Budget Bill Makes MAJOR Changes to Social Security Planning

The Bipartisan Budget Act of 2015, signed into law by President Obama November 2, 2015, will dramatically impact two claiming strategies. Both the File-and-Suspend and Restricted-Application strategies are set to be eliminated.

What’s At Stake?

Two widely used Social Security claiming strategies are about to go the way of the dinosaurs.

File and Suspend Strategy

Current Law– Once an individual reaches their full retirement age (FRA), currently age 66, they are able to file for Social Security benefits, but request that such benefits not actually be paid. Doing so has allowed these filers to continue to earn 8% delayed credits each year for their own benefit, while serving two other primary purposes.

First, once a person has filed for their own benefit, it allows certain other family members – most commonly a spouse, but in some cases a child – to claim a benefit based on the income record of the person filing. Note that it hasn’t been the act of receiving benefits that has allowed other family members to claim benefits based on the other person’s earnings record. It’s merely been the act of filing.

Second, in the event the person filing for benefits changed their mind about waiting until a later date to receive Social Security benefits, they could request a lump-sum payment for benefits that would have been paid, back to the date of their application.
New Law – The budget bill kills the file-and-suspend technique by changing the rules so that an individual’s family member may only receive a benefit based on the other person’s earnings record if that person is, themselves, receiving a benefit. The budget also eliminates the retroactive lump-sum benefit option. This essentially makes filing and suspending one’s application a meaningless endeavor, though it will still technically be allowed.
Effective Date – The effective date of this change is April 30, 2016, (180 days after the signing of the bill).
Restricted Application Strategy

Current Law – Individuals are frequently entitled to more than one type of Social Security benefit. For instance, when both members of a married couple have worked and paid into the Social Security system, the couple may be entitled to both their own retirement benefits based on their own earnings record, as well as a spousal benefit, calculated based on the earnings record of the other. Prior to a person reaching their FRA, filing for one benefit means automatically filing for both benefits. This is formally known as deeming. However, once that individual has reached their FRA, they have been able file what’s known as a restricted application, requesting that only their spousal benefit be paid. By utilizing this approach, the filer has been able to receive at least some Social Security benefits in the interim, while simultaneously allowing their own retirement benefit to continue to grow with delayed credits until as late as age 70. At that time, (or sooner if desired), they could switch over to their own, higher, benefit.
New Law – The budget bill kills the restricted application strategy by changing the rules so that deeming not only occurs prior to an individual’s FRA, but all the way through age 70. Thus, if a person files for either their spousal benefit or their own benefit at any time, they will receive the higher of the two benefits but will no longer earn any delayed credits.
Effective Date – The change in the deeming rules will impact any individuals turning 62 in 2016 or later (technically though, a person turning 62 on January 1, 2016 would be ok thanks to a Social Security quirk that treats them as if their birthday was December 31st). For those persons already 62 or older, or who will turn 62 before the end of 2015, the restricted application rules will remain the same. Once they reach their FRA, they will be able to file an application to receive only their spousal benefit. Anyone younger than 62 at year’s end, however, will no longer be able to utilize this technique. Back to the drawing board!
Social Security Planning Going Forward
The difference in the effective dates of the above changes is going to make for some pretty interesting (tricky) planning for a while. For the next six months, it’s essentially going to be business as usual – at least for those who reach their FRA by the end of that period.

After April 30, 2016, things will begin to get more complicated. From that time, through the end of 2019 (when the last of those 62 or older at the end of this year will reach their FRA), an individual reaching their FRA will not be allowed to utilize the file-and-suspend technique to allow another family member to claim a benefit using their earnings record (while allowing their own benefit to continue to grow via delayed credits), but they will be able to file restricted applications. Thus, so called “combination strategies,” where one spouse files and suspends and the other spouse files a restricted application, will no longer be viable. However, since the restricted application alone will still be a viable approach, if one spouse has already filed for their own benefit, the other spouse will still be able to file a restricted application to claim only spousal benefits (provided they have reached their FRA).

Beginning in 2020, both the file-and-suspend and restricted-application strategies will be relics of the past, little more than memories. Social Security claiming decisions will continue to be important, but the “advanced” planning strategies utilized today will no longer enable future retirees to wrench additional dollars out of Social Security’s coffers. While individuals’ life expectancies are only likely to continue being pushed higher, they are likely to become even more resistant about waiting until 70 (or anytime beyond their FRA) to claim benefits since they won’t be able to get at least a little “taste” in the interim.

** Email Question: I’m bored and can’t sleep. Can you please tell me where I can find a copy of the budget bill so I can read it myself?

** Email Answer: Sure, misery loves company! Here is a link to the budget bill. The “CLOSURE OF UNINTENDED LOOPHOLES” provisions can be found in Section 831, beginning on page 71 of the PDF. I’ve highlighted the pertinent sections for you to make them easy to spot. And here is a link to the retroactive amendment to the bill. See page 5 for the relevant change. Once again, I’ve highlighted it for you to make it easy to spot. And finally, here is a link to the Congressional website with the final version of the bill that was signed into law (amendment incorporated).

Thanks to Jeff Levine from Ed Slott and Company for the email question and answer.

Sources:

https://www.congress.gov/

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