Executive Summary
With last week’s “surprise” legislation that revealed Congress is killing the File-and-Suspend and Restricted Application claiming strategies for maximizing Social Security benefits, even those who weren’t previously aware of the strategies are now wondering whether it’s something to take advantage of before the new rules go into effect.
Fortunately, though, the new rules do not kick in immediately. Those who are already receiving benefits are not impacted at all. And those who are full retirement age – or will reach it in the next 6 months – will still have the opportunity to file-and-suspend before the crackdown takes effect after April 29, 2016. Furthermore, anyone who was born in 1953 or earlier (or January 1st of 1954) will still be able to do a Restricted Application for spousal (or divorced ex-spouse) benefits, even if the filing doesn’t occur until years from now.
Nonetheless, the next 6 months do mark an important transition period that merits a close look at Social Security claiming strategies, for the brief time window until the first "Social Security loophole" closer takes effect at the end of April 2016 - whether it’s an individual filing and suspending for a potential lump sum reinstatement in the future, a couple claiming spousal benefits, or a family claiming dependent or disabled child benefits while delaying individual retirement benefits until age 70. And for those “lucky” enough to be born in 1953 or earlier, only a few years remain to consider a Restricted Application, before that deadline ends, too!
(Michael's Note: This article was updated on November 5th at 8:37PM with updated details about the exact effective dates/deadlines and relevant birth-date requirements for file-and-suspend and restricted application.)
The Near-Term Expiration Of The File and Suspend Strategy For Married Couples
How File-And-Suspend Used To Work
The original version of File-And-Suspend allowed someone, upon reaching full retirement age, to file for Social Security retirement benefits, and then immediately suspend them. The fact that benefits had been filed for meant a spouse became eligible for spousal benefits (as spousal benefits cannot be claimed until the primary worker also files for benefits). However, the fact that benefits of the primary worker were subsequently suspended – and therefore were not actually received – meant that the original filer could still earn delayed retirement credit increases of 8%/year for waiting.
Example 1. John and Mary are both age 66, and have been married for 40 years, in a household where John was the primary breadwinner and Mary never worked outside the household. John is eligible for a retirement benefit of $2,000/month at his full retirement age, and Mary at her full retirement age will have no retirement benefit of her own, but will be eligible for a spousal benefit of $1,000/month, equal to 50% of John’s full benefit.
John wants to delay his benefits until age 70, increasing his benefit by 4 years x 8%/year of delayed retirement credits to $2,640/year (plus subsequent cost-of-living adjustments). Doing so not only boosts his own benefit, but increases the size of John’s survivor benefit that would be payable to Mary if John dies first.
However, waiting until John turns 70 means that Mary won’t receive any of her $1,000/month spousal benefits until then either, since Mary cannot get spousal benefits until John actually files for his own. And since there are no delayed retirement credits for spousal benefits, the extra 4 years of waiting just means Mary permanently loses those 4 years of $1,000/month benefits with no benefit in return!
To resolve this issue, John would File-and-Suspend upon becoming eligible at his full retirement age of 66. By doing so, Mary becomes eligible to claim her own $1,000/month spousal benefit (which she can receive in full, since she too is age 66), accumulating 4 years’ worth of spousal benefits she otherwise wouldn’t have received. (If Mary had been younger, she could have also claimed, but her spousal benefits would be reduced for starting early.) And John still gets the 8%/year delayed retirement credit increases for delaying his own benefits until age 70.
The fundamental point – with File-and-Suspend, John could allow Mary to get her spousal benefits, while still delaying his own benefits to earn the 8%/year delayed retirement credits.
How File-And-Suspend Will Work Now
Under the new rules in Section 831 of H.R. 1314, the Bipartisan Budget Act of 2015, when John suspends his benefits, he will suspend not only his own benefits, but any/all benefits payable to other individuals based on his earnings record. And since Mary’s spousal benefits are 50% of John’s benefits – and therefore are based on his earnings – then the entire File-and-Suspend strategy is effectively dead.
Now, if John were to file-and-suspend, he will suspend his benefits and Mary’s benefits, so no one gets any benefits. Which means if John wants to delay his benefits to earn delayed retirement credits, Mary will have to wait on claiming her spousal benefits, too.
