The Bipartisan Budget Act of 2015, signed into law by President Obama last month, includes provisions written to shut down two Social Security claiming tactics popular with couples and divorcees. These strategies are commonly known as "file and suspend" and the "restricted application."
File and Suspend Strategy
File and suspend is a financial strategy that allows married couples to collect some benefits now while deferring benefits for the higher earner. The primary wage-earner generally continues to work in order to earn the maximum benefit; this not only locks in the maximum retirement benefit during the primary wage-earner's lifetime, but also the maximum benefit for the surviving spouse.
In order to use the file and suspend strategy, at least one spouse has to have reached Social Security's full retirement age (FRA). For people born between 1943 and 1954, FRA is age 66. FRA then increases by year of birth up to age 67 for those born in 1960 or later.
File and suspend has been an excellent option for couples to use in either of the following situations:
� one spouse never worked (can only receive benefits as a spouse)
� one spouse has a lower wage-earnings history
Here is how the file and suspend strategy works:
The 'primary' spouse with the higher earnings record files for benefits at his or her FRA and immediately suspends the claim. The other spouse, who must be at least age 62, may then claim spousal benefits.
The primary spouse can continue to work and will earn delayed retirement benefits up to age 70. In the meantime, the other spouse collects a bigger benefit than would have been possible based on his or her own earnings history.
This strategy has worked best if both spouses are close in age, as spousal benefits are only half of the primary spouse's benefit and are reduced further for early retirement.
Restricted Application Strategy
The restricted application strategy, also known as free spousal benefits, allows a spouse to claim a benefit and continue working. Later, up to age 70, this claimant retires and switches from spousal benefits to the larger benefit earned on his or her own work history.
There are three requirements to use a restricted application:
� the claiming spouse must be at FRA
� the other spouse must have filed for benefit already (otherwise there would be no spousal benefit available)
� the claiming spouse restricts the claim to spousal benefits
This strategy can be used effectively by two-income couples; and it differs from file and suspend since the claiming spouse collects benefits while continuing to work and allowing delayed retirement credits to grow. In addition, unlike the file and suspend strategy, the claimant must have reached FRA to collect a spousal benefit.
Strategies for Divorced Workers
The restricted application strategy also works for an ex-spouse who can wait until FRA to claim the spousal benefit. The ex-spouse draws 50 percent of the other spouse's benefit and continues to work, building delayed retirement credits at eight percent per year. Then, at age 70, the ex-spouse claims benefits on his or her own record.
In the case of divorcees, the other spouse is not informed by Social Security that benefits are being claimed on his or her record.
How Did the Bipartisan Budget Act of 2015 Impact These Claiming Strategies?
The file and suspend strategy may not have been intentionally put into existence by legislators, as some say this strategy is a legal loophole used only by those who have enough knowledge of how the Social Security system works. In any event, the Bipartisan Budget Act of 2015 effectively kills the file and suspend strategy for married couples. Beginning in May 2016, married individuals will no longer be able to receive the spousal benefit if their benefits are suspended.
People born on or before May 1, 1950 (those who reach age 66 for Social Security purposes by April 2016) still have access to file and suspend as long as the request for voluntary suspension is made by the end of April 2016. In this case, auxiliary beneficiaries (the spouse and the children of a retired worker) may claim benefits under the old rules.
While file and suspend will be going away next spring, the restricted application strategy is being phased out over a longer horizon. People born on or after May 2, 1950, but before January 2, 1954 can continue to do a restricted application under the new law. People in this group can collect spousal benefits while allowing delayed retirement credits to grow, except if the other spouse suspends benefits after May 1, 2016 spousal benefits would be cut off during benefit suspension.
People born on or after January 2, 1954 (i.e., those who are under age 62 today) will not be able to benefit from either file and suspend or the restricted application. Under the new law, voluntary suspension also suspends spouse and children benefits; and there will be no option to do a restricted application. Divorcees in this age group who have been planning to work past FRA in order to maximize delayed retirement credits will not be able to collect 50% of the ex-spouse's benefits at FRA, as allowed under the old rules.
People who are eligible to file and suspend Social Security benefits between now and April 2016 should consider taking action. This includes single people who have never been married, since filing and suspending prior to the deadline could prove beneficial to a future spouse (one must be married for only a year in order to collect spousal benefits).
