The recently-passed Bipartisan Budget Act of 2015 eliminates two presumably unintended but popular Social Security claiming strategy loopholes: File-and-Suspend and Restricted Application.
However, for a few eligible folks a temporary window remains—a six-month period that began the day Congress passed the new legislation, to be exact.
These fortunate few Social Security filers are divided into two categories:
Those born on or before April 30, 1950 (age 65½ by October 29, 2015)
Those born on or before January 1, 1954 (age 62 or older in 2015)
The older group may still utilize both strategies but will need to act before April 29, 2016 to reserve this option. The younger group may only file a Restricted Application—File-and-Suspend is no longer an option for them and they do not need to take any action until their Full Retirement Age (FRA).
Born after January 1, 1954? Sorry, neither of these strategies is available. If you are already drawing a Social Security benefit, or if you have already Filed-and-Suspended, the changes of the 2015 Budget Act do not apply to you.
For definitions of some common Social Security terms and acronyms, see box below.
The Expiring Strategies
Upon reaching FRA, one files for Social Security benefits and immediately suspends them. In doing so, the filer:
Enables a spouse to become eligible for spousal benefits, even though filer is not receiving benefits.
Leaves the door open to retroactively claim lump sum benefits in event the situation changes (e.g. in the case of a terminal illness).
So among other things, File-and-Suspend allows the spouse to receive benefits while the primary worker delays benefits. As noted above, due to the Bipartisan Budget Act of 2015, the File-and-Suspend strategy is only available to those born on or before April 30, 1950 and must be elected prior to April 29, 2016. All benefits associated with this strategy end if not filed before this date.
Sam and Sarah Smith, both aged 66, have been married for 30 years. Sam was the primary breadwinner. Sam and Sarah’s FRA is also 66. Sam’s monthly benefit (his FRA Primary Insurance Amount) is $1,000. Sam would like to wait until age 70 to draw Social Security so that he can take advantage of delayed retirement credits and receive a bigger monthly benefit ($1,320 plus cost-of-living adjustments). However, if Sam waits four years to file, Sarah misses out on four years’ worth of her $500-a-month spousal benefit. Because Sam is grandfathered under the previous rules, and because he has reached his FRA, he can File-and-Suspend his benefit. This enables Sarah to claim her spousal benefit now while Sam continues to earn delayed retirement credits.
In contrast to File-and-Suspend, a Restricted Application allows you to receive a spousal benefit while delaying your own individual benefit. Restricted Applications are abolished under the Bipartisan Budget Act, unless you either:
Are grandfathered by having previously filed a Restricted Application.
Were born on or before January 1, 1954.
Restricted Application Example
Going back to the Smiths, although Sam was the primary breadwinner, let’s change things and say that Sarah also worked and has a Social Security retirement benefit of $600 a month (her FRA PIA) based on her own earnings record. Sarah decides to begin her $600 monthly benefit, while Sam still chooses to delay his benefit and seek delayed retirement credits.
Utilizing the soon-to-lapse Restricted Application strategy, Sam could file a Restricted Application to start his $300 a month spousal benefit (50% of Sarah’s FRA PIA of $600). So, even though Sam’s own benefit remains delayed and continues to grow at 8% per year for the next four years, he receives four years’ worth of his spousal benefit that he otherwise would have lost had he not filed a Restricted Application.
Combined Strategy Example
The Smiths have an additional option available to them: A combination of File-and-Suspend and Restricted Application. First, Sam Files-and-Suspends his benefit. Sarah then files a Restricted Application to start her $500 a month spousal benefit (50% of Sam’s FRA PIA of $1,000). Doing so delays both spouses’ primary benefits, allowing them to grow at 8% a year for the next four years.
So, while File-and-Suspend allowed Sarah to get her spousal benefits while Sam delayed his own, Restricted Application allowed Sam to get his spousal benefits while delaying his own Social Security benefit. Combining the strategies enables both spouses to delay their own primary benefit, while simultaneously allowing Sarah to draw four years of spousal benefits.
We hope this is helpful for you. Admittedly, our examples were pretty basic—there are many more complex iterations of the two expiring claiming strategies. Please contact us to discuss your specific situation, keeping the April 29, 2016 deadline in mind.
Full Retirement Age (FRA)
Also known as normal retirement age. At this age, currently between 66 and 67, individuals can receive full retirement benefits even if still earning. Prior to FRA, as early as age 62, one may begin drawing a reduced amount. If still earning, the benefit amount will be reduced further. Alternatively, one may delay receiving benefits beyond FRA so that it will be larger when it starts. More on delaying strategies and Filing-and-Suspending below.
While individuals may file to receive benefits early, one may not utilize the File-and-Suspend strategy until FRA.
Primary Insurance Amount (PIA)
The monthly retirement benefit one is eligible to receive at Full Retirement Age. This amount is based on earnings and employment history. Visit the Social Security Administration’s website, www.ssa.gov, to create an online profile and to periodically confirm your benefit.
Delayed Retirement Credit
Credit earned when one chooses to delay receiving monthly retirement benefits. If delayed, an 8% per year delayed retirement credit applies. Credits stop accruing at age 70, so it does not make sense to delay past this age.
Filing option under which one receives up to 50% of a spouse’s FRA PIA. In order to receive a spousal benefit, one’s spouse must have filed for a benefit or Filed-and-Suspended. There are no delayed retirement credits for a spousal benefit, so waiting to claim a spousal benefit beyond your FRA does not make sense.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.