The Bipartisan Budget Act of 2015, signed into law on November 2nd, effectively eliminated the Restricted Application and the File-and-Suspend strategies. Those already utilizing these options will be grandfathered in; some will have a short six-month window in which to act; and, others need to be aware of how future benefits will be more limited. The media has focused on how the termination of these unintended, but popular, strategies will impact married couples. The truth is that the changes will impact single individuals as well. If your retirement plan included anticipated Social Security benefits, please take the time to read more.
File-And-Suspend Benefit Provisions
Once you reach full retirement age (FRA) (currently age 66 or older), you can file based upon your own benefit record and then suspend benefits. This election is made for three primary reasons:
1. To allow a spouse to claim benefits on your record:
You typically elect this provision when your spouse has a relatively low earnings record, and he or she plans to receive benefits based only upon your higher earnings record, never switching to his or her own benefits.
Example: Eric and Jane are both 66. Jane has a low earnings record. She will receive higher benefits by electing a 50% spousal benefit based upon Eric’s earnings, rather than filing on her own benefit record. Jane would like to begin receiving benefits at 66. However, Eric plans to continue working until age 70 and defer his benefits payments. Jane can’t begin receiving her spousal benefits until Eric files for his benefits.
Current Option: Eric can file-and-suspend his benefits. By filing, Jane can commence spousal benefits based upon Eric’s record. By simultaneously suspending, Eric defers his own benefits, allowing them to grow until age 70.
Future Option: Except for those already utilizing this provision, File-and-Suspend will no longer be available after April 30, 2016. In our example, Eric must file-and-suspend before this date in order for Jane to receive Social Security benefits based upon his record. Otherwise, Jane will have to wait to receive spousal benefits until Eric files at age 70. Alternatively, Eric will have to file and begin receiving benefits earlier than anticipated.
2. To gain the ability to claim retroactive benefits prior to age 70:
By deferring benefit payments, your future payments accrue delayed retirement credits, increasing yearly, up to a maximum deferral age of 70. However, if you later become ill or wish that you had commenced benefits earlier, the file-and-suspend option allows you to capture those retroactive benefits by requesting a reinstatement of benefits back to your original file-and-suspend date.
Current Option: Currently, anyone can file-and-suspend. This enables you to potentially claim back years of retroactive benefit payments, backdated to when you elected this option.
Future Option: Eligible individuals must file-and-suspend by April 30, 2016 to retain the ability to claim retroactive benefits through a reinstatement request. The benefit will be lost for all others who are not eligible, or for those who do not file-and-suspend by April 30th.
3. To stop benefits if you return to work:
A third reason why you might file-and-suspend is if you start benefits and later return to work. Suspending benefit payments while you have an income will ensure higher payments in the future.
This feature remains available and will not change.
Restricted Application Provisions (“Claim Now, Claim More Later”)
Upon reaching your FRA (currently age 66), the Restricted Application provision enables you to claim benefits based upon your spouse’s benefit record only, allowing your benefits to grow, while retaining the option to switch to your own benefit payments at a future date.
This provision also applies to unmarried divorced individuals who were previously married for 10 years or more. You can file a Restricted Application based upon your former spouse’s benefit.
Example: Bill and Elizabeth are both age 66. Elizabeth’s earnings history is higher. The couple decides to delay Elizabeth’s Social Security benefits until she turns 70. Bill applies to receive his benefits now. This entitles Elizabeth to file a restricted application for spousal benefits only. Elizabeth will receive 50% of Bill’s FRA benefits for the next four years, during which time her own benefits will continue to accrue value at a rate of 8%, plus cost-of-living increases. At age 70, she will switch to her own higher benefits record.
Current Option: This option remains available for those already using the strategy, or for individuals who reach age 62 by December 31, 2015.
Future Option: This benefit will be lost for all individuals not currently using this strategy, and anyone who will not be 62 or older at the end of 2015.
Note for Divorcees: Currently, a former spouse is deemed to have commenced benefits upon reaching his or her FRA, regardless of their actual election. This enables you to claim spousal benefits on their record. The new rules could allow a vindictive ex-spouse to file-and-suspend benefits, thereby suspending your access to spousal benefits as well. We hope guidance will soon become available on this issue.
Given the complexity of the regulations and the broad impact that these changes may have upon your retirement income and long-term objectives, we recommend a re-evaluation of your retirement plans if you previously factored Social Security benefits into your planning assumptions. SageVest Wealth Management invites you to contact us to review your unique circumstances.