Ask a Baby Boomer who has worked the entirety or a portion of the last 30 or 40 years what Social Security Benefits are and they will likely have an answer for you.  Ask a Baby Boomer what the Bipartisan Act of 2015 is and you likely might get a limited answer or no answer at all.  

On November 2, 2015, the Bipartisan Act of 2015 was signed and changed Social Security strategies as we know them.  A portion of Title VIII of the Act set forth to close unintended loopholes of the Social Security Act.  These loophole are known as “the file-and-suspend” claiming strategy, “restricted applications” and retroactively unsuspending benefits.  Whether you are married, divorced or single one, if not all, of these changes could or will affect how and when you plan to claim Social Security Benefits. 

The file-and-suspend rule was added to Social Security as part of the Senior Citizens’ Freedom to Work Act of 2000.  The strategy which has become popular in recent years among the retirement planning community allowed married couples to maximize their Social Security Benefits.  The strategy allowed a spouse, often the higher earner, who had reached the full age retirement of 66 to file for Social Security Benefits and then immediately suspend those benefits.  This allowed two things, it allowed the spouse to begin receiving a spousal benefit at their spouse’s higher rate, while also allowing the spouse’s deferred benefit to grow at 8 percent a year and then begin taking a benefit at age 70.  Upon reaching 70, the benefit for the deferring spouse would have grown by 32 percent.  Let’s see an example of how this strategy works.  Mr. Big Income is married to Mrs. Small Income and both are 66 years old.   Mrs. Small Income worked part-time most her life, is now retired and her monthly Social Security Benefit would be $500.  Mr.  Big Income is still working, but currently would receive a $1,500 monthly benefit if he were to claim Social Security now.   Under this strategy if Mr. Big Income were to file and immediately suspend his benefits, Mrs. Small Income could claim a spousal benefit of $750 a month, one half of her spouse’s benefit.   On the other hand Mr. Big Income’s delayed benefit would continue to grow.  What does employing this strategy amount to?  Mrs. Small Income’s monthly spousal benefit will be $250 greater than her own and if her spouse delays benefits until age of 70, his monthly benefit will have grown to $1,980.

Under the new rules, a spouse can only collect spousal benefits if the other spouse is actually receiving benefits as well.   Going back to the example of Mr. Big and Mrs. Small Income, they would now be left with a few different options to consider.  Option 1, Mrs.  Small Income could still file and collect her own smaller benefits of $500, while her spouse continues to work and delay taking his benefits until age 70, if he chooses.  Option 2, Mr. Big Income can beginning taking his monthly benefit at age 66 of $1,500 and his spouse will be eligible for the spousal benefit of $750.   By choosing Option 2, Mr. and Mrs. Income forego letting the higher earner’s benefits mature to a greater future monthly benefit.  Option 3, Mr. Big Income has decided to delay taking his monthly benefit until the age of 70.  His monthly benefit has grown to $1,980.   His spouse can now begin claiming spousal benefits of $990 a month, which is greater than her own current $500 monthly benefit.  

There is some good news, if you currently have reached the full retirement age of 66 or will before May 1, 2016, then you can still take advantage of the file-and-suspend strategy.   Those who fall within this range will be grandfathered in under the old rules, if you take action and file-and-suspend by April 30, 2016. 

Restricted applications similar to the file-and-suspend strategy was an advantage for married couples under the old rules.  Restricted applications allowed a spouse to claim a spousal benefit while deferring their own benefit.  Let’s look at Mr. and Mrs. Income again.  In this scenario Mr. and Mrs. Income are both 66 and are eligible to claim comparable monthly benefits.  Mr. Income’s monthly benefit at 66 is $1,500 while Mrs. Income’s is $1,200.  Mr.  Income chooses to begin claiming his monthly benefit and at this time his spouse chooses to claim a spousal benefit.   Mr. and Mrs. Income under the restricted applications are currently receiving $2,250 in monthly benefits ($1,500 + $750) and Mrs. Income is delaying her own benefits until age 70.  Upon reaching age 70, Mrs. Income begins claiming her own monthly benefit, which is greater than her current spousal benefit.  Her benefit has matured to $1,584 monthly from $1,200.  By age 70, Mr. and Mrs. Income’s monthly combined benefit has now grown to $3,084.

Similar to the file-and-suspend strategy, those who fall within the right age group will still be able to take advantage of restricted applications.  If you have reached the age of 62 by the end of 2015 then you will still be grandfathered in under the old rules.  Under the new rules, a spouse will no longer be able to file for a spousal benefit while delaying their own benefit, if their own benefit is greater than or equal to the spousal benefit.   So using the previous example, Mrs. Income under then new rules will no longer be allowed to claim the monthly spousal benefit of $750 because her own monthly benefit is currently $1,200.   Spouses now fall under the “deemed filing” rule.  The deemed filing rules use to only apply to early retirees, it has now has been expanded to apply to anyone claiming benefits.  In other words, if you apply for a spousal benefit you are now deemed to have applied for your own benefit as well.  This change will no longer allow a spouse to have their own benefit grow while claiming a spousal benefit.

The last major change which effects married and single individuals alike is the change to suspended benefits.  Suspended benefits allowed an individual to file for Social Security at full retirement age then suspend their benefits to take advantage of the 8 percent annual growth.   However, if down the road the individual had a change in their retirement planning and needed to take the Social Security benefits now they could begin taking the benefit at the monthly amount that was due to them at their retirement age and receive a retroactive lump sum payment for any benefits they deferred.  The only benefit the individual would lose is any growth to their monthly benefit.   Under the new rules retroactive payments are no longer available to those who have unsuspend their benefits.  

In planning to claim Social Security benefits, both individuals and couples must determine what is best for them.  Factors such as health, longevity and their other forms of retirement vehicles must be considered.   As shown, some Baby Boomers will still be able to fall under these loopholes, while the rest of them and those in Generations X and Y will now be looking at Social Security benefits as what they were intended to be, a supplemental form of retirement income.  

Please feel free to contact your Dermody, Burke & Brown tax advisor to further discuss any questions you may have.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.