Not 62? Deemed filing Social Security loophole has closed

Social Security claiming strategies are complicated, and those intricacies have offered some lucrative loopholes for savvy married couples. But if you turned 62 on or after Jan. 2, 2016, one of those loopholes — the restricted application — has closed.

File and restrict, as the strategy is also known, lets a lower-earning spouse, say a wife, who is at full retirement age (currently 66) or older and is eligible for both retirement and spousal benefits, collect a spousal benefit based on her higher-earning retired husband's record.

Under the practice, the wife files for Social Security and then "restricts" her application to just spousal benefits. Meanwhile, her benefit grows, because of something called delayed retirement credits, by up to 32% until she hits age 70.

Under the old law, however, a spouse who was not yet full retirement age (FRA) who filed for benefits could not take advantage of the same loophole. A spouse not yet FRA who filed for benefits received the higher of two benefits — either the one on his or her earnings record or the spousal benefit. They could not restrict their application to spousal benefits and earn delayed retirement credits on their own benefits.

The Bipartisan Budget Act of 2015, which President Obama signed into law last November, closed the loophole that let one group of spouses (those FRA and older) benefit from file and restrict and not the other (those not yet FRA). Plus, it set the clock ticking on another strategy: file and suspend. The paperwork for that strategy must be filed by April 29.

So, what do you need to know and do about file and restrict, also known as deemed filing?

• Focus on your birthdate. Under the new law, if you were born on Jan. 1, 1954, or earlier, you can still restrict the scope of your application to just spousal benefits once you reach FRA. And if you qualify, it’s still well worth considering this benefit booster. “This strategy can give them (married individuals) tens of thousands of dollars in additional benefits,” says Elaine Floyd, director of retirement and life planning at Horsesmouth. "Spouses who are grandfathered under the old rules should definitely consider filing a restricted application for spousal benefits when they turn FRA."

If, however, your birthdate is Jan. 2, 1954, or later you’re out of luck. Once you file for one Social Security benefit — the one based on your earnings — you are “deemed” to have filed for the other benefit — the spousal benefit — as well. And once that happens, you automatically receive the higher of the two benefits. Going forward, you won’t be able to earn delayed retirement credits on your benefit while collecting a spousal benefit.

• New law doesn’t apply to survivor’s benefits. “Deemed filing doesn’t apply to widows and widowers,” says Andy Landis, author of Social Security: The Inside Story. “You can still file for only your own or only the widow(er)’s benefits, then switch to the other later. It’s a great planning opportunity if you’ve lost a spouse or even an ex-spouse.” The new law does, however, apply to divorced spouses.

• Exceptions to deemed filing. Deemed filing does not apply if you receive spouse's benefits and are also entitled to disability, or if you are receiving spousal benefits because you are caring for the retired worker’s child, according to the Social Security Administration's (SSA) website.

• Don’t sweat it. For his part, Kurt Czarnowski, a principal with Czarnowski Consulting, says all the fuss over changes to the claiming strategies is no big deal.

“The fundamentals haven't changed, and, as I am fond of saying, good things still come to those who wait,” he says.  “Because life expectancy is increasing, you are still likely to be better off by delaying the start of your Social Security benefits even if you are no longer able to take advantage of either of the claiming strategies that are going away.  The strategies simply provided a financial incentive for one or both members of the couple to wait, but while the financial incentive may be going away, the benefits of waiting aren't.”

• Why the change? Well, the financial benefits of the old law were significant, and to stay solvent, Social Security has to watch its bottom line. Plus, the change “preserves the fairness of the incentives to delay” taking Social Security based on one’s earning record, according to the SSA, Now, with the exception of spouses and divorced spouses born on Jan. 1, 1954, or earlier, the exact same laws are in place for those who file for benefits before, at or after FRA.