When Congress passed the Senior Citizens Freedom to Work Act in 2000, it introduced a new concept called “voluntary suspension” of benefits, allowing those who had already started Social Security benefits to stop their payments and earn delayed retirement credits. In the process, however, the new voluntary suspension rules unleashed several additional Social Security claiming strategies, including various “claim now, claim more later” tactics involving File-and-Suspend and Restricted Applications for spousal benefits.
Those may be going away. Under this week’s two-year budget agreement between Congressional leaders and the White House, Congress will close these loopholes in the Social Security rules. While it remains to be seen whether the agreement will become law in its current form, the new rules mean that anyone receiving spousal benefits under file-and-suspend would have them terminated next spring
The agreement actually extends the rules for deemed application, making it no longer be possible to file a restricted application for just spousal benefits. In addition, by also extending the “suspension” rules that stipulate that suspending an individual’s benefits also suspends any benefits to other people based on the same earnings record, Congress will negate the various “File and Suspend” strategies that permit spousal and dependent benefits to be paid while the primary earner still receives delayed retirement credits.
Perhaps the most notable aspect of this new Social Security crackdown, though, is the effective date. While the new limits to Restricted Application will not apply to anyone who is already age 62 or older in 2015, the new crackdown may suspend current spousal or dependent benefits in 6 months for those who are only receiving those benefits thanks to File-and-Suspend! In other words, those who already engaged in the File-and-Suspend strategy may find it terminated mid-stream, and no benefits will be payable until the individual who suspended chooses to reinstate benefits (either to restart them now, or finish waiting until age 70).
Notably, the crackdown on these voluntary suspension-related tactics doesn’t actually kill the rules for voluntary suspension itself, which remains on the books. But now, aside from a few esoteric scenarios (including
File and Suspend and Restricted Application under the Senior Citizens Freedom to Work Act
In 2000, President Clinton signed into law
While the original purpose of these “
A related strategy under these new voluntary suspension rules for couples was to file for benefits at full retirement age – both retirement and spousal benefits – but then immediately suspend the retirement benefit and only receive the spousal benefit instead. The effective result was that a spouse could choose to claim “just” a spousal benefit from full retirement age until age 70, and then reactivate and switch back to the original retirement benefit. In the subsequent years, the Social Security Administration even expedited the process by formalizing the rules to “restrict the scope of their Social Security application” (or “
Section 831 Of The 2015 Budget Legislation Closes Social Security “Loopholes”
While these File-and-Suspend and Restricted Application strategies were entirely legal and permissible under the Social Security rules as a part of the new voluntary suspension rules under the Senior Citizens Freedom to Work Act, it was not entirely clear that Congress truly intended to make such “claim now, claim more later” strategies available to married couples. Within a decade,
Given this dynamic, some began to label the Restricted Application and File-and-Suspend rules a loophole, and
But now, the so-called “
Deemed Application For All “Claim Now, Claim More Later” Restricted Application Strategies
Under the standard rules for Social Security benefits, anyone who applies for an early (i.e., “reduced”) retirement benefit or spousal benefit is
With the new rules under Section 831 of the Bipartisan Budget Act,
Thus, anyone who is eligible for a wife’s or husband’s spousal benefit is deemed to have filed for their old-age retirement benefit as well, and similarly anyone who is eligible for a retirement benefit is deemed to have filed for any spousal benefits to which he/she is entitled.
The end result is that it will no longer be feasible to file a restricted application, as any retiree who files for one benefit (retirement) is presumed to and deemed to have filed for the other (spousal) benefit as well – regardless of whether it was/is an early benefit or at full retirement age. (On the other hand, it appears that Social Security survivor benefits will still be eligible for claiming separate from retirement benefits, allowing widows/widowers to still optimize the timing of when to start each.)
