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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 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:

  1. Medicare Part B and Part D premiums;
  2. voluntary tax withholding of federal income taxes for all years prior to the current year;
  3. 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, 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, 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.