Healthcare in retirement can be very expensive. If you are a pre-retiree planning for 20 or possibly 30 years of rising costs in retirement, it is critical to account for healthcare related expenses and an often-overlooked healthcare expense is the Medicare Surcharge.
In 1965, President Lyndon B. Johnson established Medicare as the primary health insurance for seniors over age 65. Under Medicare, the federal government pays for 100% of Part A (hospital coverage). The government also pays for about 75% of Part B (regular medical coverage).
Under the Medicare Modernization Act of 2003, Medicare enrollees also have access to Medicare Part D (prescription drugs), for which they pay a monthly premium.
For individuals collecting Social Security, the government withholds Parts B and D premiums from your monthly Social Security checks. For those who delay Social Security, but have already enrolled in Medicare, you will pay the premiums directly.
The Medicare Modernization Act of 2003, which introduced Medicare Part D, shifted the funding of Medicare Parts B and D by requiring high-income Medicare enrollees to pay a higher than 25% portion of their Medicare premiums beginning in 2007.
Also, in 2011 under the Affordable Care Act, higher income individuals must pay a surcharge on their Part D, drug coverage. The increased Medicare charges are part of a larger trend where retirees will rely less on government entitlements for income security in retirement.
These extra Medicare charges are commonly referred to as IRMAA or affectionately ‘Aunt IRMAA’ (Income Related Monthly Adjustment Amount). The threshold of income which determines your surcharges have gone through several changes. And with the changes in effect this year, it takes far less income for a household to reach the top IRMAA tiers.
Keep in mind that each of the tiers in this chart is a ‘cliff threshold’, which means $1 of income passed the threshold results in the entire surcharge amount.
The center for Medicare and Medical Services sets the part B premium for the coming year, during the current year. For example, 2018 premiums were set by October 2017. Thus a household’s IRMAA tier for Medicare is determined using a prior-prior year formula. To illustrate: for 2018 a household’s Part B and D surcharges are based on 2016 tax year, as the government will use the data from your tax return that was filed by 2017.
You may be able to get your surcharge reduced if your income has dropped since the prior-prior year calculation due to ‘life-changing’ circumstances. To request your IRMAA surcharges be removed, you will need to file an SSA-44 form which can be found here link https://www.ssa.gov/forms/ssa-44.pdf.
Other IRMAA planning strategies relate to tax management. The Modified Adjusted Gross Income (AGI) that dictates IRRMA’s surcharges is your AGI (adjusted gross income) plus any tax-exempt beyond interest that must be added back to determine your threshold. Therefore it is helpful to be cognizant for whether or not you are close to hitting an IRMAA threshold, where a relatively small shift in the timing of recognizing capital gains or harvesting capital loss can get you below a threshold.
Less than 5% of tax filers will be affected by IRMAA surcharges. Taxes in general and Medicare charges specifically are the cart where your overall financial strategy represents the horse which is most important. That said, if a minor adjustment can save you $600 or $1,000 a year and surcharges, it all counts.