Social Security and Divorce: What Clients Need to Know
Put powerful emotions in the same cauldron as money and you get a volatile and highly flammable mix. If your clients need one reason to involve a trusted CPA in their divorce process, that argument is as strong as it gets. As a financial professional, you have likely seen first-hand that divorce has the potential to uproot the financial stability of your clients (see more in this latest trend survey released by the AICPA Personal Financial Planning Section). If splitting the family possessions and bank accounts weren’t complex enough, there is also Social Security and Medicare to consider.
By asking the right questions, CPAs can steer their divorcing clients around pitfalls and help them make smart choices that maximize their financial outcomes.
1. Understand the basic rules
A widow or widower at full retirement age or older is entitled to receive 100 percent of a deceased spouse’s basic Social Security benefit amount. The same rule applies to divorced spouses as long as they were married for at least 10 years and the spouse seeking to collect benefits is not remarried. If those conditions hold true, the currently single ex-spouse can collect the equivalent of 50 percent of the living ex-spouse’s Social Security benefits without any cost to the ex-spouse.
There is an additional benefit that used to apply to all ex-spouses in that position — and still may apply to a subset of your clients (more on this in a moment). An ex-spouse could file a restricted claim for spousal benefits only, allowing him or her to collect spousal benefits (50 percent of the ex-spouse's full retirement age benefit amount) while his or her own retirement benefit continued to grow by 8 percent per year up until age 70. That is where the new rules kick in.
2. Understand recent law changes
Here’s a summary of the recent changes stemming from the Bipartisan Budget Act of 2015:
- If your client was born before Jan. 1, 1954, he or she can file a restricted claim for spousal benefits on the other's earnings record at 66, which is full retirement age.
- If your client was born on or after Jan. 2, 1954, he or she can still file a Social Security claim but cannot choose which benefits will be paid. The claim is deemed to be filed for all available benefits — those based on the ex-spouse’s as well as one’s own earning record. The Social Security Administration will compare the two sets of benefits and pay the higher amount. Your client will not be able to reverse the decision.
The major take-away from this rule change is that strategic timing of filing for Social Security benefits as an ex-spouse is still available to some individuals, but is no longer an automatic option for everyone.
3. Don’t forget Medicare
Unlike Social Security, which is based on an individual’s earnings history, Medicare benefits are uniform. Part A of Medicare that provides for hospitalization coverage is available to anyone who has 40 quarters of Social Security work record. If the individual’s work record isn’t there, he or she must have been married for at least 10 consecutive years prior to a divorce to have a Medicare record based on the spouse’s work record. If neither of those two conditions is met, your client will have to pay premium for Medicare Part A (currently $420/month). Walk your client through the decision tree to ensure he or she is aware of the upcoming premium expense and can build it into the budget.
A divorce settlement agreement may require one spouse to cover the other spouse under his or her health plan, but only until the non-working ex-spouse reaches age 65. At that time, the ex-spouse must sign up for Medicare Part B to avoid the Medicare penalty.
If a divorcing couple has a company or government-sponsored retirement health plan (equivalent to Medigap), the plan will have its own rules about whether or not a divorced spouse can remain covered. CPAs can offer to review the plan rules with the client to make sure that the divorce agreement is based on factual information.
How does this affect your client’s divorce?
First, timing of the divorce matters! The rule about qualifying for Social Security and Medicare benefits based on the ex-spouse’s record is very specific, and only 10 consecutive years (no fewer) of marriage will do.
Second, strategic timing of filing for Social Security may still be an option for clients born before Jan. 1, 1954. Everyone else must clearly understand the consequences of filing so that there are no surprises.
Finally, if Social Security will be a considerable part of your client’s financial safety net, encourage him or her to work with a specialty financial planner who has a deep understanding of tax and Social Security rules. After all, Social Security is a life-long benefit and can serve as an effective longevity hedge if used strategically.
For more information on how to help your clients develop a plan for drawing social security benefits, the AICPA Personal Financial Planning Section has developed The CPA’s Guide to Social Security Planning.
Tracy B. Stewart, CPA/PFS, CFF. Tracy has advised divorcing couples and their attorneys on the financial aspects of divorce for more than 15 years. Tracy has been a member of the AICPA National Financial Literacy Commission and currently serves as a member of the PFP Executive Committee; she has been a trustee of Collaborative Divorce Texas (formerly Law Institute of Texas, Inc.); and contributes articles, as well as frequent presentations, on collaborative divorce. Contact her at firstname.lastname@example.org.
Ted Sarenski, CPA/PFS, Blue Ocean Strategic Capital, LLC. Ted is chief executive officer and president of Blue Ocean Strategic Capital, LLC, in Syracuse, New York. He is a frequent presenter on webcasts and at conferences, and authored The CPA’s Guide to Social Security Planning.
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