As a result of the Bi-Partisan Budget Act of 2015, two Social Security spousal claiming strategies, "file and suspend" and "restricted application”, are being eliminated.
Both strategies require that you reach full retirement age (FRA) and they enable the higher earning spouse to delay their retirement benefit in order to maximize it while allowing one spouse to collect a spousal benefit.
Under file and suspend, at FRA the higher earning spouse files for a retirement benefit, thereby enabling the lower earning spouse to file for a spousal benefit. The higher earning spouse, simultaneously suspends his/her own retirement benefit to allow it to earn delayed retirement credits (DRCs) at 8% a year until age 70.
Under the new law, it is no longer possible for auxiliary benefits, such as a spousal benefit, to be paid when the retirement benefit of the worker on whose record the auxiliary benefit is based is in suspension. It is still possible starting at FRA to suspend one’s retirement benefit to earn DRCs but at that point all auxiliary benefits stop as well. This defeats the key purpose of file and suspend as a spousal claiming strategy.
Spouses who reach FRA before 4/29/16 can still take advantage of File and Suspend; after that date the new rule takes effect.
Restricted application is the other spousal claiming strategy impacted by the new law. Under this strategy, at FRA a higher earning spouse whose spouse has already filed for his/her own retirement benefit files for just a spousal benefit and defers applying for their retirement benefit up to age 70 to earn DRCs. Typically, this spouse drops the spousal benefit at age 70 and switches to their maximized retirement benefit at that time.
Under the new law, only beneficiaries who reached age 62 by 1/1/16 will still be allowed to file a restricted application when they reach FRA.” Everyone else is excluded and will be “deemed” by the SSA as filing for ALL eligible benefits when filing for any and will be paid the highest benefit entitled to. As a result, if a beneficiary wishes to maximize his/her retirement benefit, they must delay their application entirely to avoid the above deeming treatment.
Note that the rules for survivor benefits are not impacted and the deeming rule does not apply. It is therefore still possible, for example, for a lower earning surviving spouse (or divorced spouse, if the marriage lasted 10 years) to file at age 62 for a (reduced) retirement benefit and then switch to a full survivor benefit at FRA. The SSA will not require this spouse to take the higher survivor benefit when they first file.
Beneficiaries who fall within the grandfathering provisions for these spousal claiming strategies and who have not yet filed for benefits should speak to an adviser to determine if pursuing them is appropriate given their particular situation.
Regardless of your situation, these changes point to the importance of saving and planning ahead to ensure you'll have enough retirement income to meet your needs. Moreover, your social security strategy should continually be reviewed and integrated with your overall plan.
Authored by fellow Alliance of Comprehensive Planner (ACP) members, Joe Alfonso, CFP, EA. Alliance of Comprehensive Planners