Executive Summary When Congress passed the Senior Citizens Freedom to Work Act in 2000, it introduced a new concept called “voluntary suspension” of benefits, allowing those who had already started Social Security benefits to stop their payments and earn delayed retirement credits. In the process, however, the new voluntary suspension rules unleashed several additional Social Security claiming strategies, including various “claim now, claim more later” tactics involved File-and-Suspend and Restricted Applications for spousal benefits. And under this week’s budget legislation, Congress has decided to close these perceived “loopholes” in the Social Security rules. By extending the rules for deemed application, it will no longer be possible to file a restricted application for just spousal benefits. And with an extension of the “suspension” rules that stipulate suspending an individual’s benefits will also suspend any benefits to other people based on the same earnings record, Congress has killed off the various “File and Suspend” strategies to allow spousal and dependent benefits to be paid while still earning delayed retirement credits. Perhaps most notable for the new Social Security crackdown, though, is the effective date for the rules. While the new limits to Restricted Application will not apply to anyone who is already age 62 or older in 2015, the new crackdown may suspend current spousal or dependent benefits in 6 months for those who are only receiving those benefits thanks to File-and-Suspend! will kick in 6 months from now (thanks to a recent amendment to the original legislation), grandfathering anyone currently going through file-and-suspend but limiting anyone who tries to suspend benefits thereafter. In other words, those who already engaged in the File-and-Suspend strategy may find it terminated mid-stream, Beyond that point, anyone who suspends will find that no benefits will be payable until the individual who suspended chooses to reinstate benefits (either to restart them now, or finish waiting until age 70). Notably, the crackdown on these voluntary-suspension-related tactics doesn’t actually kill the rules for voluntary suspension itself, which remains on the books. But now, aside from a few esoteric scenarios (including the recent Hold Harmless Medicare claiming strategy), voluntary suspension will be relegated to those unique scenarios where someone truly started benefits early, has had a change of mind and wants to stop them (after a year has passed and it’s already too late to withdraw the application) to earn delayed retirement credits, with the plans of starting benefits again at age 70. Of course, ideally those who wish to delay benefits for the value of earning delayed retirement credits will simply delay from the start to maximize the benefit, which makes voluntary suspension a moot point altogether for most retirees in the future!

(Michael’s Note: This article was updated at 5:03PM EST on Wednesday with additional information as the House adopted an amendment to the original rules, specifically pertaining to grandfathering certain file-and-suspend provisions. Sections of this article no longer applicable due to the new amendment are noted as strikethrough .)

(Michael’s Note: This article was further updated at 10:21PM EST on Thursday with additional information about a subsequent Senate amendment clarifying the effective date for ending File-and-Suspend, and clarification about the ability to reinstate prior suspended benefits.)

(Michael’s Note: This article was further updated at 11:36PM EST on Monday November 2nd to reflect today’s passage of the H.R. 1314, the Bipartisan Budget Act of 2015. If I’m counting days correctly, that means the effective date for the new file-and-suspend provisions will kick on after April 30, 2016.)

For further details on the effective dates of the legislation and planning around those deadlines, see “Navigating The Effective Date Deadlines For The New File-And-Suspend And Restricted Application Rules” as well.

File and Suspend and Restricted Application under the Senior Citizens Freedom to Work Act

In 2000, President Clinton signed into law the Senior Citizens Freedom to Work Act, which was intended to increase the flexibility for seniors to continue working even while receiving Social Security benefits. Accordingly, the new rules eliminated the Earnings Test for those who had reached full retirement age (FRA), and gave those who were already receiving benefits at full retirement age the opportunity to suspend their benefits to earn delayed retirement credits.

While the original purpose of these “voluntary suspension” rules were simply to allow those who had already claimed Social Security benefits to cease receiving benefits and earn delayed retirement credits, a secondary strategy emerged soon thereafter – retired couples could choose to file for benefits at full retirement and then immediately suspend. The reason: by filling for benefits, a spouse or even dependent children could become eligible for their benefits, and by suspending the primary worker could still not receive benefits and earn delayed retirement credits. This was far more appealing than the prior alternative, where if the primary worker wanted to earn delayed retirement credits by waiting until age 70, all related benefits were held hostage until that time as well.