Effective Date And Grandfathering Of File-And-Suspend
Under the final version of the Bipartisan Budget Act of 2015, the new limitations on File-And-Suspend will apply to anyone who requests a suspension of benefits more than 180 days after the effective date of the legislation. With the law being passed November 2nd of 2015, that means new suspensions occurring on April 30 of 2016 (when the deadline kicks in) will be subject to the new more restrictive rules (so file-and-suspend must occur on/by April 29th of 2016 to be grandfathered before the "Social Security loophole" is closed).
Accordingly, if John has already filed and suspended to give Mary access to benefits, the new legislation has no effect. There will be no adverse impact applied retroactively, as while there was an issue with retroactive enforcement in the original legislation, this was resolved with a subsequent amendment before the law was passed.
If John hadn’t yet reached full retirement age of 66, but would reach it between now and April 29th (i.e., he is already at least 65 ½, with a birthday of April 30 1950 or earlier, such that he will attain the age of 66 on April 29th of 1950 or earlier), he would still be able to file-and-suspend in that time window to give Mary access to spousal benefits while delaying his own.
However, if John is younger than 65 ½ now – such that he isn’t age 66 and won’t be by April 29 – he will not be able to use the file-and-suspend strategy at all, as the request to suspend benefits starting next April 30th will suspend Mary’s benefits as well, defeating the entire point of the file-and-suspend strategy.
Notably, if John had planned to just outright file for his benefits and get them, he can still do so, regardless of these new rules. The changes only impact the strategy of having John file to give Mary access to spousal benefits and then suspend his own. If he wants to file-and-get benefits (rather than file-and-suspend them), he can do so under the existing standard rules for Social Security.
Individual File-And-Suspend To Get A Lump-Sum Retroactive Reinstatement Is [Also] Dead
While the primary function of the file-and-suspend strategy was to allow a spouse to apply for spousal benefits while the primary worker delayed his/her own retirement benefits, a secondary version of the strategy was relevant for individuals.
Specifically, the opportunity was that at full retirement age, an individual who planned to delay benefits until full retirement age anyway could choose to file-and-suspend. While doing so would earn the same delayed retirement credits that were available by just delaying outright, the fact that the individual filed-and-suspended meant that if he/she had a change of mind later, it was possible to retroactively claim all benefits going back to the date of the original suspension.
Example 2. Jeremy is an individual who plans to delay benefits until age 70. However, just in case, he chooses to file-and-suspend upon reaching his full retirement age of 66.
If Jeremy has no change in circumstances, he will receive benefits at age 70, with the same 8%/year x 4 years = 32% increase for delayed retirement credits he would have received otherwise.
However, if Jeremy finds out he has a terminal illness at age 69, such that delaying benefits will no longer be beneficial, he can request a retroactive payment of his benefits going back to age 66. This allows him to be paid retroactively in a single lump sum for the 3 years of benefits he previously suspended.
Notably, the normal rules for “retroactive benefits” don’t allow this; it’s only possible to file a retroactive claim going back 6 months. However, under the Social Security Administration’s operations manual guidance (POMS GN 02409.130) regarding a voluntary suspension of benefits, those who had suspended payments had the option to reinstate them for the current month, a future month, or any past month during the suspension period.
Thus, as illustrated above, Jeremy can effectively get a lump sum payment of prior benefits, not by claiming “retroactive benefits” but instead by requesting a reinstatement of benefits back to the original file-and-suspend date. (Of course, doing so also meant the retiree would be treated as having claimed at the earlier date in the first place, forfeiting any delayed retirement credits, so this was generally only appealing if there was a change of health that meant the retiree didn’t expect to live long enough to reach the Social Security breakeven period for delaying benefits in the first place.)
What changed under the new rules, however, was that the Bipartisan Budget Act of 2015 created a new Social Security Act section 202(z), which defines the rules for how voluntary suspension will work in the future (including “unsuspension” or resumption of benefits). And the new rules stipulate under 202(z)(1)(A)(ii) that suspended benefits can only be resumed in the next subsequent month after the request is made, or at age 70. In other words, the new rules don’t have the option to reinstate going back to a prior month, which effectively means the optional-lump-sum-reinstatement strategy is dead.
Of course, since the new rules for suspension of benefits only apply to requests for suspension after the effective date, anyone who has already requested a suspension of benefits, or who does so in the next 6 months (if you reach full retirement age of 66 within the next 6 months!), remains eligible for the strategy. Even if the request to resume occurs years from now, as long as the original suspension occurred prior to the effective date of the legislation (by April 29 of 2016), the opportunity remains. Any suspension that begins after the effective date, though, will not be eligible for a subsequent retroactive reinstatement.
