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Social Security "Do-Over" Option May Be Eliminated Soon
Edward A. Zurndorfer, Certified Financial Planner
A relatively unknown Social Security loophole may soon be eliminated by the
Social Security Administration (SSA). This loophole, known as the Social
Security "do-over" or "reset" option, allows Social Security recipients to
withdraw their original application for benefits and to refile for benefits at
later age.
The logic behind the "do-over" or "reset" option is that it allows a Social
Security recipient who at an earlier age (as early as age 62) started receiving
monthly benefits to pay back to the SSA all previously received benefits (with
no interest and penalties) in order to refile for benefits at a later age. By
re-filing at a later age, the recipient will receive a larger monthly check for
life. A previously-posted MyFederalRetirement.com column entitled,
"Does Repaying
Social Security Benefits Make Sense for Federal Employees?" discussed this
strategy.
Current Social Security recipients who are considering the payback option
should decide as soon as possible as to whether or not they want to take
advantage of this opportunity. This is because the SSA is considering
terminating the "do-over" option. If the SSA is successful, the "do-over" option
could be eliminated within a few months.
Not every Social Security recipient will benefit from the "do-over" option,
however. Those recipients who are considering it will likely need a large amount
of available cash in order to repay their previously received Social Security
benefits. To fully understand the issues involved with a "do-over" strategy, it
is important to review the rules with respect to individual eligibility
requirements and filing options for Social Security retirement benefits.
Any individual with at least 40 credits of Social Security is eligible to
collect Social Security retirement benefit starting as early as age 62. But
claiming monthly benefits at age 62 will reduce one's benefits by as much as 20
to 30 percent compared to what the monthly benefit would be if benefits were
claimed at "full retirement age" (FRA) (age 65 for individuals born before 1938;
ages 65 years and 2 months through 10 months for individuals born between 1938
and 1942; age 66 for individuals born between 1943 and 1954; ages 66 years and 2
months through 10 months for individuals born between 1955 and 1959; and age 67
for individuals born in 1960 and later). Those individuals deciding to wait past
their FRA to start receiving benefits can boost their benefits by as much as
eight percent for every year they delay the start of benefits until they reach
age 70, potentially increasing annual benefits to as much as 132 percent of
their base amount.
What would prompt an individual to opt for the "do-over" option? A Social
Security recipient may have decided to start collecting benefits at an earlier
age because perhaps it was at the time the "right thing to do". But subsequently
the individual regrets that decision and now he or she wants to boost his or her
monthly income.
Before deciding to pay back past Social Security monthly retirement benefits,
there are some issues that recipients need to consider regarding the
consequences of the payback decision, including:
• The recipient must pay back all previously-received benefits received --
this includes benefits received by the recipient, the recipient's spouse,
children or any other individual who received benefits based on the recipient's
original decision to receive benefits. Also, anyone who received benefits based
on the recipient's original decision must also consent in writing to the request
for withdrawal of benefits.
• In addition to the monthly Social Security benefit having to be repaid in
full, the following items that were possibly withheld from Social Security
monthly benefit checks will also have to be repaid:
- Medicare Part B and Part D premiums;
- voluntary tax withholding of federal income taxes for all years prior to the
current year;
- garnishments including child support or alimony obligations, IRS levies to
collect unpaid federal income taxes, other federal agency collections of money
to pay a non-tax debt owed to that agency according to the Debt Collection Act
of 1996; and under the Mandatory Victim Restitution Act, certain civil penalties
that provide the right to garnish benefits under 18 USC 3613.
• A recipient who previously received Social Security benefits and who paid
federal income taxes (and in some states, state income taxes) on these benefits
will not have to amend previously filed income tax returns upon paying these
benefits. Instead, for federal income tax purposes the individual would claim an
"other miscellaneous itemized deduction" on Schedule A for the year(s) the
benefits were refunded or submit a claim a tax credit for the tax paid on Social
Security benefits received in previous years. The latter calculation involves
complex calculations. IRS Publication 915 (Social Security and Railroad
Retirement Benefits), available for download at http://www.irs.gov, should be obtained for more
information and guidance. In particular, the section titled "repayments more
than gross benefits" discusses what needs to be done when there is payback of
benefits received in previously years. In case of state income taxes that were
paid on previously received benefits, the recipient should contact his or her
state department of revenue for guidance on how to receive credit for previously
paid state income taxes on Social Security benefits.
