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
* 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.
