Financial Planning Healthcare Retirement Income Retirement Planning

Medicare Premiums Higher Than Expected?

Are your Medicare premiums higher than you expected? Did you or someone you know receive notice of 2022 premium increases? Did the increase surprise you, and was it far greater than in previous years?

2022 Base Medicare Premiums Increase 14.5%

Medicare premiums for Part B jumped from 14.5% from $148.50 per month in 2021 to $170.10 per month for the 2022 calendar year. That’s a monthly increase of $21.60 per beneficiary. If both spouses are currently on Medicare their monthly discretionary income just decreased by $43 monthly. That may or may not sound like much to some folks. However, it could mean one less date night per month for a couple, or fewer trips to the ice cream shop with grand kids. These are real dollars that people might have otherwise spent for their own enjoyment. 

The inflation adjusted Medicare premiums reflect rising costs throughout the healthcare industry. While the increase this year was extraordinarily larger than in years past, annual increases in the base Medicare premiums are expected and should not come as a surprise to anyone. These periodic increases should be part of your written retirement income plan. When we’re guiding folks as they plan for retirement we often recommended that they project a 5% annual increase for health care expenses within their household spending plan. (Don’t have a spending plan yourself?  Download a copy of the TWFG Spending Plan under “Planning Tool” at no cost)

High Income Earners May Pay Double or Triple

Some folks on the other hand pay much more than the base premiums! How much more? Double, or even triple the base premiums. Why does this occur? Is there anything you can do to prevent this from happening to you? That’s what were’ going to discuss so keep reading.

Once you’re eligible for Medicare, and make the transition away from either your workplace healthcare plan or your individual healthcare plan, you are now expected to pay Medicare premiums. Most notably you will be responsible for outpatient care insurance (Part B) and Prescription Drug insurance (Part D) premiums. There may be other cost associated with Medicare depending on individual decisions that you make. However, we’re not going to get into that today. We’d recommend visiting with a Medicare specialist at least 6 months before you plan to transition on to Medicare. Instead, we will stick with Medicare Part B premiums as our example throughout the remainder of this discussion.

Your Medicare Premiums Today Are Influenced by Your Income From 2 Years Ago

Medicare premiums are based on your Modified Adjusted Gross Income (MAGI). More specifically, your modified adjusted gross income that was reported to the IRS two years prior. For example, if somebody was transitioning to Medicare in 2022, Medicare will base their premiums off of their income that was reported to the IRS from 2020.

Check your Medicare premiums! Higher income earners I’m talking to you now. If during your working years your gross income exceeded $182,000 or more, you may end up paying a Medicare surcharge that is known as the Income Related Monthly Adjustment Amount, or IRMAA for short.

In 2022 the IRMAA surcharges begin at $182,001 for married couples filing jointly, and $91,001 for single filers. That means if your income exceeded this amount in 2020, you are likely going to see that your Medicare premiums exceed $170.10 for part B.

If your MAGI in 2020 exceeded $182,000 by even one dollar, you’ll end up paying additional Medicare premiums. We call this a waterfall adjustment because the entire increase is applied whether you go over by one dollar or $1,000.

How much extra would you end up paying? Well if your income exceeded $182,000, by just one dollar, your Medicare premiums will jump by $68 per month. That’s $68 for each individual of a married couple currently on Medicare. If you have a husband and wife who are both currently receiving Medicare benefits the additional premium expenses would total $1,633 for the year. That could be a nice weekend vacation to your favorite get-away destination.

Medicare’s IRMAA is bracketed at various thresholds. If a married couple filing taxes jointly has an income that exceeds $228,000 by just one dollar the premiums for Medicare Part B Medicare will double for each spouse who is currently receiving Medicare benefits. That could mean a reduction in discretionary of $4,000 for the year. 

As mentioned earlier, prescription drug benefits also known as part D are also impacted by IRMA. So that same couple will see either Part B premiums double, and also see their Part D premiums double.

The highest threshold is applied to married folks filing jointly with a modified adjusted gross income of $750,000 or more. They will pay $578.30 in addition to the $170.10 premium. Each spouse of a married couple in this situation would be responsible for paying Medicare part B premiums of $748.40 each. That’s over four times greater than the average American citizen.

$750,000 of income may seem like a lot to most folks. And you may be thinking, how many people could that actually impact?

Most folks who are married filing jointly have an income far less than $750,000. As of December 30th, 2021, the national average income for a married couple in the US was $61,970 according to Nevertheless, some business owners and recently retired high-income earners find their income temporarily far greater than the national average. Even if their income greatly decreases post retirement, this can come back to haunt them.

Retired Business Owner Next Door

Take this situation for example. A business owner decides to retire in 2020. Over the last 10 years his business generated a net annual profit of $120,000 and he was able to sell it to an interested party for 1.5 times that.

Part of the transition into retirement involves the sale of his business and business held assets. He sells the business for $180,000, and he sells the building in which the business was operating for an additional $625,000. He depreciated most of the business assets throughout the years including the building in order to reduce his taxes. Out of the $805,000 on the sale of the business, only $50,000 can be written off against outstanding business expenses. He’s left with $755,000 of income to be reported for the tax year 2020.

He transitioned to Medicare in 2020, the same year he sold his business. However, his gross income from previous years never exceeded $150,000. This is well below the income related monthly adjustment amount threshold for a married couple filing jointly. He and his spouse both transition to Medicare in 2020 and paid the base Medicare premiums. The following year their Medicare premiums did increase, but it was because the government announced an increase to the base Medicare premiums for all beneficiaries. The taxable income reported to the IRS in 2019, two years prior still did not exceed the threshold in which IRMAA surcharges apply.

