Say good-bye to a popular Social Security planning technique

Thanks to the Bipartisan Budget Act of 2015, P.L. 114-74, the popular “file and suspend” Social Security planning technique is going away. The bill was signed Nov. 2, 2015, but provides a window allowing some Social Security beneficiaries to still make use of the technique.

The “file and suspend” technique was made possible by two rules that, when put together, provided married couples significant benefits. The first rule, the file-and-suspend election, allows a beneficiary to file for benefits but suspend the actual receipt of those benefits until a later date. A beneficiary who filed for worker benefits at his or her full retirement age (FRA) (currently age 66 for Social Security beneficiaries born before 1955) and immediately suspended payment, would have his or her monthly benefit grow due to delayed retirement credits, or DRCs. Each year a beneficiary delays receiving payments, his or her benefit grows by 8%. DRCs end at age 70. At that point, the beneficiary typically elects to begin receiving payments since there is no benefit of further delays.

The question your client may ask is “Why would anyone file and suspend? Wouldn’t you get the same benefit by just not applying for your worker’s benefit until age 70?” Your client is correct. File and suspend is a beneficial strategy because a worker must file for benefits to trigger spousal benefit payments.

Example: Ann, a worker, is married to Rod. Ann has reached her FRA. Rod turned 62 before Jan. 1, 2016. Ann must file for her benefit before Rod can apply for his spousal benefit. (Note that all Ann had to do under the old law was file, not actually begin receiving payments.) Ann could file and then suspend her payments until she reached age 70, which would allow her to maximize her DRCs. In the meantime, Rod could file for and begin receiving his spousal benefit.

The second rule a couple could take advantage of to increase their overall benefits was known as the “restricted application.” Spouses of workers are allowed to receive spousal benefits even if they also had a wage history and earned benefits as a worker. Under the old law, once you reached your FRA, you could decide whether to be paid your spousal benefit or the benefit you earned as a worker yourself. Even if your worker’s benefit was higher than your spousal benefit, you weren’t forced to take the larger of the two benefits.

(Note, however, that, before a spouse who is also a worker reaches his or her FRA, he or she can only take the larger of the worker’s or spousal benefit.)

Why would you take the smaller spousal benefit if given the choice? Taking the smaller spousal benefits allows the worker’s own benefit to grow because DRCs continue to accumulate. To return to our example, if Rod begins receiving the spousal benefit instead of the worker’s benefit at age 66, his worker’s benefit would continue to grow 8% per year. Under the file-and-suspend strategy, Rod would plan to receive his spousal benefit from age 66 to age 70. At age 70, he would elect to receive his worker’s benefit, which would be 32% higher than it was at age 66.

How the new law changes things

Under the new law, your clients who have reached FRA (age 66) by April 29, 2016, have until that date to file and suspend their benefit and have a spousal benefit paid; after that, the spousal benefit cannot be paid if the worker’s benefit is suspended. Under the new rule, the restricted application is still available but only to those who turned age 62 before Jan. 1, 2016. For anyone else, they are deemed to have applied for both their individual and eligible spousal benefits, and they will receive the larger of the two.

So, in the case of our couple, there is still a planning opportunity. By April 29, 2016, Ann can file and suspend her worker’s benefit, and Rod can apply for his spousal benefit when he reaches his FRA because he turned age 62 before Jan. 1, 2016, and therefore may still file a restricted application. At age 70, Ann can begin receiving her higher monthly worker’s benefit, and Rod can switch from receiving spousal benefits to receiving his own higher worker’s benefit. 

James Sullivan, CPA/PFS, is a financial planner in Wheaton, Ill. He specializes in working with clients, and the families of clients, suffering from chronic illness.