The recent decision by Congress to phase out the file-and-suspend and restricted claim loopholes under the Bipartisan Budget Act of 2015 (BBA) has stirred up even more interest in the topic. The decision has raised public awareness of the spousal and survivor features that remain, but the changes also have created confusion about the spousal and survivor benefits still in place.
The BBA changes take full effect at the end of April 2016, so let’s review the basic rules of the road on spousal benefits.
Under the new rules, how is my ability to claim a spousal benefit affected?
If you were born before Jan. 2, 1954, and have already reached full retirement age (FRA), you can choose to receive only the spouse’s benefit and delay receiving your retirement benefit until a later date. If your birthday is Jan. 2, 1954, or later, the option to take only one benefit at full retirement age no longer exists as a result of the BBA provisions on Social Security. If you fall into the group that no longer qualifies to make a restricted claim of benefits, you will be effectively filing for all retirement or spousal benefits.
Spousal benefits are reduced for those who file before their own FRA. For example, a spouse whose FRA is 66 could receive 35% of the worker’s unreduced benefit at age 62. The amount of the benefit increases at later ages up to the maximum of 50% at the FRA.
Can I file for spousal benefits if my spouse (the higher earner) isn’t yet at the full retirement age? If so, how much will my spousal benefits be reduced?
Assuming your spouse has already filed for benefits and your full retirement benefit is less than 50% of your spouse’s full benefit, you can file for the spouse’s benefits even though your spouse is not yet at the FRA. The amount of reduction is based on your age at the time you claim the benefit.
Can I file for spousal benefits if my spouse isn’t receiving Social Security?
In general, the answer is “no.” However…
Until recently, there was one exception to that statement – the rules on so-called “file-and-suspend” and “restricted applications”. These rules are being phased out as part of the Bipartisan Budget Act (BBA) signed into law by President Obama in November 2015.
Some people will still be able to use the rules through the end of this month (the formal deadline is April 29, 2016), so here’s a look at how it works, and who can still use the rules during this transition period.
First, the spouse with a higher benefit files for his/her benefits at full retirement age and then suspends them, continuing to accrue delayed retirement credits. That sets the stage for the lower-benefit spouse to file for his/her spousal benefit but “restricting” the application to a spousal benefit only (equal to 50% of their spouse’s benefit). The restricted application effectively delays the filing for his/her own benefit, allowing it also to continue earning delayed retirement credits.
The phase-out prohibits new file-and-suspend claiming, and it disallows restricted applications for anyone who had not reached age 62 by the end of calendar-year 2015.
Because file-and-suspend is available only to workers who have reached full retirement age, it remains available to workers who either already have turned 66, or will do so by the end of April 2016. Couples who already have executed the strategy are unaffected by the new law.
Also, there likely will be a “long tail” of this type of filing stretching through 2019. The restricted application is available only for people who have turned 62 by the end of calendar-year 2015, which means an end to the practice of filing for a spousal benefit at your full retirement age and shifting to a (larger) individual benefit later on.
For example, a 67-year-old husband with a spouse currently age 64 could file and suspend his benefit now, before the window closes, then do nothing further for two years. Then, when the wife turns 66, she can make a restricted application – take the spousal benefit now and convert to her own larger benefit at 70.
The new rules also impact divorced spouses (see below).
Can my wife start collecting based on my account at age 62 and then switch to her own account at age 66?
No, it’s not possible to switch if she files on her own account before her full retirement age. Also see the rules above on the phase-out of file-and-suspend and restricted claims.
If my wife (age 62) elects early retirement and collects Social Security on her own account, will her spousal benefit be reduced when I (currently age 64) retire at 66 and begin collecting benefits then?
Social Security will pay a person’s own benefit first, before paying the spouse’s benefit. Your wife will not receive the full spouse’s rate because of her own benefit level, which is reduced as a result of filing early. The Social Security Administration will add the spousal benefit to her own benefit to arrive at her new, higher benefit amount.
Here’s an example, provided by the Social Security Administration:
Let’s say the wife’s Primary Insurance Amount (PIA) is $1,000. She files for her own benefit at 62 and receives a reduced retirement benefit of $750. Her husband has a PIA of $2,500. She is eligible to receive one half of his PIA at her full retirement age: $2,500 (his PIA), divided by two, equals $1,250, which is the full spouse’s rate. We will subtract her PIA ($1,000) from the full spouse’s rate ($1,250) and get $250.
