Alerts and Updates
Social Security Loophole Closing - Changes May Impact Your Benefits
March 15, 2016
We all are aware of the importance of the April 15 tax deadline; however, for those turning age 66 this year, April 30 may be a more significant date. Why? Glad you asked.
The Bipartisan Budget Act of 2015 (the Act) signed into law by President Obama late last year makes substantial changes to Social Security. The Act closes loopholes for claiming Social Security benefits, as it will no longer be possible to claim spousal benefits only without claiming the primary worker’s benefits at the same time. The Act also effectively eliminates most of the “file-and-suspend” strategies many retirees have used. These changes will impact married couples anticipating retirement over the next few years and may require reevaluation of their overall retirement planning strategy.
As a retiree, you control when you begin to receive Social Security benefits, whether at age 62, which will be about 25-percent less than if you waited until full retirement age—this is age 66 to 67 depending on your date of birth—or at your full retirement age, or anytime between your full retirement age and age 70, where you can realize an annual kicker of 8 percent or so.
In general, your health and financial condition are the key drivers for when to begin receiving Social Security benefits. Sooner, with discounted benefits, or later with premium benefits? However, under the new rules described below, a married couple may wish to act before April 30, 2016, to allow one spouse to collect spousal benefits based on the other spouse’s earnings record, while allowing retirement benefits to grow at 8 percent per year to age 70 for the other spouse.
Incidentally, in an effort to ostensibly protect Social Security, the Act extended the normal retirement age. For those born before 1937, and through 1959, normal retirement age is now 66, plus up to 10 months (was age 65 prior to the Act). For those born after 1959, the normal retirement age is now 67 (was age 66 prior to the Act). Additionally, the younger range of the boomer generation will no longer be able to take advantage of the planning opportunities that have existed since 2000, such as being eligible for full benefits at age 66 and employing the file-and-suspend strategy discussed below.
File-and-Suspend Strategy Bites the Dust as of April 30, 2016
File and suspend, while still available, is significantly restricted under the new law. This strategy has been employed by married couples to receive a benefit from Social Security while deferring one of the couple’s retirement benefits and allowing those benefits to grow. Such practice has allowed married couples to take advantage of the deferral credits that increase Social Security retirement benefits by 8 percent per year after full retirement age yet still collect a Social Security benefit check each month. This strategy allowed spouse A to file for retirement benefits and immediately suspend to allow spouse B to file for spousal benefits while spouse A’s retirement benefits continued to grow, which could result in a significantly larger payout of benefits.
ILLUSTRATION: Both you and your spouse have reached full retirement age at 66 and you qualify for monthly benefits of $2,500 and your spouse qualifies for monthly benefits of $2,000. To employ the file-and-suspend strategy, you would elect to do the following:
- You file for and then suspend the collection of your monthly benefit of $2,500 until age 70; and
- Your spouse requests the spousal benefit of $1,250 (one-half of your benefit) and suspends her benefit of $2,000 until age 70.
The result of this strategy would allow your spouse to collect an additional $60,000 ($1,250 x 48 months) of the spousal benefit. In addition, both you and your spouse will receive an 8-percent increase in base benefits for each year that collection is suspended. If you had the suspension in place for four years, your base would be $3,300 ($2,500 x 1.32) at age 70 and your spouse’s base would be $2,640 ($2,000 x 1.32) at age 70. These higher monthly benefits would then continue for the remainder of your lives, entitling you and your spouse to significantly higher benefits.
The Act ends this strategy for those who suspend their benefits after April 30, 2016. Therefore:
- Individuals will no longer be able to receive benefits on anyone else’s work record while their own benefits are suspended; and
- No one will be able to receive benefits on an individual’s work record while that individual’s benefits are suspended.
However, the original intent of the file-and-suspend benefit is still an option, as the Act allows a person who has filed for benefits but later returns to work or otherwise changes his or her mind to suspend the benefit and accumulate 8-percent annual delayed credits to age 70. Given these significant restrictions, persons who turn 66 and file prior to April 30, 2016, can still take advantage of this lucrative strategy.
Restricted Application Loophole
The second change affecting married couples is the termination of the restricted application loophole. This loophole allowed married couples to claim spousal benefits at age 66 while their own benefits continued to increase. Then, at age 70, the spouse would claim their own benefits. The Act now requires retirees to collect only the larger benefits, whether they are spousal or their own individual benefits, but not both.
The new rules for restricted application apply to those who attain the age of 62 in any calendar year after 2016. Therefore, individuals who turned 62 prior to the end of 2015 can still avail themselves of this strategy.
Divorced and Survivor Benefits
Divorced spousal benefits have been changed much like the restricted application rules. For people born January 1, 1954, and beyond, filing for an ex-spousal benefit while earning delayed retirement credits for your own benefit will no longer be permitted. Under the new rules, divorced spousal benefits are still available, but only if a person’s retirement benefit is lower than their divorced spousal benefit.
Survivor benefits rules have not changed. This is good news because it means that a surviving spouse of a deceased worker can still apply for and receive survivor benefits while receiving the 8-percent roll-up on their own benefit amount, which gives them the opportunity to move to a higher payment amount at a later date.
Prior to the new law, individuals (married, as well as single people) could file and suspend at full retirement age and, prior to age 70, stop the suspension. A lump-sum benefit payment would then be available for the previously suspended benefits. This strategy was, in effect, an insurance policy. Those who employed the file-and-suspend strategy at age 66 might become ill and realize that their life expectancy has been shortened. A lump sum could then be requested and all previous suspended benefits could be obtained, monthly, going forward. Another reason for the significance of the April 30 date: The lump-sum option is no longer available for anyone who is not age 66 or older before May 1, 2016.
With the expiration of the various benefit optimization options for married couples and the extension of the normal retirement age, it may be more worthwhile than ever to review your retirement plan to determine the optimal age for retirement and to ensure maximum benefits and minimum tax impact. Timing is key with the expiration of some tried-and-true planning strategies. The rules impacting these decisions are complex and should include a comprehensive review of your current tax and financial situation, as well as health considerations and family history. However, if you wish to act, you should consider doing so promptly.
For Further Information
If you would like more information about this topic or your own unique situation, please contact Stanley Todd, CPA, MBA; Mary Beth Lee, CPA, CFE; Steven M. Packer, CPA; or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page located here.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.