A related strategy under these new voluntary suspension rules for couples was to file for benefits at full retirement age (FRA) – both retirement and spousal benefits – but then immediately suspend the retirement benefit and only receive the spousal benefit instead. The effective result was that a spouse could choose to claim “just” a spousal benefit from FRA until age 70, and then reactivate and switch back to the original retirement benefit. In the subsequent years, the Social Security Administration even expedited the process by formalizing the rules to “restrict the scope of their Social Security application” (or “file a restricted application” for short) to receive just spousal benefits and not individual retirement benefits.

Section 831 Of The 2015 Budget Legislation Closes Social Security “Loopholes”

While these File-and-Suspend and Restricted Application strategies were entirely legal and permissible under the Social Security rules as a part of the new voluntary suspension rules under the Senior Citizens Freedom to Work Act, it was not entirely clear that Congress truly intended to make such “claim now, claim more later” strategies so popular for married couples. Within a decade, the Center for Retirement Research was estimating that the availability of these strategies could “cost” the Social Security Administration as much as $9.5B in additional benefits being paid out every year (if everyone did it), with a slight skew towards those at higher income levels (46% of the additional benefits being paid out to the top two wealth quintiles), and the biggest additional benefits going to households that otherwise had similar earnings between spouses.

Given this dynamic, some began to call the Restricted Application and File-and-Suspend rules a form of Social Security “loophole”, and by 2014 President Obama’s budget proposal for FY2015 was calling for a change to the rules to “prevent duplicative or excessive benefit payments” including “aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.”

And now, the so-called “Bipartisan Budget Act of 2015” negotiated and expected to pass later this week would shut down these strategies altogether, under Section 831 entitled “Closure of unintended [Social Security] loopholes”. (See here for full text of the legislation)

Deemed Application For All “Claim Now, Claim More Later” Restricted Application Strategies

Under the standard rules for Social Security benefits, anyone who applies for an early (i.e., “reduced”) retirement benefit or spousal benefit is “deemed” to have applied for any/all eligible benefits. As a result, early retirees have always been required to file for and claim all benefits they are eligible for, and since it wasn’t possible to voluntarily suspend retirement benefits before full retirement age, the claimant would be “stuck” claiming all benefits (which in practice means simply getting a benefit check for whichever was greater, individual or spousal benefits).

With the new rules under Section 831 of the Bipartisan Budget Act, Section 202(r)(1) of the Social Security Act is altered to expand the deemed application rules from applying only to early benefits to instead applying to all benefits regardless of age.

Thus, anyone who is eligible for a wife’s or husband’s spousal benefit is deemed to have filed for their old-age retirement benefit as well, and similarly anyone who is eligible for a retirement benefit is deemed to have filed for any spousal benefits to which he/she is entitled.

The end result is that it will no longer be feasible to file a restricted application, as any retiree who files for one benefit (retirement) is presumed to and deemed to have filed for the other (spousal) benefit as well – regardless of whether it was/is an early benefit or at full retirement age. (On the other hand, it appears that Social Security survivor benefits will still be eligible for claiming separate from retirement benefits, allowing widows/widowers to still optimize the timing of when to start each.)

Effective Date For Elimination Of Restricted Application

Notably, though, the new rules for restricted application applies only to those who attain age 62 in any calendar year after 2015. Thus, today’s retirees who are at FRA (or simply who are already at least age 62 in 2015, born in 1953 or earlier) will still be able to utilize a restricted application. Only future retirees – those who turn 62 in 2016 or later, which means those who would have been planning to engage in a restricted application in 2020 or later – will lose access to the Restricted Application claiming strategy. Or viewed another way, anyone born in 1953 or earlier is “grandfathered” and will still be able to engage in Restricted Application in the future (since they remain eligible based on birth year, even if they don’t turn age 66 until 2019), while anyone born in 1954 or later will never be eligible to do a Restricted Application.

