Helping Clients Make the Connection Between Income and Medicare Premiums

Posted by Anna Hays

January 8, 2019 at 10:00 AM

the connection between income and Medicare premiumsClients 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’s 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 affect 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.gov

Medicare 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.gov

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

Contesting the IRMAA

With some input, Peggy Sue 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 Peggy Sue, her retirement was a work stoppage, and she 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.

Advisors can help clients plan a Roth conversion for at least three years before their Medicare enrollment. It may be more difficult to avoid IRMAA when a client retires and uses the NUA strategy for appreciated employer stock in a 401(k), however. Suppose Peggy Sue expects the employer stock in her 401(k) to continue its already significant appreciation. Upon retirement, she qualifies for a lump-sum distribution of her 401(k). But the NUA planning that allows favorable capital gains tax treatment for the stock’s appreciation may have led to the IRMAA surcharge her first year as a Medicare beneficiary.

Peggy Sue would have to file an appeal if she disputed the SSA’s IRMAA surcharge caused by the NUA strategy and the SSA denied her request for a new initial determination. The SSA’s appeal procedure includes several administrative levels, and the process could take longer than a year. Since SSA assesses IRMAA annually, Peggy Sue may no longer be subject to the IRMAA surcharge by the time she has an administrative hearing.

Another option. If Peggy Sue’s MAGI remains above IRMAA thresholds during her retirement, qualified charitable distributions (QCDs) could provide relief when she reaches age 70½. Instead of receiving her required minimum distribution (RMD), Peggy Sue could send it directly to a qualified 501(c)(3) organization before December 31 each year. The QCD would effectively reduce Peggy Sue’s taxable income from the RMD. If she donated her entire RMD, she would report zero income from the distribution. The IRS limits QCDs to $100,000 annually. Keep in mind, though, that a married couple filing a joint return may each make a QCD up to the $100,000 limit.

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.

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

Have your clients been caught off guard by the connection between income and Medicare premiums? What strategies have you used to help reduce their exposure to the IRMAA? Please share below—we’d love to hear from you!

A Guide to Health Care Costs in Retirement

Topics: Retirement Income Planning

    
New Call-to-action
The Independent Market Observer, Brad McMillan

Follow Us