benefits upon reaching full retirement age and then suspending those benefits. While those benefits are suspended, the high earner would continue to accumulate delayed retirement credits until age 70, increasing the amount of the benefit until it is claimed at age 70. The lower earning or nonworking spouse would then file for spousal benefits based on the high earners’ full retirement age benefit.
The file and suspend strategy might also have been used by a worker that was contemplating retirement. She could have filed and suspended her benefits at full retirement age while continuing to work and, once retired, she could collect a lump sum of retroactive benefits back to the date of her original filing.
The file and suspend strategy could also have been used by someone facing health issues. If an individual foresaw a health issue that could shorten his life or shorten his ability to work, a retroactive lump sum of benefits may be more useful than the ability to accrue more delayed retirement credits.
Under the restricted application for spousal benefit strategy, the lower earning spouse would file for benefits on his own record, while the higher earning spouse would file a restricted application to receive spousal benefits based on the low earners record.
In order for this strategy to work, the higher earning spouse would have to have reached his full retirement age before filing the restricted application. This strategy allows the higher earning spouse to draw a reduced benefit based on his spouse's record while still accruing delayed retirement credits. Upon reaching age 70, when those delayed retirement credits stop accruing, the higher earning spouse would switch to his own higher benefits.
What Has Changed
The new law will effectively eliminate these strategies in the future.
Changes for suspension of benefits
The act derails the fie and suspend in a few different ways:
- It eliminates a spouse's and or independence ability to receive benefits based on a suspended record. For example, a higher earning spouse will no longer be able to file and suspend upon reaching full retirement age so that the stay-at-home spouse can collect on the high earners record while the higher earning continues to earn delayed retirement credits.
- It eliminates an individual's ability to receive benefits based on anyone else's work record while that individual's own benefits are suspended. For example, a divorce cannot file and suspend benefits at full retirement age and then collect spousal benefits based on the ex’s work record.
Workers will no longer have the option to file and suspend and then receive a lump sum retroactively back to the date of the original filing. For example, a worker with cancer might file and suspend once reaching full retirement age and then a few years later, find out the diagnosis is terminal.
The ability to receive a lump sum of what the benefits would have been had they been paid out from the original filing date will no longer be an option. Note: it does not appear that these changes will affect one's ability to file for six months of back benefits, once they are passed FRA.
It is easy to see how these new rules and changes can and will impact just about everybody, not just married couples.
Changes for Restricted Application
The biggest change is in the new "deemed filing" rule. Prior to these new rules taking effect, if an individual filed for benefits before reaching full retirement age, and that individual was eligible for benefits based on her own record and someone else's record, the Social Security Administration would pay out whichever benefit amount was the highest.
If however an individual waited until reaching full retirement age to file, she could file the restricted application and choose to collect off a spouse's or ex-spouse's record, while letting her own record continue to grow.
Under the new rules, you are deemed to have filed for the highest benefits available to you. If an individual is entitled to both her own retirement benefits and the spousal benefits and she files an application, she will be paid the highest benefit no matter what her age is.
Grandfathering and timing
There is some hope for those that are passed, at, or near full retirement age. But the clock is ticking. If you are near these ages you need to be prepared to act quickly.
It seems unlikely that these new rules will have any effect on those that have already implemented the strategies. While the Social Security Administration has yet to release much guidance, it is unlikely that the administration would take away benefits individuals are already receiving and relying on. If you are already receiving benefits based off of the strategies, it is more than likely that you will be grandfathered and that no changes will be made to your benefits.
Timing is key for File and Suspend
The changes for the file and suspend strategy will not take place for six months after the signing of the act. If you are considering using a file and suspend strategy, and have reached full retirement age or will reach full retirement age before April 30, 2016, you will have the ability to file and suspend. But the clock is ticking!
You will need to have reached your full retirement age and have everything in order, filed, and suspended before April 30, 2016.
The option to suspend benefits after reaching full retirement age has not totally gone away; rather the ability to collect benefits from a suspended record, or while your record is suspended, will be removed. If you were to file for benefits and then change your mind, you will still have the ability to suspend your benefits and accumulate delayed credits until age 70.
Timing for Restricted Applications
Some hope may remain if you are at or will be at least 62 by the end of the year. The ability to file a restricted application will still likely be available to those who are at least 62 by the end of 2015.
Because of one of the Social Security Administration's odd rules, those born on January 1 are deemed to have reached their birthday the year before, technically those who have turned 62 by January 1 2016 will still have this option available to them.
Once they reach full retirement age, they will be able to file the restricted application and collect any available spousal benefits as long as their spouse also has reached full retirement age and is claiming her own benefits.
The biggest change here is that the spouse has to be full retirement age and actually collecting her benefits, or she will have to have filed and suspended it before May 1, 2016, date after which individuals can no longer collect based on suspended applications.
With all of these rule changes and effective dates, it's easy to imagine how one might miss a deadline. Because of the ways these rules can work together, it is important to put plans into action sooner rather than later.
Who is hurt the most
These new rules might hurt some groups more than others.
Those who will not be 62 by 2015
Those who will not have reached age 62 by the end of 2015 may have to reconsider their planning strategy. A large group of people who are at or near age 61 will be especially unhappy with these changes. For some married couples, these changes are almost equivalent to losing $100,000 worth of retirement income.
Another group that may be affected in an unexpected and unfavorable way are divorcees. According to the old rules, an individual could collect based on an ex-spouse's record whether or not the ex-spouse was collecting her own benefits.
Under the new rules, one is not allowed to collect benefits based on a suspended work record. It appears that if an ex-spouse were to suspend her work record, it would eliminate the ex's ability to receive spousal benefits based on that work record until she started receiving her own benefit.
This change could likely lead to one ex-spouse holding hostage another ex-spouse's ability to receive spousal benefits.This change could likely lead to one ex-spouse holding hostage another ex-spouse's ability to receive spousal benefits.
Widows and Widowers
The group that appears to be the least adversely affected by the recent changes are survivors, especially those who are eligible for both benefits based on their own records and survivor benefits.
Survivors will still have two strategies available to them. They will still be able to start with a survivors benefit at age 60 and later switch to a higher workers benefit. Or they may be able to start with a workers benefit and then switch to a higher survivors benefit at full retirement age.
While some of the more creative claiming strategies have been taken away, planning opportunities are still available. For example, high earners can still delay claiming Social Security benefits to age 70 in order to earn deferred retirement credits.
For lower earning spouses eligible for regular retirement benefits, waiting to claim may no longer be beneficial because doing so is only advantageous if both spouses live longer.
Understanding these changes and what they will mean is important. Because some of these seem to put other rules at odds, the Social Security administration will likely release some guidance on these new rules. Furthermore, because many of the consequences of the changes may be unintended, it is possible that Congress and the president will make amendments later.
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