Window Still Open on Social Security Rules Changes

Much attention has been focused recently on changes in Social Security rules under the 2015 Bipartisan Budget Act that will significantly impact when and how couples can claim their benefits. Under those rule changes, popular strategies known as “file and suspend” and “restricted application” that help maximize Social Security benefits for couples will change starting on May 1, 2016.

Using the file and suspend strategy, a worker would file for and then suspend their retirement benefit, which allowed their spouse and dependents to access benefits tied to their record. In turn, the restricted application strategy allowed the spouse of a worker to receive a spousal benefit prior to full retirement age while allowing their own retirement benefit to continue growing.

It is important to note that file and suspend will remain available for those who reach full retirement age (66) prior to the law taking effect May 1, 2016. For those who were born on or before January 1, 1954, a group that was in effect grandfathered under the law, restricted application will remain available for an additional four years in its current form. Even with the pending changes, there are still strategies available to maximize Social Security benefits for these two populations, including those who have been divorced. Benefits for those who have been widowed are not affected by the rule changes.

The decision regarding when and how to claim Social Security retirement benefits will continue to depend on multiple factors including age and life expectancy, earnings, and how long you intend to work. Generally, it’s recommended to delay benefits as long as possible to maximize deferred credits. But health problems, the need for income or unexpected life events can affect or alter a decision. Understanding the rules and options and discussing how they affect you and your family with an advisor can be key to determining your strategy.

The file-and-suspend and restricted application were popular provisions included in the 2000 Senior Citizens Freedom to Work Act, a law originally intended to allow seniors to continue working while receiving Social Security benefits. It eliminated the earnings limit for those who had reached full retirement age and gave people the ability to suspend retirement benefits in order to receive delayed retirement credits. So, although the intent of the “voluntary suspension” rules was to allow working people already drawing Social Security benefits to suspend them to continue building retirement credits if life circumstances changed, couples instead began using them to provide benefits for spouses or minor children while still allowing the primary earner to build delayed retirement credits. Because these strategies often were used in higher income households, there was a perception that those families were getting a special benefit even though the strategies were available to anyone.

The 2015 budget bill aimed to cut costs by eliminating those unintended benefits, saving taxpayers a potential estimated $9.5 billion per year on spousal and child benefits.1

The following sections discuss in more detail various strategies that you or your spouse may want to consider in light of these changes.

Current rule through April 29, 2016 – In order to use this strategy to obtain benefits for a spouse or dependents, eligible individuals must file and suspend their benefits by the deadline. Under file-and-suspend, a worker who has reached full retirement age may file for Social Security benefits and then suspend them immediately, allowing that person to earn deferred retirement credits (DRC) of 8 percent per year (plus cost-of-living adjustments) up to age 70. At the time of the initial filing, the worker’s spouse can begin collecting spousal benefits as early as age 62, although the spousal benefit will be reduced if the spouse has not yet attained full retirement age. In most cases, the spouse with the higher income files and suspends, allowing the spouse with the lower income to receive a spousal benefit which is potentially higher than their own retirement benefit. An eligible dependent child or disabled family member could also collect benefits. At any time during the suspension, the worker can elect to receive the delayed retirement credits in a lump sum and begin collecting retirement benefits based on their monthly benefit at the timing of filing.

What changes – Effective May 1, 2016, upon reaching full retirement age, a worker can still file and suspend their benefit, but a spouse will no longer be able to collect a spousal benefit based on the worker’s earnings record during the suspension. In order for a spouse to receive a spousal benefit, he or she must be at least age 62 and the worker must currently be receiving his or her benefit. It should be noted that if the spouse has an earnings record of his or her own, the spouse would be deemed to have filed for their own retirement benefit first, with any spousal benefit added to this amount. On paper, the spouse appears to receive the larger of the two benefits (usually the spousal benefit), but it is actually a combination of both their retirement benefit and the spousal benefit. Therefore, if the spousal benefit begins before the person’s full retirement age, there is a permanent reduction in the spouse’s own retirement benefit — deferred retirement credits are not available. Finally, the lump sum payment of deferred retirement credits will no longer be available.

Restricted Application
Current rule through April 29, 2016 – An individual who is eligible for both a spousal benefit and a retirement benefit based on his or her own earnings record can choose to take only a spousal benefit if he or she has reached full retirement age. That allows the person to collect spousal benefits from full retirement age until age 70 and then switch to their own retirement benefit. In the interim, they would have earned deferred retirement credits of 8 percent per year, plus cost-of-living adjustments.

What Changes

Individuals born on or before January 1, 1954 – Access to restricted application is grandfathered in for them, even if they

· plan to file for spousal benefits later, or have not yet reached full retirement age.

· Married couples – As previously discussed, spousal benefits will be available only when the other spouse has filed to receive his or her benefits.

· Divorced spouses – Ex-spouses who were married for at least 10 years and have not remarried can claim spousal benefits as long as both ex-spouses are at least 62. If they have been divorced for at least two years, the spousal benefit is available even if the ex-spouse on whose record the spousal benefit is being based has not yet filed for benefits or has remarried.

