Medicare is a federal social insurance program introduced in 1965, which provides health coverage for Americans aged 65 and older. As of the writing of this article, there are over 60 million Americans enrolled in Medicare, which equates to over 18% of the population in the US1. With more and more Americans paying Medicare premiums each year, it’s not a surprise that the subject of IRMAA - income-related monthly adjusted amount – seems to be more and more prevalent in tax and healthcare planning meetings with our clients.
The income-related monthly adjusted amount is essentially a surcharge that is added to Medicare Part B and Part D premiums for higher earners. In other words, your Medicare premium is not a fixed amount, but is based on the income from your tax returns from two years prior. For those that are signing up for Medicare in 2022 for instance, the Social Security Administration considers their Modified Adjusted Gross Income (MAGI) from the tax year 2020 when determining the premiums. For those with higher incomes, IRMAA applies.
From a planning perspective, it is not uncommon to see big changes in client income from one year to the next, especially in their 60’s as they may be transitioning from full time work into retirement. Income related considerations such as when to apply for Social Security benefits, portfolio distributions, RMD’s, and part time work all factor into MAGI for those individuals. If you are not aware of the potential IRMAA surcharges for Medicare premiums, it can be a bit of a shock when a letter arrives from the SSA requiring additional premium payments.
While no one wants to pay more premium than they must, it is important to consider that you can also ‘appeal’ the decision for IRMAA using form SSA-44 if:
- You have a more up to date or amended tax return showing a reduction in income
- You have had a life changing even including (but not limited to) marriage, divorce, retirement, etc.
While awareness of the IRMAA rules is the key takeaway, there are clear planning opportunities and considerations for our clients when reviewing their retirement income plan and effects on their MAGI. See The following income levels (based on 2020 tax returns) which trigger the associated IRMAA surcharges in 2022: