Recent Changes Spark New Social Security Strategies

by: Vicki S. Bernardi, CPA

The Bipartisan Budget Act of 2015, signed into law in November, contains provisions that will cost some retirees thousands of dollars in Social Security benefit payments. The act eliminates the ability to “File and Suspend” as well as the “Restricted Application” strategy. In addition, individuals older than 66 who filed for benefits and then suspended them in order to get a higher benefit later, will no longer have the option to receive a retroactive lump sum payment if they change their mind and lift the suspension at a later date.

People who have been planning on using either of these claiming strategies may need to consider addressing these changes in their retirement planning.

Here is a look at the two eliminated strategies:

File and Suspend

This strategy allowed a married individual to file for benefits at his or her full retirement age (generally 66 for the current group of baby-boomers) and immediately suspend them. The individual could then begin collecting at a later time when the benefits reached their highest value (maximum value at age 70). This allowed the spouse/dependents to collect a spousal/dependent benefit based on the earner’s wage record.  A working spouse would file and suspend, enabling the stay-at-home spouse to collect spousal benefits while the earner’s check continued to grow.

Those with suspended benefits could elect at any time to un-suspend benefits and request a lump sum payment of the total amount suspended back to their original filing date.  Individuals at full retirement age could defer their monthly benefit amount and let it grow, knowing they could receive a lump sum payment if needed.  This potential to build a cash reserve has been a very valuable strategy for those who had a change in health or financial status.

Under new rules: If your spouse suspends his or her benefits, you cannot collect spousal benefits based on his or her work record. In addition, Social Security beneficiaries can no longer retroactively un-suspend benefits and receive a lump sum payment. If the individual needs to start receiving benefits, he can un-suspend his filing, and he will begin receiving monthly payments at a higher rate based on his age at that date.

Note: A spouse or children currently receiving benefits due to the wage earner filing and suspending will continue to receive these benefits.

Transitional rules: The spouse who wants to file and suspend must turn 66 before May 2016. That spouse also needs to file and suspend before April 30, 2016. The individual collecting spousal benefits must be at least 62 to do so. The beneficiary must be age 66 to receive a full spousal benefit (otherwise, it will be reduced for taking it early). There is no transitional rule for requesting lump sum payments.

Restricted Application

This strategy has been available to married individuals who have both reached their full retirement age.  Under this strategy, as long as one spouse has already claimed a retirement benefit (even if suspended), the other spouse could file a “restricted application” to collect only a spousal benefit, while their own benefits continued to increase.

Under new rules: Filing an application for spousal benefits will now also trigger your own Social Security retirement benefit.  You will receive an amount approximately equal to whichever is higher:  your personal retirement benefit or your spousal benefit.

Note: This change is not applicable to surviving spouse benefits as deemed filing does not apply to widows or widowers.

Transitional rules: Individuals who want to file a restricted application for only spousal benefits must be 62 or older by Jan. 1, 2016 — or those born Jan. 1, 1954, or earlier. Those retirees are grandfathered in; they can collect those benefits once they reach their full retirement age, even if that is several years from now. (Those who turn 62 after Jan. 1 next year are no longer eligible.)

Conclusion

The Bi-Partisan Budget Act phases out two very beneficial Social Security benefit filing strategies called “File and Suspend” and “Restricted Application.”  However, these strategies are transitionally still available for certain individuals.  For individuals at least age 62 by the end of 2015 the Restricted Application is still available upon reaching Full Retirement Age.  

Additionally, those reaching Full Retirement Age by May 1, 2016 can still File and Suspend by April 30, 2016.  For all others, these valuable strategies will no longer be available.  However, other Social Security benefit filing strategies still remain.  There is still a need to review the coordination of benefits between a husband and wife to determine the best time to take worker benefits and spousal benefits.

Still have questions on your situation?  Let us know how we can help!