Medicare’s Income Related Premiums

Joe and Margaret Welsh retired in 2011 with nice pensions, decent retirement savings and high premiums on their Medicare Part B and Part D plans.

“This was something our advisor did not help us plan for,” said Joe. “While it’s nice having the pensions and retirement savings, we wish someone had advised us on the effects Medicare’s income related premiums so we could have prepared. It’s definitely something you need to be aware of.”

The term “income-related premium” was introduced into the Medicare language by Congress in 2003, but didn’t begin affecting Medicare’s enrollees until 2007. What income related premiums do is take a retiree’s reported income into account when determining the cost value of their entitlement benefits. This term mostly applies to those with higher incomes, which could have the potential of reducing the value of their Medicare entitlements.

medicare

Photo Credits: http://www.flickr.com/photos/juhansonin/7777472866/

With Medicare’s income related premiums, the government was careful to keep the premiums structure separate from the income tax payment structure. In other words, retirees don’t pay higher Medicare premiums to the Internal Revenue Service (IRS). Instead, these premiums are deducted from a retiree’s Social Security benefits. Admittedly, income-relating can be a complex term to unravel for two reasons:

  • It primarily addresses only Medicare beneficiaries.
  • It has delayed impact—the income that high-income retirees report on their 1040’s for the year 2010 won’t determine their Medicare Part B premium costs until 2012.

To understand the confusion this can cause a retiree in the throes of planning their taxes, imagine a high-income retiree couple meeting with their accountant for a year-end tax planning session. Their highly-paid financial advisor has made an assessment on their modified adjusted gross income for the year. Their modified adjusted gross income comes out to be $204,000 for a couple. He warns them that any income reported above that amount, they will have to pay federal and state income tax.This couple’s Medicare premiums will increase two years from that date dollar-for-dollar for about the next $1,000 of income.

Having an income just a few dollars over $85,000 will cost a single retiree an extra $58.30 a month, or $700 a year in Part B premiums. A couple whose income spills above $170,000 will be hit with an extra $1,400 a year in premiums for the next $1,000 in income. If you disagree with your Part B income-related premium, you may request an appeal by completing a Request for Reconsideration Form SSA-561-U2, which you can get at your local Social Security office, or online. You can also file for reconsideration if you file an amended tax return for the previous year. There are multiple steps to the premiums. In 2010, for a single retiree, premiums rise at $85,000, $107,000, $160,000, and $214,000. For a couple each step is at twice the income level of the single retiree.

So now these retirees must decide whether it makes better financial sense to opt out of Medicare Part B, or not.  High-income retirees wishing to escape this impact by opting out will face a healthcare snare. Part B covers a number of services including doctors, outpatient services, physical and occupational therapy, x-rays, lab tests, and some health services.

The Medigap policies most retirees opt into to supplement their Medicare are designed to dovetail with Part B and aren’t accessible without Part B being in place. So, opting out to save money rarely works.

One more thing retirees need to be aware of in their golden years; Part B income-relating authorizes a data sharing arrangement between the IRS and Social Security that helps Social Security estimate annual premiums and deduct them from benefits. This could make it easier for the Congress to link retirement benefits to reported income at some point in the future.

Phil Cannella is a Master IRA Advisor and author of Crash Proof Retirement: The Planning Isn’t Over. He founded First Senior Financial Group.

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