If you were hoping to execute a ‘File and Suspend’ collection strategy of your Social Security benefits, you only have a few months remaining. Under this week’s budget legislation, Congress is killing off the various “File and Suspend” and “Restricted Application” strategies to allow spousal and dependent benefits to be paid while still earning delayed retirement credits, with just a 6-month window before the limitations start to take effect.
The File and Suspend strategy was originally passed by Congress as part of the Senior Citizens Freedom to Work Act in 2000 to allow 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 that involved File-and-Suspend and Restricted Applications for spousal benefits.
Congress has decided to close these perceived “loopholes” in the Social Security rules. By extending the rules for deemed application, it will no longer be possible to file a restricted application for just spousal benefits; instead, filing for spousal benefits means you are deemed to have filed for all benefits (spousal and retirement) and simply get whichever is higher. This eliminates the ability to take one, and switch to the other later. And with an extension of the “suspension” rules that stipulate suspending an individual’s benefits, it will also suspend any benefits to other people based on the same earnings record.
Perhaps most notable for the new Social Security crackdown, though, is the effective date for the rules. While the new limits to Restricted Application will not apply to anyone who is already age 62 or older in 2015 (i.e., those born in 1953 or earlier), the new crackdown on File and Suspend will kick in 6 months from now (thanks to a recent amendment to the original legislation), grandfathering anyone currently going through file-and-suspend but limiting anyone who tries to suspend benefits in the future. Beyond the 6 month point (sometime around May of 2016 depending on the exact date the President signs the legislation next week), anyone who suspends will find that 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 the recent Hold Harmless Medicare claiming strategy), voluntary suspension will be relegated to those unique scenarios where someone truly started benefits early, has had a change of mind and wants to stop them to earn delayed retirement credits, and who plans to start benefits again at age 70. Of course, ideally those who wish to delay benefits for the value of earning delayed retirement credits will simply delay from the start to maximize the benefit, which makes voluntary suspension a moot point altogether for most retirees in the future.
Michael Kitces, CFP®, MSFS, MTAX, CLU®, ChFC®, RHU®, REBC®, CASL®
Director of Planning Research, Partner
Pinnacle Advisory Group, Inc.
For more information on the new restrictions, see Michael’s in-depth post, “Congress is Killing the File-and-Suspend and Restricted Application Social Security Strategies,” at his blog, www.Kitces.com.