April 29 Marks the End of a Major Social Security Loophole

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Q. I remember reading an article that you published last fall about The Bipartisan Budget Act of 2015, where you mentioned that the end of file-and-suspend would be happening in six months. I am concerned about the impending deadline. Can you explain exactly when it is and what it means for those who would still like to take advantage of the loophole?

A. Not only is today tax day. It also marks two weeks until the last day those who qualify can take advantage of the file-and-suspend Social Security claiming strategy. After April 29, 2016, file-and-suspend becomes a thing of the past.

As discussed in the article you are referring to, the Bipartisan Budget Act of 2015 was signed into law in November 2015, resulting in the end of several unintended loopholes, including file-and-suspend. To understand the changes, I will explain how file-and-suspend used to work, and how it will work now.

How File-and-Suspend Worked (for married couples)

• Originally, file-and-suspend allowed someone who reached full retirement age to file for Social Security retirement benefits, and then immediately suspend them.

• Since benefits had been filed for, a spouse became eligible for spousal benefits(Spousal benefits could not be claimed until the primary worker also filed for benefits.)

• Since the benefits of the primary worker were suspended – and therefore were not actually received – the original filer could still earn delayed retirement credit with increases of 8% per year for waiting.

How File-and-Suspend Will Work Starting April 30 (for married couples)

Under the new rules in Section 831 of the Bipartisan Budget Act of 2015, when the spouse who reaches retirement age suspends his or her benefits, he or she will suspend not only his or her benefits, but any/all benefits payable to other individuals based on his earnings record.

How File-and-Suspend Worked (for single people)

Although it was more common for married couples to use the file-and-suspend strategy, it was a viable option for singles, too.

At full retirement age, an individual who planned to delay benefits until full retirement age could choose to file-and-suspend. While doing so, he or she would earn the same delayed retirement credits that were available by just delaying outright. However, if the individual elected to file-and-suspend and changed his or her mind later, it was possible to retroactively claim all benefits going back to the date of the original suspension.

How File-and-Suspend Will Work Starting April 30 (for single people)

The Bipartisan Budget Act of 2015 created a new Social Security Act section 202(z), which defines the rules for how voluntary suspension will work in the future. The new rules stipulate that suspended benefits can only be resumed in the next subsequent month after the request is made, or at age 70. In other words, the new rules don’t have the option to reinstate going back to a prior month, which effectively means the optional-lump-sum-reinstatement strategy is no longer viable.

However, for anyone who has already requested a suspension of benefits, or who does prior to the effective date of the legislation (by April 29, 2016), the opportunity remains. Any suspension that begins after the effective date, though, will not be eligible for a subsequent retroactive reinstatement.

Other scenarios you should be aware of include:

Unmarried divorced spouse: A divorced individual could choose to file and suspend, and can still do so by April 29, 2016. The restricted application tactic is still available to a divorced individual at Full Retirement Age, provided his or her former spouse is also older than age 62. If he or she were under age 62 in 2015, then the divorced individual would not be eligible to file a restricted application.

Surviving spouse: The new rules are not applicable for a surviving spouse. He or she can still independently choose the timing of when to start survivor and individual retirement benefits. In other words, if you are a widow or widower, Congress hasn’t changed the rules for you. A restricted application strategy is still available. For instance, you could take the widow’s payment as early as age 60, then switch to your own at 70. Or for many people, the opposite path is best: take your own Social Security at 62, then switch to your widow’s payment at 66.

Grandfathering of File-And-Suspend

Under the final version of the Bipartisan Budget Act of 2015, the new limitations on file-and-suspend will apply to anyone who requests a suspension of benefits more than 180 days after the effective date of the legislation. With the law being passed November 2nd of 2015, that means new suspensions occurring on April 30, 2016 (when the deadline kicks in) will be subject to the new more restrictive rules (so file-and-suspend must occur on/by April 29, 2016 to be grandfathered before the “Social Security loophole” is closed).

Social Security is Complex

As you can see, Social Security rules and strategies are very complex. Before making any decisions, be sure to educate yourself. Below are tools related to Social Security and retirement planning, that can provide more details:

• For lots of additional details about Social Security, including spousal benefits, please visit our Social Security FAQ page.

• Read our articles: Ask the Expert: Can You Explain Social Security, please?,  Can You Retire On Social Security Alone?, and What She Doesn’t Know About Social Security Could Cost Her Thousands.

• Check out AARP’s Social Security Planning guide.

It’s important to consider your options when filing for Social Security benefits. It is also important to keep in mind what could happen if you are living on Social Security alone and you or a loved one becomes incapacitated. You must take this into account when planning for retirement.  Every adult over the age of 18 should have an Incapacity Plan that includes a Financial Power of Attorney, an Advance Medical Directive, and an Advance Care Plan. If you don’t have an Incapacity Plan in place, now is the time to get started.  Please call the Farr Law Firm as soon as possible to make an appointment for a no-cost consultation:

Fairfax Social Security Law: 703-691-1888
Fredericksburg Social Security Law: 540-479-1435
Rockville Social Security Law: 301-519-8041
DC Social Security Law: 202-587-2797

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Critter Corner: Can My Sister Retire on Social Security Alone?


 
Dear Commander Bun Bun,

My sister seems to think that she can live on Social Security alone. Do you think that is possible, and if so, do you have any tips I can share with her?


Thanks,

Nada Nuffmunney

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Dear Nada,

Millions of people count on Social Security as their primary source of retirement income. In fact, Social Security was at least 50% of income for 52% of beneficiary couples and 74% of single beneficiaries, and at least 90% of income for 22% of couples and 45% of singles. So it is possible to retire on Social Security alone, but it is less than ideal. Below are some tips you can suggest to your sister to make living on just her benefit check a little easier:

1. Wait to start Social Security: If she hasn’t started Social Security, the best thing she can is to wait to claim her benefits.  When she reaches 66 (normal retirement age), she can access 100% of her benefits. For each year after that, up to age 70, her benefits will increase 8%, meaning she can access 32% more at age 70 than at age 66.

2. Share housing: Remember the Golden Girls sitcom from the 80’s? Similar to that, when two or more people share a house and household expenses, the money goes further, whether you’re renting or sharing a mortgage payment.

3.  Prioritize: Living on Social Security without any other income may make it impossible to do everything you want. However, retirement is an excellent time to take stock of what you have and what you want, so you may just need to prioritize your wants.  If your sister knows what is most important to her, she can set goals to live within her means.

4. Cut Expenses: Your sister should try keeping a record – in a notebook, a spreadsheet, a software program or on your phone – of EVERY dollar she spends. Many people are surprised to learn how much little things add up over the course of a month. Documenting expenses may also help her see things she can cut. 

5. Plan: Your sister should consider her finances both now and well into the future to see what she needs to get by. The Retirement Estimator, on the Social Security website, can help.

6. Pay off debt before you retire: Before retirement arrives, she should pay off as much debt as she can. This will free up a lot of room in her budget for other expenses. This applies to credit cards as much as it does her home and vehicle.

7. If she is healthy, she should do her best to remain healthy by eating right and exercising. Health care can easily kill a monthly budget when you are only drawing Social Security, so she should do what she can to stay healthy.

8. Tap her home equity: Homeowners have a built-in emergency fund if unexpected expenses occur in retirement. Retirees who are at least age 62 may be eligible for a reverse mortgage, which can often be taken out even if there is an existing mortgage on the house, in which case the existing "forward" mortgage gets paid off by the reverse mortgage. This will eliminate a monthly mortgage payment, which will help make things more affordable for her. Read more here.

Hop these tips are helpful!

Commander Bun Bun
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