Changes to Popular Social Security Claiming Strategies Will Impact Couples and Divorcees

The Bipartisan Budget Act of 2015, signed into law by President Obama last month, includes provisions written to shut down two Social Security claiming tactics popular with couples and divorcees.  This blog post explains how these strategies – file and suspend and the restricted application – are used today and how they are impacted by the new law.

To view the full text for H.R. 1314 (Bipartisan Budget Act of 2015), click here.

File and Suspend Strategy

File and suspend is a financial strategy that allows married couples to collect some benefits now while deferring benefits for the higher earner.  The primary wage-earner generally continues to work in order to earn the maximum benefit; this not only locks in the maximum retirement benefit during the primary wage-earner's lifetime, but also the maximum benefit for the surviving spouse.

In order to use the file and suspend strategy, at least one spouse has to have reached Social Security’s full retirement age (FRA).  For people born between 1943 and 1954, FRA is age 66.  FRA then increases by year of birth up to age 67 for those born in 1960 or later.

File and suspend has been an excellent option for couples to use in either of the following situations:

·         one spouse never worked (can only receive benefits as a spouse)

·         one spouse has a lower wage-earnings history

Here is how the file and suspend strategy works:

The 'primary' spouse with the higher earnings record files for benefits at his or her FRA and immediately suspends the claim.  The other spouse, who must be at least age 62, may then claim spousal benefits.

The primary spouse can continue to work and will earn delayed retirement benefits up to age 70.  In the meantime, the other spouse collects a bigger benefit than would have been possible based on his or her own earnings history.

This strategy has worked best if both spouses are close in age, as spousal benefits are only half of the primary spouse’s benefit and are reduced further for early retirement.

Restricted Application Strategy

The restricted application strategy, also known as free spousal benefits, allows a spouse to claim a benefit and continue working.  Later, up to age 70, this claimant retires and switches from spousal benefits to the larger benefit earned on his or her own work history.

There are three requirements to use a restricted application:

·         the claiming spouse must be at FRA

·         the other spouse must have filed for benefit already (otherwise there would be no spousal benefit available)

·         the claiming spouse restricts the claim to spousal benefits

This strategy can be used effectively by two-income couples; and it differs from file and suspend since the claiming spouse collects benefits while continuing to work and allowing delayed retirement credits to grow.  In addition, unlike the file and suspend strategy, the claimant must have reached FRA to collect a spousal benefit.

Strategies for Divorced Workers

The restricted application strategy also works for an ex-spouse who can wait until FRA to claim the spousal benefit. The ex-spouse draws 50 percent of the other spouse’s benefit and continues to work, building delayed retirement credits at eight percent per year. Then, at age 70, the ex-spouse claims benefits on his or her own record.

In the case of divorcees, the other spouse is not informed by Social Security that benefits are being claimed on his or her record.

How Did the Bipartisan Budget Act of 2015 Impact These Claiming Strategies?

The file and suspend strategy may not have been intentionally put into existence by legislators, as some say this strategy is a legal loophole used only by those who have enough knowledge of how the Social Security system works.  In any event, the Bipartisan Budget Act of 2015 effectively kills the file and suspend strategy for married couples.  Beginning in May 2016, married individuals will no longer be able to receive the spousal benefit if their benefits are suspended.

People born on or before May 1, 1950 (those who reach age 66 for Social Security purposes by April 2016) still have access to file and suspend as long as the request for voluntary suspension is made by the end of April 2016.  In this case, auxiliary beneficiaries (the spouse and the children of a retired worker) may claim benefits under the old rules.

While file and suspend will be going away next spring, the restricted application strategy is being phased out over a longer horizon.  People born on or after May 2, 1950, but before January 2, 1954 can continue to do a restricted application under the new law.  People in this group can collect spousal benefits while allowing delayed retirement credits to grow, except if the other spouse suspends benefits after May 1, 2016 spousal benefits would be cut off during benefit suspension.

People born on or after January 2, 1954 (i.e., those who are under age 62 today) will not be able to benefit from either file and suspend or the restricted application.  Under the new law, voluntary suspension also suspends spouse and children benefits; and there will be no option to do a restricted application.  Divorcees in this age group who have been planning to work past FRA in order to maximize delayed retirement credits will not be able to collect 50% of the ex-spouse’s benefits at FRA, as allowed under the old rules.

