Social Security Planning for Divorced and Divorcing Couples

By: Walter Reed
Last Update: October 29, 2016

On November 2, 2015, Congress passed the Bipartisan Budget Act of 2015 (BBA). Pursuant to the passage of the BBA, two “unintended” Social Security loopholes created by the Senior Citizens Freedom to Work Act (passed in 2000) have been prospectively closed.

Since the passage of the Senior Citizens Freedom to Work Act, savvy practitioners employed the File-And-Suspend and Restricted Application strategies on behalf of clients in order to further maximize Social Security benefits. Utilization of these strategies, however, resulted in the payment of additional Social Security benefits to individuals that, according to Congress, was never intended. With the passage of the BBA, utilization of these strategies will quickly be coming to an end.

Under the File-And-Suspend strategy, an individual qualified to receive Social Security would file for benefits (the Filing Spouse), but then suspend payments to him or herself while allowing a benefit to be paid to his or her spouse (the Receiving Spouse). The payout to the Receiving Spouse would continue even though the Filing Spouse did not retire and was not collecting benefits.

The File-And-Suspend strategy undermined the purpose of spousal benefits, which is to supplement benefits paid to the worker when there are dependent family members. By choosing to delay receipt of retirement benefits until after full retirement age, a worker accumulates credits which leads to a higher retirement benefit when they do retire. The formula for determining delayed retirement benefits is actuarially calculated and assumes no spousal benefits are being paid while the worker is not receiving his or her retirement benefits. By allowing the File-And-Suspend strategy to continue, the actuarial calculation was being subverted and allowed those employing the strategy more benefits than was intended.

The second strategy that has been curtailed (and the strategy most applicable to divorced couples and couples contemplating divorce) is the Restricted Application strategy.

In order to claim benefits based on your ex-spouse’s record, the following terms need to be met:

  • The marriage lasted ten years or longer;
  • The claiming spouse is unmarried;
  • The claiming spouse is age 62 or older;
  • The benefit that the claiming spouse is entitled to receive based on his or her own work record is less than the benefit he or she would receive based on the record of the ex-spouse (non-claiming spouse); and
  • The non-claiming spouse is entitled to Social Security retirement or disability benefits. 

In utilizing the Restricted Application strategy (sometimes referred to as the “claim now, claim more later” strategy), it is important to understand the “deemed filing rule.” This rule states that if an individual files for benefits before his or her full retirement age, he or she is required to file for all benefits to which he or she is entitled. Consequently, if an individual files for benefits at age 62, he or she would begin collecting a reduced benefit and, if eligible, a reduced spousal benefit.

However, the “deemed filing rule” is waived once an individual reaches his or her full retirement age (for those born in 1960 and later, the full retirement age is 67). Under the Restricted Application strategy, an individual age 67 can file a restricted application to collect only spousal benefits without affecting his or her personal benefit. He or she can continue to accrue retirement credits until age 70 and thus qualify for an increased payout.

Keep in mind that the spousal benefit under this scenario is just that – a spousal benefit. Once the spouse reaches age 70, he or she can collect their personal benefit if that amount is higher than the spousal benefit. It is this strategy that a number of divorced and divorcing couples employ.

It is important to note that the passage of the BBA restricts the utilization of the above mentioned strategies on a prospective basis. New applications for The File-And-Suspend strategy will be accepted until April 30th, 2016 (this is the anticipated date based on the November 2, 2015 passage of the BBA). Those already utilizing the strategy or with pending applications will be grandfathered under the legislation. Those individuals who have not reached age 62 by the end of 2015 will be precluded from employing the Restricted Application strategy.

By:Walter Reed| January 06, 2016 | Financial Issues | (0) Comments

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