• Those recipients who are already enrolled in Medicare Parts A and B could
terminate their Medicare coverage but they do not have to. But in withdrawing
from Medicare Part B, recipients need to note that unless they are employed and
their employer offers health insurance, they will be penalized when they
re-enroll in Medicare Part B during a future Medicare Part B "open season" (each
year from January 1 through March 31) - in particular, their premiums will
increase by 10 percent for every year they delay their Part B enrollment.
Recipients who keep their Medicare Parts A and B will be billed by the Centers
for Medicare and Medicaid Services (CMS) for future Part B premiums.
Needless to say, a recipient who wants to repay his or her past benefits will
likely need to have access to a hefty sum of cash in order to pay all
previously-received benefits. This includes all benefits SSA has previously paid
to the recipient and if applicable, to the recipient's spouse and to other
family members.
The "do-over" Social Security option may serve as an alternative for
recipients who are considering investing their available cash in an immediate
fixed annuity purchased from an insurance company. With a fixed annuity, an
individual (the "annuitant") usually gives a lump sum of cash to an insurance
company. The insurance company in return sends the annuitant a monthly check
guaranteed for the individual's remaining life. But in many cases, the amount of
income from a "do-over" Social Security arrangement will likely exceed the
insurance company's annuity monthly check. Also, many insurance company fixed
annuities will cease upon the annuitant's death. While a fixed annuity owner
could choose a survivor annuity or "cash refund" rider in order to allow a
survivor or beneficiary to receive anything remaining in the annuity at the
owner's death, the owner would then receive less monthly income from the
insurance company. With a married Social Security recipient, a surviving spouse
receives the deceased spouse's Social Security benefit - this includes the
enhanced "do-over" amount -- until the surviving spouse dies. Unlike the
insurance company survivor annuity arrangement, this latter benefit comes with
no reduction to the spouse's Social Security monthly benefit
Actuarial research shows that in order to make the Social Security repayment
"pay for itself," a recipient would have to live for at least 12 to 16 years
after the higher monthly payments start. Those individuals with a terminal
illness and whose life expectancy is short generally will therefore not benefit
from the "do-over" option. This is because they will not likely recoup in added
monthly benefits the cost of having to repay benefits already received. Also -
and perhaps most important - those recipients who want to leave a substantial
legacy to heirs should probably avoid the "do-over" option. The reason: the
added Social Security monthly benefits cease at the recipient's or the
recipient's spouse's death. Adult children will not receive any Social Security
survivor benefits at the recipient's death. On the other hand, any cash
remaining at the recipient's death that would have been used to perform a
"do-over" could be left in the form of a legacy to surviving children.
In order to perform a "do-over" and to repay past benefits, Form SSA-521,
downloadable from the SSA website http://www.ssa.gov, must be filled out and
submitted to the SSA. Note that included on Form SSA-521 is a question in which
the SSA asks the recipient of benefits for a reason why he or she is withdrawing
his or her application. A response such as that "I need higher monthly income"
is usually acceptable to the SSA as a valid reason. Once the form is completed
and submitted to the SSA, the SSA will notify the recipient when monthly
benefits will cease and the amount of benefits to be repaid.
Under SSA's proposed rules to modify the "do-over" option, Social Security
recipients would be permitted to withdraw their application for benefits only
once during their lifetime and only within 12 months of when they first began
receiving benefits. If they change their mind within the first year, they could
stop their benefits, pay back what they had received, and then restart their
benefits at a later date and at a higher level based on their age at that time.
But once the 12 month deadline has passed, they would no longer be eligible to
repay benefits in order to receive a higher benefit at a later age.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Registered Health
Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in
Silver Spring, MD and the owner of EZ Accounting and Financial Services, an
accounting, tax preparation and financial planning firm also located in Silver
Spring, MD. He is an instructor at federal employee retirement
seminars throughout the country for the National Institute of Transition
Planning, Inc. and writes numerous columns and books on federal employee
benefits.
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