People who are eligible to file and suspend Social Security benefits between now and April 2016 should consider taking action.  This includes single people who have never been married, since filing and suspending prior to the deadline could prove beneficial to a future spouse (one must be married for only a year in order to collect spousal benefits).

Example - Clients Mr. and Mrs. Regal

Mr. and Mrs. Regal have not yet retired and want to know how their Social Security planning strategies are impacted by the Bipartisan Budget Act of 2015.  Mr. Regal (age 65) will reach his FRA in November of 2016, while Mrs. Regal (age 66) reached her FRA in July of 2015.  Mrs. Regal is the spouse with lower earnings history; however her current income is strong and boosts her benefit calculation each year she continues to work (in addition to delayed retirement credits).  Mr. Regal is aware that delayed retirement credits will increase his benefits each year up to age 70, but he does not feel inclined to work much longer and is planning to file for retirement benefits at FRA.

As discussed above, the file and suspend strategy is now available only to people who reach age 66 by April 2016 and voluntarily suspend benefits by the end of April 2016.  Mr. Regal will turn age 66 next November, so the file and suspend strategy will not be available.  Since he has been planning to take his retirement benefit at FRA, he likely would not choose to file and suspend at FRA even if that option had not been eliminated by the 2015 law.

Mrs. Regal, on the other hand, can choose to file and suspend her benefit any time before May of 2016 since she already has turned age 66.  By doing so, Mr. Regal could file a restricted application at his FRA and collect spousal benefits while letting his delayed retirement credits grow.  This option has limited appeal since the spousal benefit in this case would be 50% of the lower earner's benefit.

The restricted application option continues to be available to Mr. and Mrs. Regal since both are over age 62 at the beginning of 2016.  The most suitable plan of action may be the following:

* Mr. Regal retires this year and files for his retirement benefit at FRA (November 2016)
* Mrs. Regal files a restricted application in November 2016 and collects 50% of Mr. Regal's benefit
* When Mrs. Regal reaches age 70, she will retire and collect benefits based on her own income

Health status and expected longevity also should be factored into the decision of when to claim benefits, since delayed retirement credits become extremely valuable when the Social Security recipient outlives normal life expectancy.  It is important that Social Security recipients weigh out the trade-offs between maximizing current income vs. lifetime income and potential survivor benefits.

Until next time,

Andrew Herman, President

AH Insurance Services, Inc.

 

 

2016 Medicare Premiums and Deductibles

In November, the Centers for Medicare & Medicaid Services (CMS) announced 2016 premium and deductible levels for Medicare Parts A and B.  Medicare is the federal health insurance program serving people age 65 and older, people under 65 with certain disabilities, and people of any age with End-Stage Renal Disease.

The announcement from CMS gave partial relief to Medicare beneficiaries impacted by a proposal made during the summer, which entailed a more than 50% hike in Medicare Part B premiums for those not held "held harmless."

2016 Medicare Part B Premiums/Deductibles

As anyone collecting Social Security already knows, there will no Social Security cost of living increase for 2016.  Consequently, most people with Medicare Part B are held harmless, or protected, from any 2016 premium increase since that would lead to a decrease in their net Social Security benefits (gross income less the Medicare Part B premium).  Those held harmless will continue to pay a Part B premium of $104.90/month in 2016.

Medicare beneficiaries not subject to the federal government's hold harmless provision will pay a base premium of $121.80 per month for Part B in 2016.  These beneficiaries are those not yet collecting Social Security benefits, those who will enroll in Part B for the first time in 2016, dual eligible beneficiaries who have their premiums paid by Medicaid, and beneficiaries who pay an additional income-related premium.  In total, these groups account for about 30 percent of Americans enrolled in Medicare Part B.

CMS also announced that the annual deductible for all Part B beneficiaries will be $166.00 in 2016.

2016 Medicare Part A Premiums/Deductibles 

Medicare Part A covers inpatient hospital, skilled nursing facility, and some home health care services.  Nearly all Medicare beneficiaries do not have to pay a Part A premium based on having at least 40 quarters of Medicare-covered employment (either on their own or on the earnings record of a spouse).