On the other hand, it’s also noting that because the reinstatement of benefits backdated to a prior month only exists because the Social Security Administration currently allows it in the Operations Manual, there also remains a possibility that the SSA will change its own manual shut down the strategy, even for those who have already filed and suspended, in a similar manner to the crackdown that occurred on the withdraw-and-reapply Social Security strategy back in 2010.
Of course, for those who were going to delay either way, there is little harm to file-and-suspend within the next 6 months just in case it turns out to be relevant in the future (though doing so will trigger enrollment in Medicare, and the end of eligibility to participate in a Health Savings Account). But be cognizant the availability of this reinstatement rule in the future is not unequivocally guaranteed, even for those who have filed-and-suspended before the effective date of the new legislation.
The End Of “Claim Now, Claim More Later” Restricted Application Strategies For Dual-Income Married Couples
How Restricted Application Used To Work
While the role of file-and-suspend was to allow someone else to get spousal benefits while the primary worker delayed his/her own benefit, the purpose of restricted application was for someone to get their own spousal benefit while delaying their own individual retirement benefit.
Example 3. Continuing the earlier Example 1 of file-and-suspend, imagine instead that Mary did spend some years working outside of the home, generating her own retirement benefit of $1,100/month. And because there’s limited benefit for both spouses to delay, Mary decides to start her own benefits now at $1,100/month, while John continues to delay.
The planning opportunity here is that John can file a Restricted Application to receive just his spousal benefit, and delay his own individual retirement benefit. This would allow John to receive his $550/month (which is 50% of Mary’s benefit) in spousal benefits for the next 4 years, and then switch to his own individual retirement benefit later. And since he doesn’t get any of his own individual retirement benefits along the way, they still earn an 8%/year delayed retirement benefit increase for 4 years, so when John switches back to his own benefit at age 70, it will have been boosted by 32% to $2,640 (plus subsequent cost-of-living adjustments).
Thus, while file-and-suspend was about allowing Mary to get a spousal benefit while John delaying his retirement benefit, restricted application is about John getting his own spousal benefit while delaying his own retirement benefit (and presuming that Mary is already getting her benefits as well).
A related Restricted Application strategy would even combine the two approaches.
Example 4. Continuing the prior example, instead of having Mary file for benefits and John file a restricted application for $550/month, John could file-and-suspend and let Mary get 50% of his benefit. Of course, there’s not much reason for Mary to claim a $1,000/month spousal benefit when she’s already eligible for a $1,100/month retirement benefit of her own, since upon filing for both benefits Mary will only receive whichever is higher, not both.
However, if John files-and-suspends, Mary can file a restricted application herself, receiving the $1,000/month spousal benefit from John while delaying her own. This way, Mary can delay her own benefit to earn the maximum 32% increase for delaying – pushing her $1,100/month benefit up to $1,452/month – and also get $1,000/month along the way until she switches back to her own benefit. And because John filed-and-suspended, he will get 32% of cumulative delayed retirement credits on his benefit, too.
Ultimately, which of these strategies is superior – having John file a restricted application, or having John file-and-suspend so Mary can file a restricted application – will depend on how long each of them lives. Nonetheless, the fundamental point of Restricted Application was/is to allow one spouse to claim spousal benefits while simultaneously delaying his/her own individual retirement benefits.
On the other hand, it’s also worth noting that because a Restricted Application is all about claiming a spousal benefit based on the other person’s retirement benefit, while also delaying your own retirement benefit, it’s only relevant for dual-income couples who each had enough in earnings to be eligible for a Social Security retirement benefit in the first place. For a single-income household, a Restricted Application is not relevant, only File-and-Suspend.
How Restricted Application Will Work Now
Under the new Section 831 rules of the Bipartisan Budget Act of 2015, when either John or Mary files for benefits, they are deemed to file for both individual and spousal benefits. And under the standard rules for Social Security benefits, anytime someone applies for multiple benefits they simply receive whichever provides the biggest benefit check (i.e., the larger benefit simply overwrites the smaller one).
In other words, there will no longer be such thing as applying for just one benefit and switching to the other later. Instead, for better or worse, either all benefits start earlier, or all are delayed later.
Effective Date And Grandfathering Of Restricted Application
In the case of Restricted Application, the effective date for the new rules is a bit different.
