Watch out for IRMAA – Who’s that, you ask?
The Income Related Monthly Adjustment Amount, referred to as IRMAA, can come as a surprise to some retirees. The standard Part B Medicare premium in 2018 is $134. What most people don’t know is that as retirees they may end up paying a significant surcharge on their Medicare Part B and Part D (Drug benefit) premiums. This is a result of the Medicare Modernization Act of 2003 (which took effect in 2007) affecting Medicare Part B premiums, and of the ACA (which took effect in 2011) affecting Part D premiums. The effect is that Medicare premiums are tied to modified adjusted gross income (MAGI) from two years prior. The higher your 2016 income, the higher your 2018 Medicare premium payment. Consider that the backdrop to this article. Now for some numbers to put it all into perspective…
Let’s begin with this hypothetical scenario: Today it’s 2018. In 2016, John and Sarah, a hypothetical couple, had a sudden cash influx when John sold his business so that he could retire. John and Sarah started collecting Social Security, opting to have Medicare Part B as well as prescription drug coverage (Part D). Their income in 2016 was over $320,000 because of the sale of the business on top of John’s income from his business. Now, in 2018, two years later, John and Sarah receive a notice from Social Security regarding IRMAA. With a current annual income of $120,000 coming from Social Security and investments and some consulting, they are informed that both of their Social Security monthly checks, totaling $5600 ($67,272/year) will now decrease by about 13% because of IRMAA, with their total health care cost rising to about 18% of their total Social Security income and 10% of their total income. This realization comes as a very unpleasant surprise.
How did this happen?
Well, Medicare part B and part D premiums are automatically deducted from John and Sarah’s monthly Social Security check. As we mentioned earlier, the base monthly cost of Medicare Part B is $134 (up 10% since 2016), but in 2018, Social Security is indicating that they will pay an additional premium based on their 2016 income (2 years prior, when John sold his business). So….every month John and Sarah will each pay an additional $294.60 for Medicare Part B as well as additional $74.80 for Part D. The total healthcare payment for the two of them combined is $1006.80 per month.
Paying $134 for Medicare Part B may have sounded just fine in 2016 – when they were flush with cash and weren’t thinking about the possibility of Medicare premiums increasing. But in 2018 this came as a shocker with their current income substantially below their 2016 income. The cost of Medicare Part B and Part D is $503.40 per month for each of them, or over $12,000 per year. This is money that they may have budgeted for travel, perhaps a monthly payment on a new car or other retirement expense. Medicare is costing John and Sarah $12,081.60 ($1006.80 x 12) per year. Without IRMAA it would be costing them $3,216 per year. Annually, IRMAA is costing John and Sarah an additional $8,865.
Do John and Sarah have any recourse?
The quick answer is yes, they do – but only if their income in 2018 is in a lower bracket (see table below) AND they have had a “life-changing event.”
Life Changing Events include:
- You married,
- You divorced, or your marriage was annulled,
- You became a widow or widower,
- You or your spouse stopped working or reduced work hours,
- You or your spouse lost income from income-producing property due to a disaster or other event beyond your control,
- You or your spouse experienced a scheduled cessation, termination, or reorganization of an employer’s pension plan, or
- You or your spouse received a settlement from an employer or former employer because of the employer’s closure, bankruptcy or reorganization.
In our hypothetical case, John stopped working, so they should be eligible to have the IRMAA waived or adjusted – so it is worth it for John and Sarah to head on down to the local Social Security office. Note also that their modified adjusted gross income has to be at least one bracket lower on the above table or be below the lowest amounts in the table since they filed their 2016 tax return and they will have to show proof of their life-changing event.
If John and Sarah’s 2018 income ends up being higher than they projected because John decides to go back to work or if they sell a piece of property or some other income producing event, they will have to pay, in arrears, any IRMAA that was lowered or eliminated.
We can’t project what will happen in the future, but we do know that the base cost of Medicare has been increasing over the years . Since 2016 it has gone up 10%. And, the income ranges in the above table have changed, lowering the income level at which the higher premiums take effect. Since we do not know how these premiums and income ranges might change in the future, it becomes even more important to have good planning that allows for rising costs, including not only the cost of basic living expenses, but also the cost of health care. Additionally, it can be important to plan ahead to have sources of income that are not included in MAGI.
The real answer for John and Sarah is to engage in a comprehensive financial planning process that looks at their total risk exposure, including to IRMAA. A good financial planner should be able to help them with this as well as other aspects of their retirement planning.
Sources: Social Security Administration: Sliding IRMAA Tables
Jane W. Evelyn, CFP® is a Certified Financial Planner™ and NAPFA Registered Investment Advisor with Beck Bode Wealth Management.