The Medicare Part A annual deductible for hospital admission will be $1,288 in 2016, an increase of $28 from the 2015 deductible level.  The Part A deductible covers beneficiaries' share of costs for the first 60 days of Medicare-covered inpatient hospital care in a benefit period.  Daily coinsurance amounts will be $322 for days 61 -90 of hospitalization in a benefit period and $644 for lifetime reserve days.  For beneficiaries in skilled nursing facilities, the daily coinsurance for days 21-100 in a benefit period will be $161.00 in 2016 (up $3.50 from the 2015 level).

Enrollees age 65 and over who have fewer than 40 quarters of coverage and certain persons with disabilities pay a monthly premium in order to receive coverage under Part A.  Individuals with 30-39 quarters of coverage may buy into Part A at a reduced monthly premium rate of $226.00 in 2016 (up $2.00 from 2015). Those with less than 30 quarters of coverage pay the full premium, which will be $411.00 a month (up $4.00 from 2015).

Click here for the November 10, 2015 press release from CMS.

Until next time,

Andrew Herman

President, AH Insurance Services Inc.

Medicare Trustees Report: Slow cost growth overall but some may see a 52% increase in Medicare Part B Premium

In July, the Medicare Trustees projected that the trust fund financing Medicare’s hospital insurance coverage will remain solvent until 2030.  Click here for the 7-22-2015 Press Release.

“Growth in per-Medicare enrollee costs continues to be historically low even as the economy continues to rebound.  While this is good news, we cannot be complacent as the number of Medicare beneficiaries continues to grow,” said Andy Slavitt, Acting Administrator of the Centers for Medicare & Medicaid Services (CMS).  “That’s why we must continue to transform our health care system into one that delivers better care and spends our dollars in a smarter way for beneficiaries so Medicare can continue to meet the needs of our beneficiaries for the next 50 years and beyond."

While per-enrollee Medicare spending growth has been low, a looming concern is a potential 52% jump in the Medicare Part B premium impacting 2016 Medicare beneficiaries in any of the following groups:

* New enrollees who start Medicare Part B on or after 1/1/2016

* Enrollees who are billed directly for their Medicare Part B premium (i.e., monthly premium is NOT deducted from Social Security benefits)

* Enrollees who pay an income-related higher premium

Decisions about premium changes will be made in October, so the premium hike that would impact approximately 30% of Medicare beneficiaries is not final.

Why only 30% Of Medicare beneficiaries impacted, not everyone?

People who have claimed Social Security benefits and are on Medicare must, by law, have their Part B premiums withheld from their Social Security payments.  Except for those paying an income-related higher premium, these Medicare beneficiaries are protected by a “hold harmless” provision mandating that their net Social Security benefits (gross monthly benefit less the Medicare Part B premium) cannot decline from one year to the next.  Normally, this is not an issue because in most years Social Security benefits are increased with a yearly cost of living adjustment (COLA).

What happens when the COLA is zero, as currently is forecast for 2016?  As noted above, Medicare beneficiaries having the standard Part B premium deducted from Social Security benefits cannot be required to pay any premium increases.  Yet, Medicare costs are increasing; and by law Medicare must collect 25% of Part B expenses from beneficiaries in the form of monthly premiums. Since Medicare cannot increase premiums on the 70% of beneficiaries who are held harmless, in order to achieve the targeted 25% ratio it must collect more from those beneficiaries who are not held harmless.

The Medicare Trustees projected that Medicare beneficiaries not protected by the hold harmless provision would pay 52% more in Part B premiums next year.  Those not held harmless include new enrollees to Medicare in 2016, people with modified adjusted gross incomes (MAGI) above $85,000 ($170,000 on joint tax returns) and those who haven’t yet begun receiving Social Security benefits.  Beneficiaries with low-incomes who have their premiums paid by their state are also not held harmless, so state budgets also would be impacted next year.

For those not subjected to the income-related higher premium, the 2016 Medicare Part premium would be $159.30 (52% increase compared to $104.90 premium in 2015).  Beneficiaries in the higher income premium groups would have similar percentage hikes, from a range of $146.90 to $335.70 a month in 2015 to a range of $223 to $509.80 in 2016.

Some Medicare beneficiaries could see an even higher percentage increase in 2016 Part B premium; for example a current enrollee who falls into a higher income premium group for the first time.  Assuming the first tier of higher premium applies, and for the first time in 2016, the Medicare Part B premium would more than double in 2016 (from $104.90 in 2015 up to $223 in 2016).