Suspending All Benefits Under File And Suspend

To further limit some of the perceived “loophole” abuses under voluntary suspension claiming strategies, the Bipartisan Budget Act also includes a new Social Security Act subsection 202(z), which stipulates that if an individual chooses to suspend benefits, then:

1) All benefits payable to that individual will be suspended, based on both his/her own earnings record (i.e., retirement benefits) and also based on any other person’s earnings record (i.e., spousal benefits). 2) No other individual will be eligible for benefits based on the earnings record of the person who voluntarily suspends benefits.

The first prong of these new rules puts yet another nail in the coffin for any type of restricted application strategy, as not only will the deemed application rules require that if an individual is eligible for one benefit then both must be claimed, but for those who suspend a benefit, both must be suspended.

The second provision, however, effectively kills all of the File-and-Suspend strategies as well. After all, the whole point of the file and suspend strategy was that if one person (e.g., the husband) files and suspends benefits at full retirement age, he can earn delayed retirement credits while making his wife eligible for spousal benefits. Yet under these new rules, when the husband suspends, it suspends not only his benefits, but all benefits payable based on his earnings record, which means he would no longer be able to trigger spousal benefits either (because his wife’s spousal benefit is based on his earnings, which are no longer considered).

And notably, because the new rule applies to any other individual receiving benefits based on the primary worker’s earnings record, a voluntary suspension of benefits would trigger a suspension of the individual’s own retirement benefits, and any spousal benefits he/she is eligible for, and anyone else’s spousal benefits that person was eligible for, and even any dependent benefits being paid based on that parent’s/worker’s earnings record!

(In point of fact, the new suspension provision is so broad, it may even unintentionally limit access to an ex-spouse’s divorced spouse benefits if the primary worker spouse voluntarily suspends, although this was likely not intended and will hopefully be fixed before the effective date for the new rules!)

Effective Date For Ending File And Suspend Impacts Current Retirees

While the new rules on deemed application rules limiting Restricted Application will only apply to those who turn age 62 beginning in 2016 or later, the new rules limiting suspended benefits will apply to anyone who tries to file-and-suspend after a 6 month grace period beyond the effective date of the legislation. This 6-month “grandfathering” window was created in a subsequent amendment to the original legislation. (Or at least, the Social Security Administration is authorized to begin applying the new rules within 6 months of when the legislation is passed.)

Given the legislation was signed into law on November 2nd, 2015, this means the 180 day period will close on April 30th of 2016, after which the grace/grandfathering period is over, and any filing of voluntary suspension will trigger the new rules. Thus for those who are not FRA by next April 30th, file-and-suspend will effectively be “off the table” (and won’t remain open based on birth year the way Restricted Application will be).

Those who are already eligible (or will become eligible very soon) may wish to be even more proactive about engaging in the File-and-Suspend strategy while possible. And anyone who won’t even reach the full retirement age of 66 until after the effective date will simply be “out of luck” for the file-and-suspend strategy. any benefits being paid in relation to an individual who suspended his/her own benefits may no longer payable. Which means couples currently receiving a spousal benefit under File-and-Suspend may find their checks cease once the effective date has passed!

Of course, the maximum benefit that a spouse could claim under File and Suspend was limited to 50% of a worker’s Primary Insurance Amount (PIA), which would be 50% x $2,787.80 = $1,393.90/month, or about $16,700 per year. And at the most, the strategy would only unlock four years’ worth of benefits (from when the retiree reached full retirement age at 66, until age 70 when benefits would have started anyway). Nonetheless, the new rules could cut off as much as about $67,000 of benefits over a 4-year time window for those who planned to engage in File-and-Suspend and as much as 3.5 years of benefits for those who were already receiving File-and-Suspend-based benefits (if the Social Security Administration promptly enforces an effective date in 6 months).