· Individuals born in 1954 or later – Access to restricted application is eliminated. Under the new rules, so-called “deemed filing” will be in effect, meaning that anyone filing for benefits will not be able to choose between a spousal or earned benefit. Instead, if a person is eligible for more than one benefit, the payable benefit will be a combination of their own retirement benefit and the spousal benefit, as previously discussed.

Window of Opportunity
With the April 29 deadline looming, it’s critical for married couples and divorced individuals to review their Social Security benefits and the claiming strategies available to them, especially those who were born in 1953 or earlier. Here are some potential scenarios to consider:

Married couples who qualify to receive spousal benefits under the file-and-suspend strategy but have not yet applied should evaluate their financial situation quickly to determine whether it’s best for them to take advantage of the strategies discussed. Even if the higher-earning spouse already has started drawing benefits, he or she can suspend before the deadline to obtain the lump sum benefit available under the current rules if it makes sense based on their individual situation.

For a couple consisting of a worker who is older with a higher retirement benefit and a spouse age 62 or older with a lower benefit, it might make sense for the younger spouse to take a reduced retirement benefit now and for the higher-earner to take a spousal benefit, allowing their own retirement benefits to increase through deferred credits. If the higher-earner dies before their spouse, the spouse then receive an increased survivor benefit based on their deceased spouse’s retirement benefit, which was allowed to grow for a longer period of time.

Individuals who decide to start receiving Social Security benefits prior to the April 29th deadline have access to an additional opportunity, in that they have a 12-month window within which they can change their minds and request a suspension of their benefits. Perhaps they believe they made a mistake by taking benefits too soon, or have an unforeseen opportunity to continue working and receive earnings beyond the annual limit. If so, there is a one-time “do over” available, which would allow the individual to pay back any benefits received. Later, whenever you restart benefits, they will be paid based on the later filing date.

Like any financial decision, it’s important to consider Social Security benefits within the context of your overall financial plan, tax circumstances and in consultation with your trusted advisors.



Spousal Benefits for Divorced Individuals
Qualified divorced spouses are generally entitled to the same spousal benefit as a married spouse would be, as long as certain requirements are met. Moreover, it’s important to note some key differences regarding benefits available to divorced spouses:

· Claiming a spousal benefit does not affect your ex-spouse’s benefit because he or she no longer is a member of your family. As such, they will not be informed of your claim.

· Unlike married couples, both divorced spouses can claim spousal benefits at the same time if they have been divorced for at least two years.

· The ex-spouse’s benefit at full retirement age (their Primary Insurance Amount or PIA) is used to calculate the spousal benefit, regardless of when the ex-spouse starts receiving benefits.

· The earnings limit for Social Security benefits, currently $15,720 per year, applies only to individuals who start receiving benefits before full retirement age.

There also are potential disadvantages for divorced spouses to be aware of, including restricted access to information about the amount of your potential spousal benefit.

Social Security officials are prohibited from revealing information about your ex-spouse’s benefit to help you make your decision, but you can counter that by asking the agency what your benefit would be at a specific age. They will factor your ex-spouse’s benefit in their response to you. In addition, you will need to prove you are entitled to the benefit with proof you were married for at least 10 years, and proof of divorce.

Spousal benefits for divorced individuals generally end if they remarry because they can receive benefits based on their new spouse’s earnings record. But there is an exception if your new spouse is a beneficiary, such as someone who was widowed and is receiving survivor’s benefits, which you would not be entitled to. In those cases, the spousal benefit from the first marriage would continue.

In addition to retirement benefits, divorced spouses are eligible for survivor’s benefits based on an ex-spouse’s earnings record. To qualify, a surviving divorced spouse must have been married for at least 10 years, be at least age 60 (50 if disabled) and cannot have remarried before age 60 unless that marriage also ended. You can continue to receive a survivor’s benefit if you remarry, but the benefit will be subject to the earnings limit, which is $15,720 per year for 2016. The age at which the deceased spouse started claiming benefits is a factor in the amount of the survivor’s benefit available, unlike retirement benefits which are based on the ex-spouse’s full retirement age.

The requirement of being divorced for at least two years to be eligible for spousal benefits can be waived in order to obtain Supplemental Social Security Benefits for young children. For that reason, some couples make such a waiver part of their divorce agreement in order to ensure benefits for their children.

Those benefits include:

· Child in Care Benefit – This is a spousal benefit for children up to age 16, regardless of the receiving spouse’s age. It is limited to a single benefit regardless of the number of children in the household for up to 50% of the eligible worker’s benefit at full retirement age but is subject to the earnings limit, currently $15,720 per year.

· Children’s Benefit – This benefit is paid directly to a representative for each child, often the divorced spouse. It is for children up to age 18 (19 if still in high school) and can be up to 50% of the eligible worker’s benefit at full retirement age up to limits based on multiple factors determined by the Social Security Administration.2 The benefit also is subject to the annual earnings limit. Disabled children might be eligible to receive benefits beyond age 18.

Tiffany Rovaina is a Wealth Advisor with Bronfman E.L. Rothschild

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2 Social Security benefits for children

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