Medicare officials say they will do what they can to reduce these increases while still honoring their funding obligations to support Medicare Part B expenses.  In the meantime, the only strategy to avoid these increases is for beneficiaries paying their premiums directly to Social Security to sign up for Social Security before the end of 2015 and begin having their Part B premiums automatically deducted from their Social Security payments.

Some people who have been delaying Medicare Part B past age 65 due to presence of other health insurance coverage may be planning to enroll in Medicare Part B on 1/1/2016 due to retirement or other reasons.  These folks might want to consider contacting Social Security to request that their Medicare Part B coverage be put into effect on 12/1/2015.  Keep in mind that this strategy to avoid the premium increase would work only when Social Security benefits are being collected, and it may not be worthwhile to trigger Social Security benefits solely for purposes of avoiding a higher 2016 Part B premium.

What happens in the future when COLAs resume?

Let's assume that there is no COLA increase in 2016 on Social Security benefits.  If in 2017 there is also no COLA increase to benefits, then people held harmless in 2016 would continue to be held harmless in 2017.  But these "savings" are unlikely to continue for life.

Once Social Security COLAs resume, Medicare Part B premiums will trend towards "normal" benefits with consistent premiums for those not collecting and those collecting monthly Social Security benefits.  Beneficiaries held harmless in 2016 would face premium increases when COLAs resume, and beneficiaries not held harmless might see a decrease.  It seems probable that after a few years, all beneficiaries without any income-based premium surcharge will once again be paying the same Part B premium.

As a final note, the Medicare Trustees report projected the annual deductible for Medicare Part B also will increase by 52% (from $147 to $223).  Beneficiaries on Original Medicare supplemented by either Medigap Plan C or Medigap Plan F would not be impacted, since these two Medigap plans pay the annual Part B deductible.  Beneficiaries with Part C Medicare Advantage (MA) plans likely would not see a direct impact since MA health plans set their own deductibles, and most MA plans do not charge the enrollee any Part B deductible.

Until next time,


Andrew Herman
President

Supreme Court Saves ObamaCare Again

In a 6-3 decision, the Supreme Court saved the controversial Affordable Care Act (ACA) law commonly known as ObamaCare.  Today's ruling holds that the ACA authorized federal tax credits for eligible insureds - not only in the states that established their own exchanges - but also in the 34 states that have been using the federal marketplace that is accessed online at www.healthcare.gov.

The State of Florida leads the nation in ACA enrollments, with approximately 1.5 million 2015 enrollments.  Florida uses the federal marketplace and is one of 21 states that have not chosen to expand the Medicad program (that aspect of ObamaCare was left up to the states to decide in the earlier Supreme Court decision that ruled the ACA is constitutional).  The overwhelming majority of ACA enrollees on the federal marketplace receive premium subsidies (in many cases nearly the entire health insurance premium), so there was a lot at stake in today's ruling.

Chief Justice John Roberts issued the majority ruling, and once again was an unlikely hero in saving Obama's signature legislative achievement.  He was joined by Justice Anthony Kennedy, who is often the High Court's swing vote, and the four liberal Justices Stephen Breyer, Ruth Bader Ginsberg, Elena Kagan and Sonia Sotomayor.  Justice Antonin Scalia wrote the dissenting opinion and was joined by Justices Samuel Alito and Clarence Thomas.

Justice Scalia dissented in forceful terms, even going so far as to give the ObamaCare program a new name:  SCOTUScare.

Until next time,

Andrew Herman

Reporting From the Front Lines - 2015 ACA Open Enrollment

By the Numbers - Open Enrollment for 2015 Affordable Care Act (ACA) Health Insurance

Earlier today, I joined on the conference call with U.S. Department of Health and Human Services (HHS) Secretary Sylvia Burwell.   After graciously thanking the audience for contributing to the success of this year's Open Enrollment Period, Ms. Burwell provided the following ACA and Health Insurance Marketplace updates:

* 11.4 Million Americans selected or were auto-enrolled into a 2015 ACA plan

* Of the 11.4 Million, 8.6 Million enrolled through the Federal Marketplace and 2.8 Million through State-based Exchanges

* Florida came in first-place for Federal Marketplace enrollments, with 1.6 Million Americans enrolling in a 2015 plan so far

The figures above reflect all consumers completing an application and selecting a health plan, without regard to whether the premium was paid.  Ms. Burwell stated that the federal government's goal for 2015 open enrollment had been 9.1 Million actually paying the plan premium, and it appears that the 2015 goal is likely to be met or exceeded.

