Have you ever been surprised by an increase in your Medicare premium? Or maybe it’s your first year on Medicare and your premium is surprisingly high? Many people are unaware of, or simply don’t think about, the income-related monthly adjustment amount (IRMAA), which is a surcharge added to Medicare Part B and Part D. Since 2007, high-income Medicare recipients have been required to pay the surcharge in addition to their monthly premium. Even if you’re not yet near your desired retirement age, understanding IRMAA—and its appeals process—can help you craft a proactive plan to potentially reduce what you pay for future Medicare premiums.
For high-income Medicare beneficiaries, Part B and Part D premiums include an additional charge based on modified adjusted gross income. As you can imagine, premiums increase as income increases. It’s important to know that if your income increases by even one dollar into the next range, your surcharge will be higher. The surcharge is for only one year, beginning two years after it’s reviewed.
Medicare Part B covers doctor visits and outpatient services. In 2023, the base premium will be $164.90 per month, and those who are subject to the surcharge should plan to pay between $230.80 and $560.50 per person, per month. Part D covers prescription drugs, and the monthly cost depends on the plan. The income surcharge ranges from $12.20 to $76.40. The tables below show the sliding scale for determining IRMAA for Part B and Part D.1
Your premium is not “locked in” based on one year of high income. It’s reviewed every year, which means your premium may go up and down throughout your life, depending on your income during the prior two years. Because you’ll be eligible for Medicare at age 65, and because premiums are based on income during the prior two years, you might want to start thinking about your income level—and how it’ll impact your Medicare premium—when you turn 63.
Let’s say you and your spouse are gainfully employed, turn 63 in 2022, and have an income of $250,000. If you begin Medicare Part B and Part D in 2024, then the additional cost, above and beyond your base premium, would be $392.60 per month, as a couple. That’s a $4,711.20 expense that you would need to build into your 2024 budget.
In certain circumstances, such as when you have a “life-changing event,” you can appeal the increased premium. Now let’s say you have plans to retire in 2023 and will have a significantly lower income going forward. Enter the appeals process. For example, retirement is a legitimate reason for the Administration to lower your premium if your income drops significantly after you leave the workforce. Retirement is the most common life change that could result in a reduction of the surcharge, but it’s not the only one. Reduced work hours, marriage, divorce, death of a spouse, and a few other reasons might also warrant an appeal.
If your income is higher due to a one-time event, rather than a life-changing event, it’s likely not worth your time to appeal. Some situations that are unlikely to get approval for a reduction of premium are: property sale resulting in unusually high capital gains, deferred IRA withdrawal, Roth IRA conversion.
It’s important to be aware of the impact these one-time events can have on your premium so that you can weigh the pros and cons of receiving a higher income. Then properly plan for it in your budget or, if possible, modify your strategy so that you don’t slightly move into the next premium range.
Remember that for the one-time events, the higher income will impact your premium for only one year, beginning two years after the income spike.
If you believe you have a case for appealing a higher Medicare premium, you can request a review by completing the Form SSA-44 and providing supporting documents; these can be faxed or mailed to the Social Security Administration office. If you would like to speak with a Social Security representative, you can find the phone, fax, and address information for local offices here.
Having worked for the federal government for 10 years, I know firsthand how inefficient their processes can be. Therefore, I recommend a proactive approach to avoid the appeals process. You certainly don’t want Medicare premiums to be the main driver of your financial plan, but it’s worth talking with your financial advisor to see if there’s something you can do to lower future premiums.
However, if a premium hike is unavoidable and you still believe there’s a case to appeal, the income ranges listed above can help you determine whether the appeal will be worth it. Be sure your income difference will result in a lower premium, so that the time spent going through this process pays off.
Bottom line, be aware of the additional IRMAA surcharge when crafting your retirement budget and financial plan. If you have a life-changing event, follow the steps outlined above to appeal the surcharge. Where possible, consult with your advisor to ensure prudent strategies that take increased Medicare costs into consideration, and adjust your financial plan as needed.
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All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
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