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The recent passage of the “Bipartisan Budget Act of 2015” which was signed into law by President Obama on November 2, 2015, changed some very popular Social Security planning strategies that now need to be re-examined.  For many, this will require that action steps be taken to protect the ability to maximize future Social Security planning.

Prior to this law change, a popular strategy for maximizing Social Security benefits was to utilize the “file-and-suspend” rules, which permitted an individual – upon reaching full retirement age – to file for benefits but then suspend them immediately, allowing delayed retirement credits to be earned while simultaneously still allowing a spouse to begin to receive spousal benefits including family benefits for minor children.  A typical additional strategy was to then have one’s spouse, upon reaching their full retirement age, to file a “restricted” application which would allow their benefits (based on their work record) to continue to grow by allowing delayed retirements credits to compound and yet commence their spousal benefit – based on their spouse’s full retirement age benefit. This “cake and eat it too” strategy is what forced Congress, at the urging of the President, to change the rules. The “file-and-suspend” strategy was very straight forward but did have some downsides including:

  • Suspending resulted in a suspension of all benefits (which limits couples from crisscrossing spousal benefits by having each file and suspend);
  • Suspending triggered the onset of Medicare Part A benefits, which can render someone who chooses to file and suspend to be ineligible to make any more contributions to a Health Savings Account (HSA).

The new law changes the above rules and strategies essentially denying any benefits being paid to a spouse or other person based on a worker’s earning record if the worker’s benefit is suspended. Furthermore the new law will allow a spouse to file a restrictive application for benefits only if they are age 62 by the end of 2015. These two changes severely limit the ability to obtain any social security benefits while still earning delayed retirements benefits. These changes and the law’s effective date may require that a protective “file and suspend” application be filed within a short six month window. Some highlights that need to be considered include:

  • Beginning 6 months after the passage of the bill, no one will be able to implement a “file and suspend” strategy. Benefits based on a worker’s earnings record will no longer be paid to any spouse or other dependent if the worker’s benefit is suspended.
  • If a client has already claimed benefits using a “file and suspend” strategy, they will be “grandfathered” and may continue receiving benefits as they are now. Any benefits being paid on the earnings of a worker who has suspended benefits will continue in this circumstance.
  • If a client implements a “file and suspend” strategy within 6 months of the passage of the budget bill, they will be allowed to continue with the benefit claiming strategy, and benefits that begin being paid to a spouse from the suspended benefits of a worker will continue.
  • If a client will have already reached age 62 before the beginning of 2016, he or she will still have the option of filing a “restricted application” at full retirement age. This will allow the claiming of a spousal benefit while their own benefit will accrue delayed retirement credits. It will be possible for the client to switch to his or her own higher benefit at a later date.

Based on this and subject to future regulations it may be important that one consider the following action steps based on one’s personal situation and considering the aforementioned downsides:

  1. If you are currently over full retirement age (66) and have not started receiving your social security benefits you may want to file a protective  application to “file and suspend”  before May 1, 2016.
  2. If you will turn age 66 before May 1, 2016 you may want to file a protective application to “file and suspend” immediately upon turning age 66.

This is a very new law and regulations have not been drafted so please consult your wealth or tax advisor to maximize planning opportunities.

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

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