For those who turn age 62 or older this year – in essence, those born in 1953 or earlier, or someone born on January 1st of 1954 who technically "attains" age 62 as of December 31 of 2015 under POMS GN 00302.400 – Restricted Application is grandfathered under the current rules. Which means if you’re already receiving a spousal benefit under restricted application, you can continue to do so. And if you’re not receiving a spousal benefit yet, but planned to file a restricted application for it in the future, you can still do so – even if your filing for restricted benefits wouldn’t have happened until as late as 2019 when today’s 62-year-olds finally reach full retirement age.
On the other hand, for those who are under age 62 this year – i.e., born January 2nd of 1954 or later – there will simply no longer be any opportunity for doing a Restricted Application, now or in the future. Instead, a spouse eligible for spousal benefits will be required to file for all benefits, or wait on all benefits.
Notably, though, the entire question of filing a restricted application for spousal benefits is a moot point until the other member of the couple has already filed for benefits. In the next 6 months, that other member of the couple could file-and-suspend for benefits to activate the spousal benefits; beyond that point, while a restricted application may be possible, it can only occur if the other member of the couple files-and-gets benefits.
Impact of the New Rules On Divorced/Ex-Spouse Benefits To “Claim Now, Claim More Later”
In the case of a divorced spouse, file-and-suspend was not relevant, since the divorced spouse is eligible for a full spousal benefit at full retirement as long as his/her ex-spouse is at least age 62 (regardless of whether that person has filed for benefits).
However, filing a restricted application to obtain the ex-spouse spousal benefits while delaying individual benefits was an effective strategy to maximize retirement benefits while obtaining some (ex-spouse) benefits along the way.
This version of the “claim now, claim more later” strategy remains available under the new rules, but only for those born in 1953 or earlier (or on January 1st of 1954) who are grandfathered under the budget legislation. Thus, for those who are already claiming ex-spouse spousal benefits, or were born on January 1st of 1954 or an earlier year and planned to claim ex-spouse spousal benefits in the future, the option to claim spousal at full retirement age and delay retirement benefits until later remains available.
For those born on January 2 of 1954, or later, there will no longer be any option to delay individual retirement benefits while claiming an ex-spouse’s spousal benefit. Instead, a divorcee must either claim all benefits (both spousal and retirement) and receive whichever is higher, or wait to increase the individual retirement benefit and claim none until then. The claim-one-and-switch strategy will no longer be available.
A Potential Wrinkle For (Vindictive) Divorced Spouses
One significant caveat and complicating factor of the new rules is that while file-and-suspend was not normally relevant in divorced spouse situations, the new crackdown on suspended benefits may have unwittingly made it relevant.
The issue is that under the new Social Security Act section 202(z)(3)(B), when someone suspends a benefit “no monthly benefit shall be payable to any other individual on the basis of the [worker’s] wages and self-employment income.” This is the provision that eliminated the traditional form of file-and-suspend, by stipulating that when one person in a couple suspends benefits, the spousal benefit based on his/her record will also be suspended.
However, the reality is that an ex-spouse’s spousal benefit is also a benefit paid on the basis of the primary worker spouse’s earnings record. Which means while the reality is that while a divorced spouse didn’t need the other spouse to file for benefits to be eligible, a former spouse who suspends could potentially cause the divorced ex-spouse to lose access to benefits as well.
Example 5. Charlie and Betsy are divorced, after having been married for 10 years, and are currently unmarried. As long as Charlie is at least age 62, Betsy is able to file for an ex-spouse’s spousal benefit at her appropriate age, which wasn’t changed under any of the new rules of the budget legislation.
However, under the new rules, if Charlie plans to delay benefits until age 70 anyway, he could go into the Social Security Administration at age 66 (after the effective date of the new legislation), and file-and-suspend just to be vindictive and prevent Betsy from getting her ex-spouse’s benefits. After all, the new rules stipulate – as quoted above – that once effective, when Charlie suspends, “no monthly benefits shall be payable to any other individual [such as an ex-spouse] on the basis of [Charlie’s] wages and self-employment income.” In other words, while Charlie doesn’t have to file to give Mary benefits, Charlie’s suspension may potentially suspend his ex-wife’s benefits.
This was almost certainly not an intended outcome of the legislation, and may be within the Social Security Administration’s control to be fixed. If not, though, it may require subsequent legislation from Congress to further amend the Social Security Act to prevent this undesirable outcome. Either way, it will not matter until the new rules take effect after April 29 of 2016, so there is at least a 6-month period for the issue to be resolved.
