Understand Deemed Filing to Avoid a Surprise in Your SS Strategy

There’s nothing worse than feeling as if you have your Social Security filing strategy all lined out, when a rule like deemed filing rears its ugly head to throw your strategy off track.

Here’s an example: Steve and his wife Edie are ages 66 and 61 respectively. The plan is for Steve to file for his Social Security benefit now (at his Full Retirement Age), and for Edie to file for her own benefit when she reaches age 62. Then Edie will wait until she reaches Full Retirement Age of 66 to file for the Spousal Benefit based on Steve’s record, which will increase her benefit by $500 at that time.

Oops! Deemed filing will apply to Edie when she files for her own benefit at age 62, which will eliminate her chance to wait until filing for the Spousal Benefit. This will effectively reduce her total monthly benefit from the expected $875 per month down to $725. It may not seem like a lot, but $1,500 per year is still significant, and it could be considerably more depending upon the circumstances.

How does deemed filing work?

If you are under Full Retirement Age (FRA) when you file for your own benefits you are “deemed” to have filed for all benefits that you are eligible for. In our example above, since Steve had already filed for his own retirement benefit, Edie is eligible for the Spousal Benefit based upon Steve’s record as soon as she reaches age 62.

So when she plans to file for her own benefit early at age 62, she is deemed to have filed for all benefits that she is eligible for – her own benefit and the Spousal Benefit. This effectively eliminates her opportunity to delay filing for the Spousal Benefit. If she goes ahead with the filing at that age she will receive both benefits at a reduced rate for the rest of her life.

What could be done differently?

There are two things that could have been done differently in the example, although given the circumstances these two options may not be very helpful. Note: with the passage of the Bipartisan Budget Act of 2015, deemed filing has changed for anyone born on or after January 2, 1954. Now, regardless of when you become eligible for a benefit, deemed filing will force you to accept that benefit immediately, so the example below would not allow Edie to wait to receive the spousal benefit. See the article New Deemed Filing Rules for more details on the new deemed filing rules.

1. Steve could delay his own filing until some time after Edie files. This would delay his filing until at least his age 67, increasing his benefit by 8% per year of delay, and would allow Edie to receive her own benefit while delaying the Spousal Benefit until her FRA. The downside is that Steve would not receive a benefit between now and whenever he files. This could be a problem for the couple in terms of cash flow.

2. Steve could still file now for his benefit, and then Edie could delay filing for her own benefit until her Full Retirement Age. This would increase Edie’s overall benefit to be equal to half of Steve’s FRA benefit, but the downside is that Edie would go four years with no benefit received. Again, this might cause a problem with cash flow.

A Couple More Gotchas

As with many Social Security rules there are many facets about deemed filing to consider. The first additional “gotcha” is that this works the same way if Edie had tried filing for the Spousal Benefit alone (instead of her own benefit) when she is still under Full Retirement Age. You probably already knew this because you fully understand all of the rules about filing a Restricted Application. You can’t file a Restricted Application if you’re under FRA, right?

The other “gotcha” is that deemed filing also applies to folks who are divorced and eligible for benefits based on an ex-spouse’s record. What’s different about divorcee treatment is in the way that eligibility occurs. A divorcee becomes eligible for a Spousal Benefit without regard to the ex-spouse’s filing – only the ex’s age is important, so long as there has been at least tw0 years since the divorce was finalized.

So, if Steve and Edie were divorced (after a 10-year marriage or longer) and were divorced for at least two years when Edie reaches age 62, it doesn’t matter if Steve has already filed or not. By virtue of the fact that two years has passed since the divorce and Edie is age 62, she is automatically eligible for a Spousal Benefit. So if she files for her own benefit at any time before she reaches FRA, deemed filing will apply and she will be deemed to have filed for the Spousal Benefit as well.