Social Security will add that $250 to her reduced retirement benefit amount of $750, and her new benefit amount at full retirement age will be $1,000, which is less than the full spouse’s rate.
If my spouse has not worked full-time most of his or her life, can the spouse qualify for Medicare at age 65, and does she get half of my Social Security?
If you are at least 62 years old, your wife becomes eligible at age 65 for Medicare based on your employment record. She could receive the free Part A hospitalization coverage, and pay for Part B medical coverage. She would be eligible to receive 50% of your Social Security benefit at her own FRA.
Can my wife receive spousal benefits once I reach full retirement age, even though she will continue to work? If your wife’s full Social Security benefit is less than 50% of your full benefit, she may be eligible for spousal benefits on your record (assuming that you already have filed for benefits). If she continues to work and she is below FRA, her benefits will be subject to the Earnings Test. This is the formula that withholds benefits for people who have claimed benefits below their full retirement age (FRA) and still earn income from work. Although some people think of the earning test as a tax, the withheld amounts actually are added back into your benefit after you reach FRA.
Is it still beneficial for married couples to coordinate filing strategies now that file-and-suspend is ending? Absolutely! Couples will still be able to benefit by considering a range of options. Should one or the other spouse start benefits early, should both delay, or should both file early? Most often, couples will benefit if the higher-benefit spouse delays filing to earn delayed credits. Social Security’s filing rules are designed to be actuarially “fair,” which means the credits for delayed filing (and penalties for early filing) should give us all roughly the same lifetime income – at least, according to the actuarial tables. You get about 8% less for every year you file early (starting at age 62), and the same increase for every year you wait until age 70 – the last year for which additional credits are available.
Higher income people tend to live longer, so they stand to benefit from delayed filing. The most recent mortality tables from the Society of Actuaries show that average life expectancy for a 65-year-old male is 3.16 years longer in the highest-income quartile than in the lowest band; for women, the gap is 1.52 years.
Can I file for spousal or survivor benefits from a divorced spouse?
In many cases, yes. Social Security’s rules require that you are currently single, had been married to your ex at least 10 years, are at least 62 years old (which is the minimum Social Security eligibility age), and are not already receiving a benefit greater than the divorced spouse’s benefit.
Your divorce must have been final for two years prior to filing. Eligibility for an ex’s benefit is lost if you remarry, and you can’t file for benefits on your new spouse’s earning record until you’ve been married to that person for at least one year.
Filing for a divorced spouse benefit is a completely private affair between you and the Social Security Administration. The Social Security Administration doesn’t report to your spouse that you’ve inquired – or filed for benefits–on his or her record.
You’ll need to prove you were once married by visiting your local Social Security office with paperwork in hand. Be prepared to show a birth certificate, proof of citizenship, W-2 forms, or self-employment tax returns for the last year, your final divorce decree, and your marriage certificate. The same rules apply for Medicare eligibility.
How does the phase-out of file-and-suspend and restricted claims affect divorced couples?
In general, the changes do not affect the filing rules for divorced spouses, or for widowed spouses. A divorced spouse who meets all the other rules for filing on an ex’s record (see above) could still file on that ex’s record even if that person is not receiving benefits (due to non-filing or suspending). However, a spouse, whether married or divorced, who has reached full retirement age can no longer make a restricted claim if they fall outside the now-closing age eligibility window. Upon filing, he/she will be awarded both the spousal benefit and their own retiree benefit, and thus will receive the higher of the benefits available at that time, whether her own or that of a spouse. In that respect, divorced spouses are treated like all other spouse claimants under the new rules.
Paul Staib | Certified Financial Planner (CFP®), MBA, RICP®
Paul Staib, Certified Financial Planner (CFP®), RICP®, is an independent Fee-Only financial planner. Staib Financial Planning, LLC provides comprehensive financial planning, retirement planning, and investment management services to help clients in all financial situations achieve their personal financial goals. Staib Financial Planning, LLC serves clients as a fiduciary and never earns a commission of any kind. Our offices are located in the south Denver metro area, enabling us to conveniently serve clients in Highlands Ranch, Littleton, Lone Tree, Aurora, Parker, Denver Tech Center, Centennial, Castle Pines and surrounding communities.
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