Social Security File-and-Suspend: New Guidance Released

In the year 2000, Social Security rules were changed to give older couples more options when it came to applying for Social Security benefits. These options included the popular File-and-Suspend strategy and the Restricting Application, which gave couples thousands of extra dollars in benefits. But the Obama Administration felt that these strategies were allowing upper-class couples to manipulate the system to their advantage, and as these nifty strategies became more and more popular, they put an increasing strain on the program. Therefore these strategies were eliminated in the Bipartisan Budget Act of 2015, and couples who are getting ready to file for Social Security benefits are soon going to have these options closed to them. Filers who are old enough to qualify for these two provisions have until April 29 to claim them before the new rules take effect. The loss of these provisions is a major blow to retirees, but may help the Social Security system stay solvent until a later date.

For decades, smart Social Security filers have been able to take advantage of filing options that allow the primary breadwinner to file for benefits and then suspend them until a later date. In the meantime, their spouse is able to collect benefits to help offset the temporary loss of benefits that comes with the suspension. There has even been a provision that allows the primary filer to file as a spouse and collect spousal benefits based upon the secondary breadwinner’s benefit.

Those who use these strategies can collect thousands more in benefits than those who failed to do their homework. But the Bipartisan Budget Act of 2015 is closing this door permanently for all future filers, so those who are old enough to qualify for the survivor benefits need to file before April 29 in order to get grandfathered in under the old rules. The Social Security Administration has said that it will accept all applications that are filed by that date even if they are not able to process them all before the deadline. It issued an emergency communique to all of its field offices last week stating that “Individuals who have already requested or who request voluntary suspend before April 30, 2016, are not affected by the changes.” The agency will also honor any file-and-suspend request that asks for a lump-sum payout in lieu of receiving delayed credits for retirement. But this provision will also end on April 29, 2016. (For related reading, see: Social Security 'Start, Stop, Start' Strategy Explained.)

The only reason that filers will request the file-and-suspend strategy going forward is to delay retirement credits so that they will increase every year until age 70. For example, if a filer begins collecting reduced Social Security retirement benefits early at age 62, they may decide to suspend their benefit when they reach full retirement age in order to collect a larger benefit later. Once April 30 rolls around, the primary breadwinner will actually have to receive benefits in order for the other spouse to be allowed to collect the spousal benefit, which can amount to 50% of the amount that the primary filer will collect at full retirement age. Ex-spouses who were married to the primary filer for at least ten years and have not remarried are still eligible to receive this spousal benefit. This will be the case even if the primary filer opts to suspend benefits until a later time. Here are some examples of how the new rules will apply:

• Frank will turn 66 in June 2016. He decides that he will be better off suspending his benefits, so he puts in a request to do so in June. The suspension will take effect in July. Then, in February 2017, he loses his job and decides that he needs to go ahead and start taking his benefits now to replace his lost income. He would therefore like to reinstate his benefits retroactive to July of the previous year. Before the new rule change, he could have received a lump-sum payment for the entire amount that was suspended. But he will now only be able to resume his benefits in March 2017.
• Erica is 68 years old. She is married and has a grown son with Down syndrome who lives with them and qualifies to receive benefits based upon her earnings. She puts in a request to suspend her benefits in August 2016 so that she can earn a higher retirement benefit later on. Under the old rules, her husband and son would have been able to collect benefits while her benefit was suspended. But they cannot now collect these benefits until her own payout begins under the new rules.

The new law disallows the collection of excess auxiliary or spousal benefits when the benefits of the spouse are larger than those of the filer who suspends their benefit. (For more, see: 4 Unusual Ways to Boost Social Security Benefits.)

• Francis is 66 years old and puts in a request to suspend her benefits in August 2016. She is eligible to receive a spousal benefit on her husband’s benefits as well. Under the new rules, Social Security will not only suspend her primary benefits but also her excess spousal benefit that she would get based upon her husband’s earnings. She would have received the latter benefit under the old rules.

Although the new rules drastically curtail the allowable options for retirement benefits, they do not apply to survivor benefits. But those who are old enough to qualify for the options that are being phased out should do so soon. Rather than going an office to file your paperwork, an online application can ensure that your request is made in a timely manner regardless of when it is processed. For more information on the new Social Security rules, visit the it's page on suspending benefits. (For more, see: Tips on Delaying Social Security Benefits.)