Effective Date For Elimination Of Restricted Application
Notably, though, the new rules for restricted application applies only to those who attain age 62 in any calendar year after 2015. Thus, it appears that today’s retirees who are full retirement age (or simply who are already at least age 62 in 2015) will still be able to utilize a restricted application. Only future retirees – those who turn 62 in 2016 or later, which means those who would have been planning to engage in a restricted application in 2020 or later – will lose access to the Restricted Application claiming strategy.
Suspending All Benefits Under File And Suspend
To further limit some of the perceived “loophole” abuses under voluntary suspension claiming strategies, the Bipartisan Budget Act also includes a new Social Security Act subsection 202(z), which stipulates that if an individual chooses to suspend benefits, then:
1) All benefits payable to that individual will be suspended, based on both his/her own earnings record (i.e., retirement benefits) and also based on any other person’s earnings record (i.e., spousal benefits).
2) No other individual will be eligible for benefits based on the earnings record of the person who voluntarily suspends benefits.
The first prong of these new rules puts yet another nail in the coffin for any type of restricted application strategy, as not only will the deemed application rules require that if an individual is eligible for one benefit then both must be claimed, but for those who suspend a benefit, both must be suspended.
The second provision effectively kills
And notably, because the new rule applies to any other individual receiving benefits based on the primary worker’s earnings record, a voluntary suspension of benefits would trigger a suspension of the individual’s own retirement benefits, and any spousal benefits he/she is eligible for, and anyone else’s spousal benefits that person was eligible for, and even
In point of fact, the new suspension provision is so broad, it may even unintentionally limit access to an ex-spouse’s divorced spouse benefits if the primary worker spouse voluntarily suspends, although this was likely not intended and will hopefully be fixed before the effective date for the new rules.
Effective Date for Ending File and Suspend Impacts Current Retirees
While the new rules on deemed applications will only apply to those who turn age 62 beginning in 2016 or later, the new rules limiting suspended benefits will apply just 6 months after the effective date of the legislation. (Or at least, the Social Security Administration is authorized to begin applying the new rules within 6 months of when the legislation is passed.)
This is significant, because once the new rules are effective, any benefits being paid in relation to an individual who suspended his/her own benefits may no longer payable, which means couples currently receiving a spousal benefit under File-and-Suspend may find their checks cease once the effective date has passed.
Of course, the maximum benefit that a spouse could claim under File and Suspend was limited to 50% of a worker’s Primary Insurance Amount (PIA), which would be 50% x $2,787.80 = $1,393.90/month, or about $16,700 per year. And at the most, the strategy would only unlock four years’ worth of benefits (from when the retiree reached full retirement age at 66, until age 70 when benefits would have started anyway). Nonetheless, the new rules could cut off as much as about $67,000 of benefits over a 4-year time window for those who planned to engage in File-and-Suspend and as much as 3.5 years of benefits for those who were already receiving File-and-Suspend-based benefits (if the Social Security Administration promptly enforces an effective date in 6 months).
For those who want to ‘undo’ the impact of losing benefits under these new rules, and active their individual retirement benefits in order to also continue receiving spousal benefits, they will be
Start Stop Start – Voluntary Suspension of Social Security Benefits Still Exists
Notwithstanding all the new changes, the original rule allowing for voluntary suspension of an individual’s retirement benefits remains in place.
Now more narrowly construed, the rule exists for those who started retirement benefits early (prior to full retirement age), who have now “changed their mind” and wish to delay Social Security benefits and earn delayed retirement credits (
A voluntary suspension will also remain relevant in other limited scenarios, such as
Still, aside from these somewhat esoteric circumstances, the new rules effectively kill most forms of “
Reports out over the past 24 hours indicate that the budget agreement is expected to pass later this week. This would immediately start the clock on the end of restricted application for anyone still under age 62 by year end. Anyone receiving spousal benefits under file-and-suspend would find those checks terminated next spring—or at least until any voluntary suspensions of benefits by either member of a couple is ended.
Michael Kitces, CFP, is a Financial Planning contributing writer, and a partner and director of research at
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