Ms. Burwell noted on the call that the 10 Million drop in uninsured Americans from 2013 to 2014 is the largest drop in the uninsured since the 1970s.

Below are additional numbers released on February 11th by HHS:

There has been an increase in coverage choices:

25%              The increase in issuers competing for business in the 2015 Marketplace as compared to last year.

40                 The average number of plans consumers can choose from this year.

It has become easier to navigate the web site or seek help in another language:

76 to 16       The reduction in the number of screens on HealthCare.gov that typical consumers need to click through when completing an application online this year as compared to last year.

200+              Languages in which consumer assistance is provided at the Marketplace Call Center.

60%               Percentage of consumers who visited CuidadodeSalud.gov through a mobile device or tablet.

Help for folks to sign up without the need for their own Internet, cell phone or tablet:

23,000+        Certified application counselors, navigators and in-person assisters on the ground in communities across the nation working to educate and enroll individuals in Marketplace coverage.

74,000+       Agents and brokers on the ground in communities across the nation working to educate and enroll individuals in Marketplace coverage.

Another government date soon approaching is the 2014 Federal Income Tax payment deadline.  Many folks may be interested to know about these just released income tax related numbers:

$268             The average monthly tax credit for people who qualify for financial assistance in the 37 states using Healthcare.gov through January 30.

87%              The percentage of Marketplace consumers who qualified for tax credits to make their monthly premiums more affordable in the first two months of open enrollment.

Until next time,

Andrew Herman

Certified Agent on the Marketplace

Do I Have to Pay an ACA Tax Penalty for 2014?

Were you covered under Affordable Care Act (ACA) or Grandfathered Health Insurance during 2014?  If not, you may have to make an individual shared responsibility payment (SRP) on your 2014 federal tax return.

The annual penalty for not having health insurance in 2014 is $95 or 1% of your 2014 income, whichever is greater.  This amount is for each person - if you have a family, you must pay this amount for you, for your spouse, and for each child ($47.50 per child under 18), up to the maximum annual penalty shown in the chart below. The penalty amount increases in future years:

From Kaiser Health News

The penalty amount each year is capped at the national average premium for a Bronze-level plan.  For 2014, the annual national average premium is $2,448 per individual ($204/month per individual) or $12,240 for a family of five or more members ($1,020/month).

If you are uninsured for a portion of a year, 1/12 of the yearly penalty applies to each month that you are uninsured.  If you are uninsured for less than three months of the year, you do not have to make an SRP.

How does the federal government count income for purposes of calculating the SRP?

- Start with all gross income reported on your 2014 return that is not exempt from tax

- Include any income from the sale of your main home in 2014

- Include only the taxable part of any social security benefits

- Include any gains (but not losses) from Form 8949 or Schedules C, D or F

- Then subtract the filing threshold amount (see table below for your filing status)

 

For example, a single person under age 65 with 2014 taxable income of $100,000 would subtract $10,150 to arrive at an adjusted income amount of $89,850.  Without any health insurance in place during 2014, that person must pay an SRP of $898.50 (this amount equals the greater of $95 or $89,850 x 1%).

Click here for a handy ACA Tax Penalty Calculator

Who qualifies for an exemption from the SRP?

If you did not have minimum essential coverage in 2014 required by ACA, review the following list to see if you can qualify for an exemption from the SRP:

• You’re uninsured for only 1 or 2 consecutive months of the year
• You enrolled in a health plan that started no later than May 1, 2014, but were uninsured any number of months before that in 2014
• The lowest-priced coverage available to you, through either an individual or job-based plan, would cost more than 8% of your household income
• You don’t have to file a tax return because your income is below the level that requires you to
• You’re a member of a federally recognized tribe or eligible for services through an Indian Health Services provider
• You’re a member of a recognized health care sharing ministry
• You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare
• You’re incarcerated (serving a term in prison or jail), and not being held pending disposition of charges
• You’re not lawfully present in the U.S.
• You’re a U.S. citizen living abroad, or one of certain types of non-citizens
• You qualify for a hardship exemption.

To learn more about how to apply for any of the exemptions shown above, visit the official government website at the following link:

https://www.healthcare.gov/fees-exemptions/exemptions-from-the-fee/

Until next time,

Andrew Herman