New Budget Deal Closes Social Security Loopholes
Claiming strategies affected
Social Security claiming strategies have been a critical component of retirement planning for several decades now. In recent years, several perceived “loopholes” have come under criticism as unintended benefits to higher income earners that have the education and access to resources, such as paid advisors, to optimize their Social Security benefits based on complex claiming strategies. The merits of whether or not the strategies are truly tilted towards high income families are debatable, as these strategies tend to center around dual income families, which dominate the middle class. However, the fact of the matter is that the new law will require retirement plan updates for everyone, regardless of income level.
1. File and Suspend
The first strategy affected is referred to as File and Suspend. In this strategy, a claimant that has reached full retirement age files for benefits. This allows spouses and dependents to claim benefits based on the claimant’s earnings record (known as spousal or dependent benefits; we’ll use spouse in this example). The claimant then suspends their own benefits in order to earn delayed retirement credits on their record, while the spouse continues to earn the spousal benefits. Delayed retirement credits increase the claimant’s full retirement age benefit by 8% per year they delay up until age 70. In short, the File and Suspend strategy generates current spousal benefits while the claimant delays and grows their own individual benefit.
2. Restricted Application for Social Security Benefits
The second strategy affected is the restricted application for Social Security benefits. The restricted application applies to individuals that are eligible for spousal benefits based on their spouse’s earnings record, but also have a benefit based on their own individual earnings record. The restricted application allows a claimant that has reached full retirement age to file for and receive just their spousal benefit, while simultaneously delaying their own individual benefit. While they earn spousal benefits, their own individual benefit earns delayed retirement credits. They can later activate their own, higher individual benefit, which reaches its maximum at age 70.
The Bipartisan Budget Act of 2015 effectively eliminates these strategies. Under the new rules, anyone who applies for benefits is deemed to have applied for all eligible benefits. This eliminates the restricted application strategy in that once an individual applies for a spousal benefit, they are presumed to have applied for their own individual benefit, and vice versa. Therefore, an individual can no longer grow their own benefit through delayed retirement credits while they simultaneously collect a spousal benefit.
To eliminate the File and Suspend strategy, the new law stipulates that when suspending benefits, the individual suspends all benefits associated with their earnings record, which includes spousal and dependent benefits. Therefore, it is no longer advantageous for an individual to file for benefits to trigger spousal or dependent benefits with the intention of suspending their own benefit to earn delayed retirement credits. Suspending their individual benefit will also suspend the spousal or dependent benefit.
Please note it appears that the new rules apply to individual retirement benefits, but survivor benefits for widows/widowers may still be eligible to optimize the timing and claiming of benefits. Please consult your tax advisor for more information as we await further guidance from the Social Security Administration.
What happens next?
The new rules for the restricted application apply only to those who turn age 62 in 2016 or later. Those who are age 62 or older in 2015 are “grandfathered” in the old rules and will still be able to utilize the restricted application in the future. Anyone age 61 or younger at the end of 2015 will never be eligible for a restricted application.
The new rules on deemed applications, which eliminate the File and Suspend strategy, affect requests for benefits submitted at least 180 days after the effective date of the legislation, anticipated to be April 30, 2016. This provides a six-month grace period to claim benefits for those eligible. File and Suspend claims made before the deadline, including those already executed before the new legislation, will not be affected by the new rules.
The new Social Security claiming rules will have a lasting impact on retirement planning for those of all income levels. It is especially important for anyone age 62 or older in 2015 to evaluate their eligibility for the restricted application claiming strategy and have a plan of action in place to ensure optimal benefits. For those at full retirement age who may be eligible to File and Suspend, they must take action before the April 30, 2016, deadline to secure their benefits. Regardless of age, anyone in the process of retirement planning should reevaluate their cash flow projection to ensure it corresponds with the new rules.
The experts at WithumSmith+Brown are here to help. If you have any questions or would like to discuss this matter further, please contact a member of Withum’s Private Client Services Group at [email protected].
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Stephen Paul, CPA 609-520-1188 [email protected]    |
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