By W. Andrew Larson
Two Social Security claiming strategies that have been popular with affluent couples are undergoing meaningful change. Your clients may know these claiming strategies as "file and suspend" and "restricted application," which have been used in concert by affluent couples for over a decade. The administration considers these legitimate claiming strategies to be "unintended loopholes" that have potentially allowed individuals to claim billions of dollars in extra benefits. The restricted application is now only available to a spouse who attained age 62 by December 31, 2015. But a short window of opportunity still exists to use the more generous file and suspend option for those clients eligible to take advantage before the phaseout date of April 29, 2016. Take the time now to identify clients who may qualify.
Who is affected?
- Workers who are or will be 66 before the phaseout date and have not used file and suspend by April 29, 2016
- Spouses who have not used restricted application and have attained age 62 by December 31, 2015
What is changing under file and suspend?
Under the soon-to-be-expired file and suspend rules, a client who has reached full retirement age (FRA) can file for Social Security benefits, which then makes the benefit available to his or her spouse as well. Then the filer can suspend his or her benefit up to age 70 in order to accumulate delayed retirement credits ((DRCs)) and increase the benefit amount -- 8% per year of delay. This also offers a potentially higher surviving spouse benefit since, in that case, the spouse can be eligible for 100% of the benefit amount including the delayed retirement credits. After April 29, 2016, workers will still be able to file and suspend their own benefit (if they left and returned to work for instance). However, Social Security benefits will not be available to a spouse while the worker has suspended his or her own benefits.
What action can I take?
Individuals who are age 66 and file by April 29, 2016 have a final window of opportunity to lock in under the old claiming rules. After that date, a worker can still suspend benefits, but at that point a spouse will not be eligible for spousal benefits until the worker resumes his or her benefit payments.
How have restricted application rules changed?
Under the old law, clients who reached FRA could elect to receive either their own or their spousal benefit. Restricted application allowed a worker to claim a spousal benefit at FRA and then switch to his or her own (presumably more valuable) worker benefit at a later date, up to age 70. This mechanism allowed spouses to get a spousal benefit while continuing to earn DRCs on their worker benefit. This is sometimes referred to as, "claim now - claim more later." Going forward, only clients who attained age 62 or older by December 31, 2015 have the option to file a restricted application. For those who did not attain age 62 by the end of 2015, restricted application is no longer available; the Social Security Administration will deem the benefit to be the higher of the worker benefit or spousal benefit -- a rule already in place for a married person who files before FRA.
How can I help my clients?
For clients who are eligible to file for Social Security benefits but have not yet done so, review with them their reasons for delaying, considering the changes to these claiming strategies. Pay attention to time-sensitive elections and procedures. Expand your client discussions on Social Security benefits to include a review of their complete retirement income plan. Encourage clients to consult with their tax professionals regarding the tax impact of various payout options.
This material is for educational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Management does not provide tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Material prepared by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management.
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