Helping Clients Make the Connection Between Income and Medicare Premiums

 

the connection between income and Medicare premiums

Clients newly enrolled in Medicare may not understand the connection between income and Medicare premiums. The IRS, the Social Security Administration (SSA), and the Centers for Medicare & Medicaid Services all play a part in the income-related monthly adjustment amount (IRMAA) that are tacked on to Medicare premiums and recalculated every year. The higher an individual’s or couple’s modified adjusted gross income (MAGI), the higher their premiums will be for prescription drugs and doctor visits.

How exactly is the IRMAA calculated, and what can you do to potentially minimize its effect on your clients’ health care costs? Let’s take a closer look.

MAGI Tiers and Medicare Part B and D Premiums

Medicare looks at tax returns from two years ago to determine current-year premiums. Last year, there were five income tiers on which Medicare premiums were based. For 2019, due to the Bipartisan Budget Act of 2018, the fifth tier, which previously included incomes above $160,000 for individuals and $320,000 for married couples filing a joint return, has been modified. The income range is now $160,000 to $500,000 for individuals and $320,000 to $750,000 for married couples filing a joint return. In addition, the statute has added a sixth tier for 2019 that will apply to individuals with incomes above $500,000 and married couples with incomes above $750,000. See Figure 1 for more details.

Figure 1. 2019 MAGI Tiers (Based on 2017 Income Tax Return)
File individual
tax return
File joint
tax return
File married
and separate
tax return
$85,000 or less $170,000 or less $85,000 or less
Above $85,000 up to $107,000 Above $170,000 up to $214,000 N/A
Above $107,000 up to $133,500 Above $214,000 up to $267,000 N/A
Above $133,500 up to $160,000 Above $267,000 up to $320,000 N/A
Above $160,000 and less than $500,000 Above $320,000 and less than $750,000 Above $85,000 and less than $415,000
$500,000 and above $750,000 and above $415,000 and above

Source: Medicare.govMedicare Part B. The standard Part B premium in 2019 is $135.50. Depending on your clients’ MAGI from two years ago, however, they may pay significantly more than this amount (see Figure 2).

Figure 2. 2019 IRMAA for Medicare Part B (Based on 2017 Income Tax Return)
File individual
tax return
File joint
tax return
File married
and separate
tax return
Part B IRMAA
$85,000 or less $170,000 or less $85,000 or less $135.50
Above $85,000 up to $107,000 Above $170,000 up to $214,000 N/A $189.60
Above $107,000 up to $133,500 Above $214,000 up to $267,000 N/A $270.90
Above $133,500 up to $160,000 Above $267,000 up to $320,000 N/A $352.20
Above $160,000 and less than $500,000 Above $320,000 and less than $750,000 Above $85,000 and less than $415,000 $433.40
$500,000 and above $750,000 and above $415,000 and above $460.50

Source: Medicare.govMedicare Part D. The standard Part D premium in 2019 is $32.50, though premiums can cost up to an additional $77.40 per month over the regular plan premium (see Figure 3).

Figure 3. 2019 IRMAA for Medicare Part D (Based on 2017 Income Tax Return)
File individual
tax return
File joint
tax return
File married
and separate
tax return
Part D IRMAA
$85,000 or less $170,000 or less $85,000 or less Plan premium
Above $85,000 up to $107,000 Above $170,000 up to $214,000 N/A $12.40 + plan premium
Above $107,000 up to $133,500 Above $214,000 up to $267,000 N/A $31.90 + plan premium
Above $133,500 up to $160,000 Above $267,000 up to $320,000 N/A $51.40 + plan premium
Above $160,000 and less than $500,000 Above $320,000 and less than $750,000 Above $85,000 and less than $415,000 $70.90 + plan premium
$500,000 or above $750,000 and above $415,000 and above $77.40 + plan premium

Source: Medicare.gov

The IRMAA in Practice

As these figures illustrate, the SSA does not base Medicare premiums on anticipated future income. Every October, it reviews the most recently filed income tax return to assess the premiums a beneficiary will pay beginning in January. This timing causes a two-year gap between the MAGI used to assess IRMAA and the beneficiary’s current income.

The premium adjustments. Let’s say you retired in 2017 and in October 2018, the SSA reviewed your  2017 income tax return to set your Medicare premiums for 2019. Since your 2017 MAGI was $130,000, the SSA assessed the IRMAA surcharge. The fact that you had retired at the end of 2017 wasn’t included in the assessment. Your Part B premium for 2019 was set at $270.90 and now expected to pay an additional $31.90 for her Part D premium. In December 2018, you learned this from an SSA notice titled “Initial IRMAA Determination.”

Contesting the IRMAA

With some input, you could have disputed the SSA’s initial determination. The SSA allows beneficiaries to contest the IRMAA surcharge without having to make a full appeal if one of the following life-changing events has affected their tax filing status or reduced their income:

  • Marriage
  • Divorce/annulment
  • Death of a spouse
  • Work stoppage
  • Work reduction
  • Loss of income-producing property
  • Loss of pension income
  • Employer settlement payment

For you, let’s say your retirement was a work stoppage, and you could file Form SSA-44 to inform the SSA of this life-changing event.

Timing of advice. Two common tax planning strategies—Roth conversions and net unrealized appreciation (NUA)—cause one-time increases in ordinary income. Neither is considered a life-changing event; consequently, clients approaching age 65 need timely advice that connects income, tax planning, and Medicare.

Guiding Your Clients

Although clients often do not understand the connection between income and Medicare premiums, advisors can play a critical role in educating them about their health care costs. Evaluating the impact of tax strategies put in place before they turn 65 will prepare clients for the possibility of income-adjusted Medicare premiums in their early retirement years. Continuing that analysis after age 70½ will help clients manage their Medicare premiums throughout their retirement.

Check out our Medicare web site for additional information:

NorthWest Medicare Solutions.

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