The Bipartisan Budget Act of 2015 was signed into law on November 2nd and has been popularly reported as avoiding another debt ceiling fiasco. However, the act also has created major changes to Social Security and particularly claiming strategies that benefit married couples.
These changes will affect many of our clients, and we will be identifying affected clients and revisiting plans for each over the coming weeks. One certainty is that Social Security will remain complicated, and clients will need guidance through this new process. Below is a synopsis of our firm’s understanding of the new rules.
The passage of new rules eliminates the “restricted application.” Restricted application allowed a spouse who had attained full retirement age, who was also eligible for his or her own retirement benefit, to collect only a spousal benefit. Later, and up to age 70, the spouse would switch to his or her own retirement benefit, which would have grown to its maximum with delayed retirement credits.
The new legislation extends an existing concept called “deemed filing.” Previously, deemed filing had only been a factor before reaching full retirement age. The new rule extends the deemed filing provision to age 70, meaning that the payable benefit will always be the higher benefit if eligible for more than one.
Prior to reaching full retirement age, if you filed for any benefit, you were “deemed to be filing” for all benefits. This meant that if you were under full retirement age and eligible for your own benefit and a spousal benefit, you would only be paid a single benefit – the equivalent of the higher of the two. However, if you waited until full retirement age to claim a benefit, you could choose which benefit to receive. If the choice were made to restrict the application solely to receive a spousal benefit, your own retirement benefit would continue to accrue delayed retirement credits.
There is one small concession in the new legislation. The new rules around restricted application apply only to individuals who attain age 62 after 2015. For those who achieve age 62 prior to 2016, it remains possible to file a restricted application for spousal benefits only at full retirement age. However, this option is being effectively “phased out” over the next four years.
Divorced benefits seem to have suffered what some are calling an unintended consequence of the legislation. As of now, since filing a restricted application will not be available for anyone reaching age 62 after 2015, divorced individuals will not able to use this option unless they fall into the grandfathered group who will already be aged 62 by the end of 2015.
Voluntary Suspension (File & Suspend)
What is commonly known as “file and suspend” benefit claiming strategy will cease to exist 6-months from November 2nd when the act was signed. This claiming option involves one spouse, usually the higher earner but not always, filing for retirement benefits but immediately suspending payment. The purpose was to allow the worker’s spouse to begin a spousal benefit while the worker’s benefit continued to earn delayed retirement credits on his own record.
With the new legislation, when you suspend benefits, all benefits paid from your record are also suspended. Previously, you could suspend benefits while a spouse or young children could continue collecting a benefit from his record. The new legislation will require that you receive your own benefit in order for other benefits to be paid from your record.
The new legislation will leave on the table the ability to suspend benefits and accrue delayed retirement credits. For example, if you file before your full retirement age and later decide it was a mistake, you can suspend benefits at full retirement age and accrue delayed retirement credits. However, any other benefits being paid from the suspended benefit will stop.
The good news is that anyone who has already claimed benefits with a file and suspend strategy, or anyone who implements such a strategy before the deadline, can continue with their strategy.
Our firm is continuing to monitor developments with this legislation. Again, we will proactively reach out to those affected and modify plans as needed. In the interim, please call or email with any questions you have.
Kevin Kroskey, CFP®, MBA | President & Senior Wealth Advisor
- As of May 1, 2016, spousal or child benefits will no longer be payable unless the primary earner is also collecting Social Security benefits. Spouses will also no longer be able to file restricted claims for spousal benefits at their full retirement age.
- Workers and spouses who are currently using these strategies (e.g. have already filed and suspended claims) are grandfathered in under the deal and will not be affected.
- Retirees who will be age 62 or older by December 31, 2015 may still be able to file a restricted application for spousal benefits.
- Retirees who will be age 66 or older before May 1, 2016 may still have time to file and suspend and trigger benefits for their spouse or dependents.