Major changes are coming to Social Security retirement benefits, and now is the time to meet with clients and formulate a plan before a window of opportunity closes on April 30, 2016. Individuals turning age 66 before April 30, 2016 that have not filed for Social Security retirement benefits are the most exposed to the changes. It is also time for advisors to meet with all of their baby boomer clients to discuss the rule changes and their retirement plan timeline.

The Bipartisan Budget Act of 2015, signed into law Nov. 2, 2015, effectively eliminates two highly-discussed Social Security claiming strategies: file-and-suspend and file restricted. These two strategies have gained popularity with married couples as a way to increase lifetime Social Security income. File-and-suspend and file restricted strategies are an unintended consequence of The Senior Citizens Freedom to Work Act of 2000, which was designed to encourage more seniors to work. Now considered a “loophole,” the file-and-suspend caveat was originally intended to help senior citizens increase their Social Security benefit by delaying retirement.

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The new law was passed with major changes to the tax code without any Congressional hearings, major discussion or debates on the floor of the House or Senate. The Center for Retirement Research at Boston College previously estimated the file restricted approach could add $9.5 billion in annual benefit costs to the program if everyone eligible pursued the strategy. The cost of the file-and-suspend tactic was estimated to have a more modest impact.

Advocates for rule changes argue that the ultra-wealthy are abusing the system to reap excessive rewards. In reality, removing the file-and-suspend and file restricted strategies will meaningfully reduce the overall Social Security benefits to millions of Americans across every income level.

The good news is there is time left to take action. Those who are already receiving benefits are not impacted at all, and clients who turn 66-years-old before April 30, 2016 can still file and suspend benefits, but they must do so by that date. Additionally, the file restricted strategy continues to be available to those who are age 62 or older on Dec. 31, 2015. Either strategy, or a combination of the two, can add tens of thousands of dollars in spousal benefits.

Advisors need to act fast to ensure their clients take the best course of action considering the new rules. First, it is important to fully understand the amendments. Because of their complexity, this can be a daunting task. The best way to go about tackling the complicated rules is to explain by using examples.

File-and-suspend, old rules

The idea behind file-and-suspend was to permit one spouse — usually the higher earning spouse — to file for retirement benefits at full retirement age, only to immediately suspend them. Once the benefits were suspended, the other spouse could then file for, and receive, spousal benefits. Remember, spousal benefits are not available until the primary worker files. The higher earning spouse then earns 8 percent delayed retirement credits until age 70, resulting in a 132 percent increase in monthly benefits.

Example: Jonathan is 65-years-old and still working. He plans to retire in the next year, but wants to let his Social Security benefits grow until age 70 to ensure the largest monthly and survivor benefit. His 61-year-old wife, Emily, has worked less than 10 years and does not qualify for her own retirement benefit.

Emily wants to start receiving her spousal benefit at age 62, even though her check would be reduced for claiming early. Jonathan plans to go online to the Social Security website at his full retirement age (FRA) and complete a file-and-suspend application in order for Emily to be able to file for a spousal benefit.

File-and-suspend, new rules

Under the new rules in Section 831 of the Bipartisan Budget Act of 2015, when the higher earner suspends his benefits, he will also suspend any benefits payable to his spouse or children.

Unfortunately for this couple, Jonathan is not FRA until after the April 30, 2016 file and suspend deadline. Therefore, Emily will not receive any benefits until Jonathan begins collecting his Social Security payments.

Additionally, there will no longer be an option to retroactively claim suspended benefits. Before the tax law change, a person who filed and suspended benefits could request a lump sum payment of the amount deferred. This caveat was also used by single individuals when the retiree became ill or had a change in financial circumstances. This option also goes away on April 30, 2016.

Deemed filing rule

The deemed filing rule is set to change as well. Under this rule, a spouse filing early before their full retirement age was deemed to be filing for their own retirement benefit first. It did not apply to those who filed for benefits after their full retirement age. This rule was considered the door-opener for couples’ strategies. This door has closed except for those who are 62 years old or older by the end of 2015. Under the new set of rules, deemed filing applies regardless of what age benefits are claimed. The person filing will receive the higher of their own benefit or the spousal benefit.

File restricted, old rules

A restricted application allowed individuals to get spousal benefits while delaying their own Social Security retirement benefit. This strategy let their own benefit grow from age 66 to age 70 with the 8 percent delayed retirement benefits.

Example: Tom and Susan, both 60 years old, met with their financial advisor last year to review their retirement income goals. At full retirement age, Tom expects to receive $25,000 in annual Social Security benefits and Susan expects $20,000 in benefits. They plan for Susan to claim her benefit first and for Tom to file a restricted application to receive a spousal benefit from Susan of $10,000 a year. Tom’s own benefit will continue to grow. At age 70, he will notify Social Security he is turning on his own benefit. At this point, Tom will receive $39,600 annually due to delayed retirement credits of 8 percent, not counting cost of living adjustments.

File restricted, new rules

Under the new rules, a spouse born in 1954 or later who files for Social Security will be deemed to have filed for both their own and spousal benefits, and will receive whichever benefit is higher. In effect, it kills the strategy. As a young baby boomer, Tom can no longer choose to collect a restricted spousal benefit at full retirement age and let his retirement benefit grow until age 70.

Widow/widower benefits

Good news: Surviving spouses are not impacted by the tax law change. The survivor is eligible for a widow or widower’s benefit equal to 100 percent of the deceased spouse’s benefit. The rule also applies to a divorcee whose former spouse has died, as long as the couple was married for 10 years and the divorcee remained unmarried until age 60.

Deemed filing never applied to survivor benefits, and it does not now. The surviving spouse has a choice about when to claim for each benefit. Widows and widowers can file a restricted application for survivor benefits and let their own retirement benefit grow, or vice versa.

Example: Rebecca is 60 years old when her husband dies. She has worked and will be eligible for her own retirement benefit. She can take a reduced widow’s benefit now based on her deceased spouse and then switch to her own benefit later if it is higher. Alternatively, she can start with her own retirement benefit at age 62 and switch to a full survivor benefit when she reaches full retirement age.

Divorce benefits

Divorced parties do not fare well under the amended rules. Under the old rules, an ex-spouse who had been married for 10 years can collect a benefit based on the former spouse’s work record even if he or she is not collecting benefits. However, that ex-spouse must be more than 62 years old.

Under the new rules, divorced spouses who are younger than 62 years of age by the end of 2015 will not be able to collect spousal benefits while their own retirement benefits continue to grow up to age 70. Now, when the divorcee makes a claim, they either receive their own benefit or a spousal benefit, whichever is higher.

Example: Julie is 57-years-old today and divorced. Whenever she decides to claim benefits, she will receive the higher of her retirement benefit or her former spouse’s benefit period. Her friend Cindy, who is also divorced, was age 62 in December 2015. Unlike her friend, Cindy will be able to file for a spousal benefit at her full retirement age and then file for her own retirement benefit later.

Additionally, it is unclear what happens to the spousal benefit if the ex-spouse suspends his or her own benefit. According to 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 on the (worker’s) wages and self-employment income.” This unintended consequence will hopefully be fixed.

Look at the new tax law as an opportunity to bring value and solutions to your clients. For most retirees, it still pays to delay Social Security benefits. Individuals who wait receive the 8 percent per year delayed retirement credits from their FRA to age 70. For many clients, they will need to increase their Social Security benefits and tap other financial resources to fill in the retirement funding gap. Retirees can continue to work or retire and draw down other assets such as cash from tax efficient permanent life insurance.

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