For those who want to ‘undo’ the impact of losing benefits under these new rules (if they do suspend and lose benefits), and/or to just activate their individual retirement benefits in order to also continue receiving spousal benefits, they will be required to file for a reinstatement of voluntarily suspended benefits to “re-start” both the spousal benefits and begin their own. Or alternatively, the retiree can continue to delay his/her individual benefits until age 70… recognizing that will now also delay a spousal benefit, too, and may delay a dependent benefit so far out that the child will be too old to receive dependent benefits when the time comes!

Start Stop Start – Voluntary Suspension Of Social Security Benefits Still Exists

Notwithstanding all the new changes to the Social Security rules to limit the File-and-Suspend and Restricted Application claiming strategies that were created when the Senior Citizens’ Freedom to Work Act was passed in 2000, the original rule allowing for voluntary suspension of an individual’s retirement benefits remains in place.

Now more narrowly construed, the rule exists for those who started retirement benefits early (prior to FRA), who have now “changed their mind” and wish to delay Social Security benefits and earn delayed retirement credits (especially in light of today’s low return environment and the appealing implied return of delaying Social Security). Given that the Social Security Administration shut down the “withdraw-and-reapply” Social Security strategy 5 years ago, voluntary suspension remains the only way for someone who has a change of mind (or circumstances) and wants to earn delayed retirement credits after having already received benefits for at least a year.

A voluntary suspension will also remain relevant in other limited scenarios, such as individuals (not couples) who wish to engage in the strategy simply so that they have the option of changing their mind and reinstating benefits between full retirement age and age 70 (which allows them to get all of their benefits paid retroactively back to full retirement age if they have a change in health and decide it wasn’t valuable to delay after all). For those approaching age 62 with young dependents, where it may also still be appealing to file for benefits early to get retirement and dependent benefits, and then suspend at full retirement age (after the children may no longer be eligible for benefits anyway) to still earn the delayed retirement credits later. Or perhaps even those who have started Social Security benefits earlier given the looming “Hold Harmless”-driven 52% spike in Medicare premiums, who will choose to suspend later to earn some delayed retirement credits (although notably, the new legislation also contains at least a partial fix for the premium spike, but it appears to simply spread out the impact of the spike, not eliminate it). On the other hand, the strategy to file-and-suspend for benefits individually, with the plan/option to reinstate them like (and get prior benefits repaid retroactively back to full retirement age) appears to be ended, as the new Social Security Act 202(z)(1)(A)(ii) limits a resumption of benefits in the next subsequent month or at age 70, but no longer contains the option to resume benefits in a prior month (as previously existed under POMS GN 02409.130). (Hat tip to Mike Piper of Oblivious Investor for spotting this crackdown on reinstatement of prior benefits.)

Overall, aside from a few of these somewhat esoteric circumstances, the new rules effectively kill most forms of file-and-reinstate, “claim now, claim more later” and “start-stop-start” Social Security claiming strategies. For everyone else, the decision of whether to delay Social Security to age 70 or not will simply be evaluated by the implied value of delaying all of a person’s individual and spousal benefits. Which means delaying one person’s benefit effectively holds all spousal benefits hostage in the meantime! Of course, in situations with married couples, where it rarely pays for both spouses to delay Social Security benefits, one spouse may start early and the other will delay, but again no spousal benefits will be payable for either spouse until that delay is over!

Ultimately, it remains to be seen whether this budget legislation will be passed into law in current form, although the reports out over the past 24 hours indicate that both the White House and Congressional leaders are backing the compromise and that it will pass later this week. Which will immediately start the clock on the end of restricted application for anyone not already age 62 by the end of this year, and means that even with a final amendment to grandfather current file-and-suspend beneficiaries, anyone planning to do so in the future may have just 6 months to become eligible and get it done, or be out of luck! any spouses receiving spousal benefits under file-and-suspend may find those spousal checks terminated next spring (at least until the couple ends any voluntary suspensions of benefits!) .

For further details on the effective dates of the legislation and planning around those deadlines, see “Navigating The Effective Date Deadlines For The New File-And-Suspend And Restricted Application Rules” as well.