New Social Security Law Regarding “File and Suspend” Will Not Adversely Impact Right of Divorced Spouses
On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 which, in part, did away with several Social Security strategies often used by retirees and spouses to maximize their benefits. The impact of this new legislation will be experienced most by those who have been born on or after January 1, 1954 (i.e. anyone younger than 62 years of age). The intent of the legislation was to reduce the government deficit by eliminating “social security loopholes” that will save the government billions of dollars over time while eliminating thousands of dollars in benefits to retirees and their current and former spouses.
First, a brief overview of the “social security loopholes” and how the new legislation eliminates them. Under prior law, a retiree could employ a strategy known as “file-and-suspend.” What this means is that a retiree could file for Social Security benefits at his or her Full Retirement Age (FRA) and then immediately suspend those benefits. By doing so, the retiree’s own benefit would increase approximately 8% a year in exchange for agreeing to forego the monthly benefit up until the age of 70. Yet, the spouse of the retiree could immediately start to collect his or her spousal benefit associated with the retiree’s suspended benefit. For example, if John is 66 years of age today and was a high earner, his maximum Social Security retirement benefit would be $2,663. If he filed and suspended his monthly benefit, his wife could begin to collect immediately on one-half of that benefit (i.e. $1,331 per month) and for the next four years, until John reaches the age of 70, the couple would receive a total of approximately $64,000 of additional social security benefits. Once John turned 70 years old, he then would receive his full benefit which would have increased annually at 8% for the past four years. This is no longer an option under the new legislation.
Another strategy that has been eliminated is known as the “restricted application.” Under this process, an individual who reached Full Retirement Age and was eligible to receive both a spousal benefit based on the work record of a current or former spouse and a retirement benefit based on his or her own work record, could elect to take only the spousal benefit until he or she reached 70 years of age at which time he or she could switch to his or her own maximized (i.e. think 8% growth each year from Full Retirement Age to age 70) benefit. For example, assume Beth and Greg were married for more than 10 years when they divorced. When Beth reached her Full Retirement Age, she could elect to receive a spousal benefit based on Greg’s work record while her own “independent benefit” could continue to grow at 8% each year until she either switched over to her own benefit or reached the age of 70, whichever first occurred. This is no longer an option under the new legislation.
This elimination of these strategies is being phased in depending on the age of the retiree, but generally speaking, people born after January 2, 1954 will not have these options available to them. If someone is at Full Retirement Age right now and hasn’t applied for retirement benefits with social security, they can still do this “file and suspend” strategy if they file by April 30th. This is the segment of the population born before 1954 that is affected by the change in law, and they have a very short window to take advantage of the current rules before it is too late.
There is an important exception to this new legislation available only to divorced spouses collecting benefits on his or her former spouse’s earning record. Subsection 831 of the Bipartisan Budget Act of 2015 states that if an individual chooses to suspend benefits, then:
(1) All benefits payable to that individual will be suspended, based on both his/her earnings record and also based on any other person’s record (i.e. spouse)
(2) No other individual will be eligible for benefits based on the earnings record of the person who voluntarily suspends benefits.
What this means is that a spouse cannot collect benefits on his or her spouse’s earnings record if the retiree suspended his or her benefits. This could have had devastating impact on divorced spouses. In acrimonious divorces, the retiree spouse could have suspended his or her Social Security benefit simply to prevent his or her former spouse from receiving benefits based on the marriage. Fortunately, the Social Security Administration carved out an exception to this rule for divorced spouses. If a former spouse is entitled to benefits based on the marriage, then he or she will receive them regardless if the other spouse suspends his or her own Social Security benefits.
As a reminder, a former spouse is entitled to receive Social Security benefits based on the earning record of the other spouse if these key factors are present:
- The parties’ marriage was a minimum of 10 years in length.
- Both spouses are at least 62 years in age and the divorce has been more than two years from the date of the claim.
- The spouse seeking spousal benefits has not remarried. If the person does remarry, it will cut off benefits based on the first marriage until the second marriage ends in death, annulment or divorce. If any of those situations occur in the second marriage, then the person has the ability to once again seek a benefit based on the first spouse’s work record. However, there is one exception to this remarriage rule which is that if the person remarried at or after reaching the age of 60, then he or she may still collect on the former spouse’s work record.
- Remarriage only impacts benefits of the person who is seeking benefits based on a former spouse’s earning records. If the other spouse remarries, it does not terminate the person’s right to collect benefits on the remarried spouse’s earning record. For example, if Jill and Brian were married for 12 years and Brian remarries, Jill can still collect benefits based on Brian’s earning record so long as Jill does not remarry before age 60.
- At retirement, the person will have the option to select either one-half of his or her former spouse’s full benefit or a full benefit amount based on his or her own work record, whichever is greater. If the person elects one-half of the former spouse’s benefit, it does NOT impact or reduce the amount of the benefit the former spouse will receive on his or her own earning record.
- Remind the client that Social Security Survivor Benefits are still available to divorced spouses (and are unaffected by this new legislation).
It is important to also understand that divorced spouses may still receive Social Security Survivor Benefits based on a previous marriage. This new legislation does not impact those rights and the amount of that benefit remains 100% of the full benefit amount.
For questions and more information about Social Security benefits and divorce, please contact Attorney Christopher Krimmer at firstname.lastname@example.org or by calling him directly at (608) 252-9205.
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