Alicia stared at the statement that had been arrived in the mail.
“This can’t be right,” she mumbled. “There is no way Dad’s Medicare premiums have doubled. And why has his monthly Social Security check been reduced?” She picked up her coffee mug and sipped. “I need to call someone.” She scanned the notice for a phone number and dialed. After a polite conversation, in which she inquired about the changes, Alicia hung up. She was furious.
Her partner, Debbie, studied her, waiting for Alicia to speak. When she remained silent, Debbie finally asked, “What did they say?”
“Remember when my dad sold that vacation home in Arizona? Apparently, the Feds count that as income. When a Social Security recipient has a significant increase in income, Medicare can increase their Part B premium. Apparently, the more income you make, the more you pay. And since Dad’s premium is deducted from his Social Security benefit, that income took a hit as well.”
“Well, that makes sense,” Debbie said.
“Sure, but he can’t afford that increase or the resulting decrease in his Social Security check.”
Debbie arched an eyebrow. “Didn’t he consult a tax guy first? What did he get for that house? Half a million? He had to know there would be tax consequences. Someone should have told him it would impact his Social Security income and Medicare premiums.”
Alicia shook her head. “You know Danny, my sister’s husband, is a bookkeeper. He’s not really a tax guy. He’s a numbers guy. He just told my dad he would have to pay capital gains tax, so he should hang on to some of the money until it was tax time. He paid his taxes and thought it was done deal.” She glared at the notice. “I don’t know how the heck he is going to pay this increase. It’s really going to hurt.”
Debbie frowned. “Maybe he can appeal it or something? You need to talk to an attorney.”
Medicare is made up of four parts. Part A is insurance for hospitalization and related services. Part B is basic medical insurance and covers 80 percent of the cost of services not covered by Part A, including physician visits, outpatient hospital and home health services, and durable medical equipment. Part C is Medicare Advantage or “Medicare substitute” plans. Part D provides prescription drug coverage.
In most cases, Part A is free. It is paid through the Medicare tax deducted from paychecks when employed. Recipients of Social Security, or Railroad Retirement Board or Office of Personnel Management benefits, automatically receive Part B. It is funded through a monthly premium withdrawn from the monthly benefits check. Others are billed directly for Part B. Part C consists of privately managed Medicare plans that encompass Part A, Part B, supplemental insurance, and usually, Part D. Medicare pays a set amount to private insurance companies to manage the coverage, using funding from Part A and Part B premiums. Part D is prescription drug coverage provided by private insurance companies. The monthly premiums vary based on the level of coverage, but are also deducted from the monthly Social Security benefits.
Annual income impacts monthly Medicare Part B premiums. In 2020, for example, individual retirees with an annual income of less than $87,000 a year or married couples whose annual income is less than $174,000, pay $144.60 each month for Medicare Part B. Those with higher incomes pay more.
Five additional income tiers are used to determine the higher premiums or surcharges, and they are strictly adhered to. Exceed a tier by $1 and you will be pushed into the higher income tier and assessed a steeper premium. Where an individual falls within the tiers is based on modified adjusted gross income or MAGI. Currently, MAGI is calculated by adding 2018 income, as reported on the federal income tax return, to any tax-exempt interest.
A 2018 income of $87,001 to $109,000 or between $174,001 and $218,000 for married couples, will result in a premium increase of $57.80 per month or $202.40 per individual. The premiums continue to increase incrementally until income reaches $500,000 for individuals or $750,00 for couples. In that tier, the premiums top off at $491.60 per month per insured.
Medicare recipients who fall into the higher-income categories receive notice of an Income-Related Monthly Adjustment Amount or IRMAA, which stipulates the surcharge for the upcoming year. Selling a home or the sale of other investments, such as securities, pushes Social Security recipients into a higher income tier, triggering the surcharge and a resulting decrease in monthly Social Security benefits.
Unfortunately, once a surcharge has been assessed, Social Security recipients have only three options: They can pay the increase for that year, they can prove that the information used to determine the surcharge was outdated or incorrect, or they can appeal the surcharge based on a life-changing event that resulted in a decrease in income.
For IRMAA determinations, the Social Security Administration considers the following to be life-changing events:
- Marriage, divorce, or annulment.
- The death of a spouse.
- Work reduction or stoppage.
- The loss of income-producing property that is beyond the beneficiary’s control.
- The reduction or loss of pension income through plan failure or termination, or a scheduled cessation of payments.
- An employer settlement payment received as the result of an employer’s closing, bankruptcy, or reorganization.
However, an income boost caused by the sale of a vacation home or a stock portfolio does not qualify as a life-changing event.
Obviously, Medicare recipients faced with a sudden boost in income must plan ahead. For example, health savings accounts, Roth IRA contributions and conversions, and other financial strategies can minimize the impact of a potential Medicare surcharge. For more information, contact a financial advisor or visit https://www.medicareinteractive.org/get-answers/medicare-health-coverage-options/original-medicare-costs/part-b-costs-for-those-with-higher-incomes.