The Bipartisan Budget Bill 2015, signed into law by President Obama on Monday, November 2nd, has made some of the most sweeping reforms to Social Security in several years.  Some of the strategies we've explored with clients for maximizing Social Security have, unfortunately, been eliminated.  There are two specific rules affected:  what's known as the "File and Suspend" strategy, and also the "Restricted Application" strategy.  Below, I'll overview further details of these strategies so you can relate them to things we may have discussed in the past.

First, though, let me overview who's NOT affected. 

• Fortunately, those already actively using either of both of these strategies will generally be able to continue to do so. 

• File and Suspend is available for another 6 months for those who will qualify (see below). 

• Restricted Application options are available for another 4 years for those age 62 or older in 2015.

• Widow and Widower filing options are not affected.

• Individuals drawing their own normal retirement benefits are not affected.

PARAGON's Action Plan:

Paragon is analyzing current and planned filing strategies for all clients between the ages of 60 and 70, who are not already actively taking their own Social Security benefits.  If we have discussed any alternative strategy in the past, we will be in touch to share with you our assessment of how these changes affect you.  If there are any additional options you should consider before any of the deadlines are reached, we will let you know. 

In the interim, if you have questions for us, please feel free to contact us to discuss your personal situation further.

Overview of our understanding of what has occurred:                                                                 (synopsis provided by Social Security Solutions, Inc.)

 File and Suspend Strategy Discontinuation   

What we know as “file and suspend” as a benefit claiming strategy will cease to exist in about 6 months. This claiming option involves one spouse, usually the higher earner but not always, opening their record for benefits but immediately suspending payment. The purpose was to allow the worker’s spouse to begin a spousal benefit while the worker’s benefit continued to earn delayed retirement credits on his own record.   With the new legislation, when a client suspends his benefit, all benefits paid from his record are also suspended. Previously, a beneficiary could suspend benefits while a spouse or young children could continue collecting a benefit from his record. The new legislation will require that a beneficiary be receiving his or her own benefit in order for other benefits to be paid from his record.   The new legislation will leave on the table the ability to suspend benefits for the purpose of accruing delayed retirement credits. So if a taxpayer files early and later decides it was a mistake, he or she can suspend benefits at full retirement age and accrue delayed retirement credits. However, any other benefits being paid from the suspended benefit will stop.   The good news is that anyone who has already claimed benefits with a file and suspend strategy, or anyone who implements such a strategy within the next 6 months (available to those who reach their Full Retirement Age in that 6 month period), can continue with their strategy.  

Restricted Application  

The other major change with the passage of new rules is the elimination of the “restricted application.” Restricted application allowed a spouse who had attained full retirement age, who was also eligible for his or her own retirement benefit, to collect only a spousal benefit. At a later date, usually age 70, the spouse would switch to his or her own retirement benefit which would have grown to its maximum with delayed retirement credits.   The new legislation extends a concept called “deemed filing.” Deemed filing has previously only been a factor before reaching full retirement age. Prior to reaching full retirement age, if a client filed for any benefit, he or she was “deemed to be filing” for all benefits. This meant that if a client was eligible for his or her own benefit and a spousal benefit, he or she would only be paid a single benefit – the equivalent of the higher of the two. But if the individual waited until full retirement age to claim a benefit, he or she could choose which benefit to receive. If the choice was made to receive a spousal benefit, his or her own retirement benefit would continue to accrue delayed retirement credits. The new rule extends the deemed filing provision to age 70, meaning that the payable benefit will always be the higher benefit if eligible for more than one.   There is one small concession in the new legislation. The new rules around restricted application apply only to individuals who attain age 62 after 2015. For those who achieve age 62 prior to 2016, it remains possible to file a restricted application for spousal benefits only at full retirement age. However, this option is being effectively “phased out” over the next four years.  

Widows and Divorced Benefits  

Nothing in the legislation mentions widows benefits, and we believe the strategies available to widows remain unchanged. It will still be possible for a widow to begin a widow benefit and switch to his or her own retirement benefit at a later date or vice versa.  

Divorced benefits seem to have suffered what some are calling an unintended consequence of the legislation. As of now, since filing a restricted application will not be available for anyone reaching age 62 after 2015, divorced individuals will not able to use this option unless they fall into the grandfathered group who will already be aged 62 by the end of 2015.  

Our firm is continuing to monitor developments with this legislation, and we’re working diligently to analyze its implications for individual clients. There are a number of procedural questions that will require interpretation by the Social Security Administration before some of the impacts are finalized. 

As always, we appreciate the faith you have in us and allowing us to serve your needs.

Michelle Ash, CFP®, CASL®, is a Managing Partner for Paragon Wealth Strategies, LLC.  Please see her bio here.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific planning strategy, investment, or investment strategy (including those undertaken or recommended by PARAGON Wealth Strategies, LLC), will be profitable or equal any historical performance level(s).  PARAGON and its advisors are neither attorneys or accountants.  Please consult a financial advisor for information specific to your personal situation.  For additional disclosures please see our "Important Disclosure Info" page.