Law changes emerging from Congress within the Bipartisan Budget Act this past November have led to distress and/or confusion within the retirement community. That’s because of a provision called the “closure of unintended loopholes,” which could punch a $50,000-plus hole in the retirement plans of married couples nationwide.
If you or your clients are feeling a little disgruntled by this decision, you’re not alone. I know my team and I are sad to see this option disappear for so many of the pre-retirees we’ve worked with. As an agent or advisor, however, you need to switch gears and think about how you’re going to help prospects and clients make the most of the new dynamic it creates.
What we’re losing
If you aren’t familiar with the file & suspend strategy, it went like this: Matthew and Sarah have both reached their full retirement age (FRA) of 66, but are in great health and want to keep their positions in the workplace for the next four years while they allow their Social Security benefits to accrue delayed retirement credits and get that coveted 132 percent benefit check for the rest of their lives.
In the meantime, our industrious couple can collect up to $64,000 more in benefits from Social Security over the course of the next four years, all without cutting into their own retirement credits.
How? Under the old rules, Matthew and Sarah could go into their local Social Security office where one of them — let’s say Sarah — files for benefits.
Then the other, Matthew, files a restricted application for his spousal benefit. Finally, Sarah suspends her benefit so that she can continue to accrue her delayed retirement credits while Matthew collects his spousal benefit based on her account.
Each month for the next four years, they’ll receive a check for half of Sarah’s primary insurance amount — a useful bonus savvy couples have been taking advantage of for years.
But it’s going away?
That’s right. As part of the Bipartisan Budget Act of 2015, the ability to collect benefits based on a suspended account and the ability to file a restricted application will be phased out in two separate steps.
To understand those steps, let’s take a second to quickly review the difference between “file and suspend,” and filing a “restricted” application, which often get confused since they so often get rolled up into the same strategy. First, “file and suspend,” in its intended form, is actually not going away. Per our earlier example, Sarah can still file for her benefits and then suspend them any time after she reaches FRA to continue to accrue those valuable delayed retirement credits (DRCs) — like, say, if she retires and then decides to go back to work.
The difference is that after April 29, 2016, if Sarah suspends her benefits, she’ll be able to accrue DRCs, but nobody else will be able to collect benefits based off her account. (Officially, the cut-off date is April 30. But because it’s a Saturday and your clients won’t be able to take advantage of this strategy on April 30, you can help protect them by not suggesting it.)
But what if Sarah suspends her benefits before the cut-off? Will Matthew stop receiving his spousal benefit May 1, 2016?
No. You may have seen some confusion about this point because, as the law was originally written, he would have. But Congress added an amendment so that couples who take advantage of this loophole before the cut-off date will continue to receive those benefits without interruption.
The second cut-off date to be aware of concerns restricted applications, which will work a bit differently.
Normally, retirees who file for benefits are considered to be filing for all their benefits and will receive the greater of either their personal or their spousal benefit (which is half their spouse’s primary insurance amount or PIA). This is why Matthew in our earlier example filed a restricted application when he and Sarah were planning to use the file and suspend strategy. A restricted application allowed him to apply for only his spousal benefit while his own benefit continued to accrue DRCs.
If your clients will be 62 or older by January 1, 2016, then they will be eligible to file a restricted application in the future, when they reach their full retirement age. These clients don’t need to (and, in fact, many can’t) take action now. It just means they’ll have the option to when they reach FRA.
For those clients who hadn’t turned 62 by January 1, restricted applications will not be available at any point, even after they reach FRA.
While this is bad news for many pre-retirees, you can best help your clients by easing the transition for them and finding ways they can adapt to these new terms. Here are 5 suggestions.