Then, in November 2021 the retired business owner and his spouse receive notification from the Social Security Administration that their Medicare premiums for 2022 will cost them $748.40 each, just under $18,000 for the year. How could they possibly go from paying $3,564 per year in 2021 to almost $18,000 per year in 2022? Their income in 2022 isn’t anywhere near the $182,000 threshold in which IRMAA applies.

Hold it right there. Remember what we discussed earlier. The sale of the business took place two years prior. It took a couple of years to catch up with them, but now they are having to deal with the fallout. Are they stuck paying extraordinarily high Medicare premiums for a year, or is there something that can be done?

Meet Form SSA-44

Medicare recognizes that folks have a life changing events that can impact their income. A life-changing event could be a reduction in the hours worked, like switching from fulltime employment to part-time, or you might stop working all together. Maybe one spouse passes, or a single person gets married. There are eight total lifechanging events recognized on Form SSA-44 that can be applied to many different circumstances effecting your future income or filing status.

A life-changing event could potentially impact how much you are expected to pay for Medicare premiums, and potentially reduce your Medicare premiums if your pre-retirement income would have triggered IRMAA surcharges. This form is used to communicate your life changing event, and to provide the Social Security Administration with a more accurate portrayal of what your post life-changing event income will be.

So, let’s look at a couple of examples of where this might come in to play. Remember the high-income earners from earlier, well they could submit SSA- 44 to notify the Social Security Administration that they’re no longer earning an income exceeding the IRMAA threshold. They can use SSA- 44 to communicate either a reduction in work, or work stoppage altogether. They can provide an estimate of what their post retirement gross income will be. If it falls below the IRMAA threshold, Social Security will likely adjust their Medicare premiums accordingly.

What about that business owner who would end up paying the top tier threshold of IRMAA surcharges? Well he can benefit submitting form SSA-44 as well. In fact, he and his spouse would both communicate to the Social Security Administration of the life changing event. Because both of them are already on Medicare and paying premiums as individuals, they both must submit SSA-44 in order to reduce or eliminate their surcharges. However, isn’t it worth a little time and effort in order to save roughly $14,000 in unnecessary Medicare expenses?

With the assistance of their financial professional who knows how to navigate this particular challenge, they can complete the form in less than an hour and mail it to their local Social Security office, that’s like receiving a value of $14,000 per hour.

Little Effort, Yet Little Known

It’s been my experience that most folks don’t know that form SSA-44 even exist. Even folks who specialize in helping average American retirees navigate how to sign up for Medicare, and decide which Medicare supplemental insurance to choose often overlook this opportunity. I suppose many of these professionals don’t know about it, because if 90% of your clients are average American’s IRMAA is an afterthought. Most of the folks they serve probably are not ever going to be impacted by IRMAA surcharges.

Unless you routinely guide high-income earners or retired business owners to and through retirement you may not feel the need to have knowledge in this area. Nevertheless, it’s a rather simple strategy to deal with an expensive problem.

Before You Reach Age 63

We know that the Medicare surcharges are triggered by the modified adjusted gross income from two years prior tax returns. A little proactive planning may be able to mitigate or even prevent running into this issue in the first place. For folks who are 63 years of age or younger there’s often time left to act. Those age 63 or older may have fewer options, but all is not lost. We just might have fewer strategies to work with. Therefore, the real opportunity to take evasive action is prior to age 63.  

By planning ahead, you may be able to avoid putting yourself in a position where Medicare surcharges get triggered. Structuring your income and your assets in order to strategically keep yourself below the IRMAA thresholds post retirement would be a great place to begin. What can you do?

To the best of your ability try to control how much pre-tax money you carry into retirement. If you can set yourself up to have a blend of pre-tax, after-tax, and never-taxed resources you have a better shot at successfully managing your modified adjusted gross income throughout retirement.

Many folks have a large percentage of their retirement resources socked away in pre-tax accounts like IRAs, 401(k), and other IOUs the IRS. Deferring taxes until later in retirement might come back to bite them. Strategic Roth conversions, filling up lower tax brackets, may be an effective strategy to mitigate future tax liabilities and reduce your MAGI. There are still several years to take advantage of the lower tax rates under the Tax Cuts and Jobs Act of 2017. You can take advantage of this through 2025.

Another strategy could be delaying Social Security benefits. This accomplishes two things. Delaying Social Security beyond your full retirement age will earn you delayed retirement credits. These are worth 8% increases in your Social Security benefit for each year you delay beyond your Full Retirement Age (67 for most folks) up to age 70. Number two you’ll likely spend down some of your pre-tax money between the year you retire and the year in which you optimize Social Security.

Remember, the date at which you claim Social Security, and the date at which you retire are independent of each other. You can choose to retire at 65 if you have the resources to do so, but not claim Social Security until age 70. That means you’ll need to fill in the gap created by delaying Social Security between age 65 to 70. Distributing some of your pre-tax money during this period of time would reduce the amount of pre-tax money that you carry into your later years in retirement, and allow your Social Security benefits to earning those valuable delayed retirement credits.

Are You One of The Few?

Many folks will never have to worry about Medicare premium surcharges. For those high-income earners, or businesses who sell assets near retirement, Medicare premium surcharges can add up quickly. Knowing how to avoid them in the first place is valuable, and knowing how to deal with them in the event you are impacted by them may save you tens of thousands of dollars in unnecessary Medicare premium surcharges.

Be sure to work with your tax professional, and your financial planner to determine your potential exposure to IRMAA surcharges. Then determine what, if anything, can be done to mitigate or eliminate them and take action!