The (Non-)Impact of the New Rules On Survivor Benefits (Including Divorcee Survivors)
When one member of a married couple passes away, the survivor is eligible for a survivor’s benefit (also known as a widow or widower’s benefit), equal to 100% of the decease spouse’s benefit. The rule also applies to a divorcee whose former spouse has passed away, as long as the couple was married for at least 10 years, and the divorcee remained unmarried until age 60.
As with any/all Social Security benefits, in the event that a surviving spouse claims multiple benefits – such as a widow’s benefit and his/her own individual retirement benefits – only the higher of the two is paid, not the cumulative total of both.
However, surviving spouses have a choice about when to claim each – the widow’s benefit and his/her own individual retirement benefit – and the new budget legislation does not change these rules.
As a result, a surviving spouse still has the flexibility to choose whether to begin widow’s benefits as early as age 60 or as late as full retirement age (at age 66), and also can choose whether to start his/her own retirement benefits as early as age 62 or as late as age 70. In both cases, starting earlier than full retirement age results in a reduced benefit, and with retirement benefits delaying past full retirement age still earns delayed retirement credits. But either way, the surviving spouse can choose independently when to start one and then the other.
Start-Stop-Start And File-And-Suspend For Parents With Dependent Or Disabled Children
When someone claims individual Social Security retirement benefits, an additional payment of 50% of his/her Primary Insurance Amount is also payable for each dependent child in the household (including biological and legally adopted children, as long as the child is unmarried and under the age of 18). The rules also apply to disabled children with no upper age limit, as long as the disability started before the age of 22. Furthermore, an “early” spouse’s benefit is also available to a spouse under age 62, if he/she is a parent caring for a disabled child (of any age) or a young child under the age of 16. These payments collectively are subject to a maximum family benefit, which varies between 150% and 180% of the primary worker’s full retirement benefit.
Because these dependent and disabled child benefits apply only once an individual has actually filed for benefits, the claiming of such benefits was eligible for the file-and-suspend rules. Thus, someone at full retirement age could file-and-suspend to activate dependent and disabled child benefits (in addition to spousal benefits), while delaying his/her own benefits to age 70 to earn delayed retirement credits.
Given the crackdown on file-and-suspend, though, only parents who are at least 65 ½ by November 1st (such that they reach full retirement age of 66 by the end of next April) will be able to pursue this file-and-suspend strategy at their full retirement age (but must file after full retirement age and before the new rules take effect!).
For younger parents who won’t be full retirement age until after the effective date, the only option will be to either start all benefits – including both retirement, spousal, and dependent/disabled child – or delay all benefits.
On the other hand, since the rules for voluntary suspension of benefits at full retirement age remains in effect, the option remains to engage in the “Start, Stop, Start” approach, where a parent starts Social Security benefits early to claim the full family benefits (including dependent/disabled child benefits), and then suspends benefits at full retirement age. Doing so will fully suspend all family benefits beyond the effective date of the legislation, but if the children are old enough to be over age 18 by then, it may still be appealing to claim full family benefits for a period of time (starting at age 62), then stop benefits to earn delayed retirement credits at 66, and then resume just the increased retirement benefit (and also the spousal benefit if available) at age 70.
A 6-Month Transition Period Until The File-And-Suspend Effective Date Deadline
Ultimately, the fact that the final version of H.R. 1314, the Bipartisan Budget Act of 2015, left a 6-month “transition period” for file-and-suspend means any/all couples who have a member that either already reached full retirement age, or will in the next 6 months, needs to carefully evaluate whether a file-and-suspend strategy makes sense or not. Because once the time window has passed, any subsequent voluntary suspension will be subject to the far-less-favorable new rules.
For those who are at least 65 ½ but were born in 1953 or earlier (or on January 1st of 1954!), the window for filing a restricted application for spousal benefits (including a divorced ex-spousal benefit) remains available for a few more years, though the ability to coordinate that strategy with file-and-suspend will still be over in 6 months when this proclaimed Social Security loophole closes in April 2016.
And for everyone else in the long-term future, coordinating the benefits planning of a couple will remain relevant… but unfortunately, with far fewer tools in the strategy toolbox to maximize those benefits!
So what do you think? How are the new rules impacting your claiming strategies and decisions with clients? Are you finding any new/unique scenarios coming up? Please share in the comments below!
