Many Federal Employees and Annuitants Are Affected by New Social Security Rules
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Under Social Security's “dual entitlement” law, a married individual is entitled to the higher of: (1) the Social Security retirement benefit based on his or her own earnings history or (2) a spousal benefit equal to 50 percent of his or her spouse's or a former spouse's retirement benefit. Married individuals who file for retirement benefits before their full retirement age (FRA) (age 65 to 67, depending on what year an individual was born) based either on their own earnings record or on spousal benefits, are “deemed to have filed” for both benefits at the same time. But once a married individual reaches his or her FRA, that individual can “restrict the application” to one type of benefit, allowing the individual to apply for one type of benefit at FRA and apply for the higher Social Security retirement benefit at a later time.
These two filing options give rise to two planning strategies, especially beneficial to married and to divorced individuals. In short, these strategies enable married and divorced individuals in certain situations to possibly maximize their lifetime combined Social Security retirement benefits. The Bipartisan Budget Act of 2015, enacted on November 2, 2015 (hereafter referred to as the “new law”), amended Social Security provisions related to “deemed filing” and benefit “suspension”, in order to prevent individuals from obtaining larger Social Security retirement benefits than Congress intended. The result is that many individuals will no longer be able take advantage of “file and suspend” and “restrict an application” (also known as “claim now, claim more later”) strategies discussed in previous columns. However, because of the effective dates and the grandfather provisions of this new law, some married couples may still be able to take advantage of the “file and suspend” strategy before it takes full effect during 2016. Also, depending on when an individual was born, the individual may be able to “restrict an application”. This column discusses what the end of “file and suspend” and “restrict an application” means to federal employees, annuitants, as well as to their spouses and families. Under current rules which remain in effect until April 30, 2016, a “fully insured” individual (someone who has at least 40 credits of Social Security) upon reaching FRA can file for his or her Social Security retirement benefit and then immediately suspend the benefit (after receiving the first monthly retirement check, contact the Social Security Administration to suspend payments and return the current payment). Since the individual has formally filed for benefits, the individual's spouse is permitted to request a spousal benefit assuming the spouse is: (1) at least age 62; and (2) if the spouse is younger than his or her FRA, the spouse's own Social Security benefit is less than half of the other (higher earning) spouse's Social Security benefit. Furthermore, since the benefits of the higher earning spouse are suspended, the higher earning spouse will earn delayed retirement credits (DRCs) of 8 percent per year until age 70. The DRCs amount potentially to a maximum 32 percent increase in benefits for higher earning spouses whose FRA is age 66 (those born between Jan. 2, 1943 and Jan. 1, 1955). Under the new law, if an individual suspends benefits, then all benefits associated with that individual's Social Security earnings are suspended. These benefits include individual, spousal, and dependent children benefits. The new law effectively ends the” file and suspend” strategy. Most importantly, it eliminates a means of potentially maximizing benefits for married couples, especially those couples who were born in the same year and who both have contributed to Social Security most of their working years. However, because of the effective dates and the “grandfather” provisions of the new law, some married couples may still be able to take advantage of the “file and suspend” provision. In particular, under the following conditions a married couple can still take advantage of “file and suspend” option: (1) the “higher earning” spouse, the one who is filing and suspending, must be at least age 66 as of April 30, 2016 (born April 30, 1950 or earlier; and (2) the “lower earning“ spouse must have been born before Jan. 2, 1954. In addition, the “file and suspend” option must be elected before April 30, 2016. The following example illustrates: Howard reaches his FRA in January 2016 but plans to continue working until age 70. His retirement benefit at FRA is $2,200 a month. His wife Alice is age 62, is no longer working and will receive $900 a month at her FRA of 66. If she begins taking benefits at age 62, the benefits based on her earnings record would be $900 times 75 percent or $675, while her spousal benefit amount would be $2,200 times 50 percent times 70 percent, or $770. Alice can claim a spousal benefit only if Howard has claimed his benefits. Therefore, Howard “files and suspends” which enables Alice to draw a spousal benefit which is greater than the benefit based on her own earnings record. In the meantime, Howard waits until age 70 to begin receiving benefits which enables him to receive delayed retirement credits so that his monthly benefit, beginning at age 70, is $2,904 (8 percent of $2,200 equals $176; four(years) times $176 is $704, added to $2,200 equals $2,904). When an individual claims individual Social Security retirement benefits, an additional payment of 50 percent of his or her primary insurance amount (PIA) (the amount payable each month at his or her FRA) also goes to each dependent child in the household. Children include biological and legally adopted children, provided the child is unmarried and under the age of 18. The rules also apply to disabled children with no upper age limit, provided the disability occurred before the age of 22. An “early“ (pre-age 62) spousal benefit (“father” or “mother” benefit) is also available to a spouse under the age of 62 if the spouse is a parent caring for a disabled child of any age, or for a young child under the age of 16. These payments collectively are subject to a maximum family benefit which varies between 150 and 180 percent of the primary worker's PIA. Given that spousal, dependent and disabled children benefits will occur only upon an individual's filing for his or her own benefits, the claiming of spousal and dependent child benefits is a direct result from the “file and suspend” rules. This means someone at FRA could “file and suspend” at FRA to activate not only a spousal benefit, but dependent and disabled child benefits while delaying his or her own Social Security retirement benefits to age 70 in order to earn delayed retirement credits. But with the new law, only those individuals born before April 30, 1950 and who elect to actually “file and suspend” before April 30, 2016 can take advantage of this option. For those individuals born after April 29, 1950 and who want their spouses and children to receive Social Security benefits based on their PIA, the options include to either immediately receive their benefits – even before FRA at a reduced rate - or