Social Security Benefit Loophole Ended

Hispanic couple managing finances

Cross References

• Public Law 114-74, Subtitle C, Section 831

The Bipartisan Budget Act of 2015, signed into law on November 2, 2015, contains a provision that closes a loophole in the rules for collecting Social Security benefits. The provision has to do with the so called “file and suspend” strategy. Section 831 of the law states: “In the case of an individual who requests that such benefits be suspended under this subsection, for any month during the period in which the suspension is in effect…(B) no monthly benefit shall be payable to any other individual on the basis of such individual’s wages and self-employment income….”

The file and suspend strategy. Under prior law, upon reaching full retirement age, a person could file for Social Security retirement benefits, and then immediately suspend them. The strategy for doing this was to allow a spouse to become eligible for spousal benefits based upon the primary workers benefits, while the primary worker suspends his or her benefits in order to receive an increased benefit in some future year.

Example: John and Mary both reach their full retirement age of 66. John has been the primary wage earner for the family over the years. John is eligible for a retirement benefit of $2,000 per month at full retirement age. Mary at full retirement age is eligible for a spousal benefit of $1,000 per month, which is equal to 50% of John’s full benefit. John delay’s his benefit until age 70, increasing his benefit by 8% per year for four years. His new benefit (not counting COLA adjustments) is $2,640 per year.

Under prior law, John could file for, and then immediately suspend his benefits until age 70, allowing Mary to immediately start collecting her $1,000 per month in benefits at age 66. Under the new rules, Mary cannot get spousal benefits until John actually starts collecting his own benefits. The new rule causes Mary to have to wait four years to collect her benefits if John decides to wait until age 70 to receive his increased benefit. The new law effectively causes Mary to lose four years of benefits.

Effective date. This new law is effective 180 days after the date the legislation was signed into law. Thus, with the law being signed on November 2, 2015, the effective date for closing this loophole is April 29, 2016. In other words, the file and suspend strategy was allowed for those who implemented it on or before April 29, 2016.

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