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Budget Bill Makes MAJOR Changes to Social Security Planning

| November 03, 2015
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Budget Bill Makes MAJOR Changes to Social Security Planning

Provided by Robert J. Whelan CPA, CFP

In A Nutshell
Both the House of Representatives and the Senate have passed a budget bill that has major implications for retirement planning. The bill is expected to be signed into law by the President in the very near future. There’s a lot more on the details of this bill, how it will impact your clients, and what to do going forward, below. But if you’re just looking for the headlines and high-level information, here it is...

The bill will eliminate both the file-and-suspend and restricted-application strategies. Clients who have reached their full retirement age will still be allowed to file and suspend for six months once the bill is signed and restricted applications will be allowed for those turning 62 before the end of the year (2015).

In addition, the bill reduces the Medicare Part B premium hike many clients were going to face next year. For those not protected by the hold harmless provision, premiums will “only” rise by 15%.

The Nitty-Gritty
Two bread-and-butter Social Security claiming strategies are about to go the way of the dodo bird. Both the file-and-suspend and restricted application strategies are set to be eliminated.

Current law- Once a client reaches their full retirement age (FRA), currently age 66, they are able to file for Social Security benefits, but request that such benefits not actually be paid. Doing so has allowed a client to continue to earn 8% delayed credits each year for their own benefit, while serving two other primary purposes.

First, once a client has filed for their own benefit, it allows certain other family members – most commonly a spouse, but in some cases a child – to claim a benefit based on the client’s earnings record. Note that it hasn’t been the act of receiving benefits that has allowed other family members to claim benefits based on your client’s earnings record. It’s merely been the act of filing

Second, in the event your client changed their mind about waiting until a later date to receive Social Security benefits, they could request a lump-sum payment for benefits that would have been paid, back to the date of their application.

New law – The budget bill kills the file-and-suspend technique by changing the rules so that a client’s family member may only receive a benefit based on the client’s earnings record if the client is, themselves, receiving a benefit. The budget also eliminates the retroactive lump-sum benefit option. This essentially makes filing and suspending one’s application a meaningless endeavor, though it will still technically be allowed.

Effective Date – The effective date of this change will be 180 days after the signing of the bill. With the President’s signature on the bill imminent, that puts the effective date of this change sometime around the end of April or beginning of May of 2016.

Restricted Application Strategy
Current Law – Clients are frequently entitled to more than one type of Social Security benefit. For instance, when both individuals of a married couple have worked and paid into the Social Security system, the couple may be entitled to both their own retirement benefits based on their own earnings record, as well as a spousal benefit, calculated based on the earnings record of the other. Prior to a client reaching their FRA, filing for one benefit means automatically filing for both benefits. This is formally known as deeming. However, once a client has reached their FRA, they have been able file what’s known as a restricted application, requesting that only their spousal benefit be paid. By utilizing this approach, the client has been able to receive at least some Social Security benefits in the interim, while simultaneously allowing their own retirement benefit to continue to grow with delayed credits until as late as age 70. At that time, (or sooner if desired), they could switch over to their own, higher, benefit. 

New Law – The budget bill kills the restricted application strategy by changing the rules so that deeming not only occurs prior to a client’s FRA, but all the way through age 70. Thus, if a client files for either their spousal benefit or their own benefit at any time, they will receive the higher of the two benefits but will no longer earn any delayed credits.

Effective Date – The change in the deeming rules will impact clients turning 62 in 2016 or later (technically though, a client turning 62 on January 1, 2016 would be ok thanks to a Social Security quirk that treats them as if their birthday was December 31st). For clients who are already 62 or older, or who will turn 62 before the end of the year, the restricted application rules will remain the same. Once they reach their FRA, they will be able to file an application to receive only their spousal benefit. Clients younger than 62 at year’s end, however, will no longer be able to utilize this technique. Back to the drawing board!

Social Security Planning Going Forward
The difference in the effective dates of the above changes is going to make for some pretty interesting (tricky) planning for a while. For the next six months, it’s essentially going to be business as usual – at least for clients who reach FRA by the end of that period.

After the initial six month period beginning with when the bill is signed into law, things will begin to get more complicated. From that time, through the end of 2019 (when the last of those 62 or older at the end of this year will reach their FRA), clients reaching their FRA will not be allowed to utilize the file-and-suspend technique to allow another family member to claim a benefit using their earnings record (while allowing their own benefit to continue to grow via delayed credits), but they will be able to file restricted applications. Thus, so called “combination strategies,” where one spouse files and suspends and the other spouse files a restricted application, will no longer be viable. However, since the restricted application alone will still be a viable approach, if one spouse has already filed for their own benefit, the other spouse will still be able to file a restricted application to claim only spousal benefits (provided they have reached t heir FRA).

Beginning in 2020, both the file-and-suspend and restricted-application strategies will be relics of the past, little more than memories. Social Security claiming decisions will continue to be important, but the “advanced” planning strategies utilized by advisors today will no longer enable clients to wrench additional dollars out of Social Security’s coffers. While clients’ life expectancies are only likely to continue being pushed higher, they are likely to become even more resistant about waiting until 70 (or anytime beyond their FRA) to claim benefits since they won’t be able to get at least a little “taste” in the interim.

Note: Although it is not yet 100% clear, it appears that the changes in the Social Security rules will not impact widow(er) planning, in which such widow(er) can choose to begin by taking either their own benefit or their survivor benefit, and later, switch to the other, higher, benefit.

High-Income Medicare Part B Participants Dodge a Bullet
Thankfully, there’s at least some good news to come out of the budget deal for boomer clients – at least for some of them. Medicare Part B premiums for many high-income clients were expected to rise by over 50% next year thanks in large part to Social Security’s hold harmless provision.

As you are no doubt aware, while most clients receive Medicare Part A at 65 with no out-of-pocket costs, Medicare Part B coverage generally comes with a price. Most Americans covered by Medicare Part B – about 70%, in fact – pay monthly premiums of $104.90, deducted directly from their monthly Social Security benefits. Under Social Security’s hold harmless provision, those participants cannot see a drop in their Social Security checks from one year to the next. Thus, if there is no cost-of-living increase for their Social Security checks from one year to the next – which will be the case in 2016 – there is no way to increase their Medicare Part B premiums. That leaves the other 30% of Medicare Part B participants not protected by the hold harmless rule left to foot the bill, which is why their Part B premiums have been expected to rise by more than 50% next year.

The budget bill will significantly reduce this impending increase. Under the budget bill, the U. S. Treasury would loan billions of dollars to Medicare to help meet expenses. This will shrink Part B premium increases for those not benefited by the hold harmless provision to 15%. That’s still a sizeable increase, but it’s a heck of a lot better than more than 50%! The annual Part B deductible will also be increasing next year by 15% - up from $147 to $167 – but all Part B participants will feel that pain, not just the “unlucky” 30%.

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