to delay them. The other alternative is the option of “start, stop, and start”. With this alternative, a parent begins Social Security benefits before FRA in order to for family benefits to start. Family benefits includes spousal and dependent/disabled child benefits. The parent then suspends his or her benefits at a later age, perhaps FRA. This strategy is especially beneficial if a child is younger than age 18 when the parent is younger than FRA, and the child will become age 18 by the time the parent becomes FRA. When the parent reaches FRA, the parent will stop the benefits in order to earn delayed retirement credits starting at FRA and until age 70. Starting at age 70, the parent's retirement benefit, even though it was originally and permanently reduced because the parent started the benefit before his or her FRA, would now have increased by as much as 32 percent since it was stopped at FRA. The spousal benefit, if this is also available at age 70, would also be increased by as much as 32 percent even though it was originally reduced. “Grandathering” of “Restricted Application” or “Claim Now, Claim More Later” Under the new law taking effect immediately, an individual who applies for a spousal benefit is automatically “deemed” to have also applied for his or her own retirement benefit. Therefore, a restricted application for only one type of benefit is no longer allowed. It will no longer be possible to apply for just one benefit and then switch to another benefit later. In short, either the individual or the spousal benefit starts earlier, or both are delayed until later, at which time the claimant simply receives whichever benefit is higher. This new rule prevents married couples from taking advantage of the “claim now, claim more later” strategy that has been used in the past. Note that this provision in the new law applies only to individuals born after Jan. 1, 1954. Any individual 62 or older during 2015 can still file a “restricted application” under the current rules. This means that if an individual is already receiving a spousal benefit under the “restricted application”, then the individual may continue to do so. It also means that if an individual is not receiving a spousal benefit yet but had planned to file a “restricted application” for it in the future, the individual can still do so if the individual was born before Jan 2, 1954. This is true even if the individual had not planned to file their own Social Security retirement benefit until as late as 2019, when anyone born during 1953 reaches FRA. Effect of New Rules on Divorcees With respect to divorced spouses, “file and suspend” is not relevant because a divorced spouse is eligible for a full spousal benefit at his or her FRA, provided his or her ex-spouse is at least age 62, regardless of whether the ex-spouse has filed for his or her Social Security benefits. Filing a “restricted application” in order to obtain the ex-spouse's benefits while delaying the individual's own retirement benefits remains an effective strategy to maximize an individual's lifetime Social Security retirement benefits. This is accomplished by collecting the ex-spouse's Social Security benefits, as much as half of it if the ex-spouse is living or all of it if the ex-spouse is deceased. This is done for a period of time and then switching to one's own social Security benefit which have been increased by delayed retirement credits. Note that the “restricted application” strategy remains available under the new law for individuals born before Jan. 2, 1954. For divorcees born after Jan. 1, 1954, they must either claim the higher of their retirement benefit or half of the ex-spouse's retirement benefits, or delay filing for their benefit in order to receive a higher amount of their retirement benefit. Either way, a divorcee born after Jan. 1, 1954 only gets the higher of whichever benefit – his or her own or half of his or her ex-spouse's - and not both cumulatively. Interestingly, the new law could make it advantageous for divorced couples to remarry, especially couples in which the spouses were born in the same year and both have contributed substantially to Social Security throughout their working careers. Suppose there are two formerly married individuals, both of whom have reached their FRA of 66, were married for 32 years, and have been divorced for at least two years. Because each former spouse has reached FRA and because the couple has been divorced for at least two years, each former spouse can collect a full spousal benefit (half of the other spouse's Social Security) while delaying the receipt of his or her own Social Security benefit. This delay results in delayed retirement credits of 8 percent per year. When they turn age 70, they remarry and switch to their own Social Security retirement benefit, which has increased by 32 percent. For high-earning couples, this strategy could result in as much as $100,000 in additional lifetime Social Security benefits. Effect of New Rules on Survivor Benefits The new law has no effect on survivor benefits. For that reason, the rules regarding survivor benefits for married couples and divorced couples are reviewed here. When one spouse of a married couple passes away, the surviving spouse is eligible for a survivor benefit, also known as a widow's or widower's benefit starting as early as age 60 provided the widow/widower does not remarry before age 60. It is equal to 100 percent of the deceased spouse's benefit. This rule also applies to a divorcee whose former spouse has died, provided the couple was married for at least 10 years and the divorcee remains unmarried until age 60. A surviving spouse or divorcee who has not remarried until at least age 60 has the choice of selecting the higher of the widow/widower benefit or his or her own retirement benefit and not the cumulative total of both. But surviving spouses/divorcees still have a choice concerning when to claim each – the widow/widower benefit, or his or her own individual retirement benefit – and the new law does not change these rules. As a result, a surviving spouse/divorcee still has the option of choosing whether to begin widow/widower benefits as early as age 60 or as late as 70, and also can choose whether to start his or her own retirement benefits as early as age 62 or as late as age 70. Note that whether a surviving spouse/divorcee starts receiving either a widow/widower benefit or his or her own retirement benefit before their FRA, starting any Social Security before FRA results in a reduced benefit. By electing a widow/widower benefit instead of his or her retirement benefit (and delaying the retirement benefit past FRA) the result will be an increased retirement benefit (through delayed retirement credits) that could result in an increase in monthly Social Security benefits as much as 32 percent higher. Keep in mind that a widow/widower benefit is not eligible for delayed retirement credits.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial Consultant, Chartered Life Underwriter, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD -- and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD. Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.
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