How to Reduce Medicare IRMAA and Medicare Supplemental Insurance Premiums

An individual enrolled in Medicare Part B (medical insurance) (referred to from now on as a Medicare Part B “beneficiary”) pays a monthly premium. The amount of the monthly premium a Medicare Part B beneficiary pays in the current year depends on the beneficiary’s modified adjusted gross income (MAGI) from two years ago.

In particular, a Medicare Part B beneficiary’s monthly premium will depend on which MAGI “income tier” they fall into. For 2023, most Medicare Part B beneficiaries (filing as single during 2021) will pay $164.90 per month for Medicare Part B as a result of their 2021 MAGI being less than $97,000. If they filed as married filing joint during 2021 and their 2021 MAGI was less than $194,000, then each spouse enrolled in Medicare Part B during 2023 will pay $164.90 per month for Medicare Part B.

SEE ALSO:

• How Medicare Works and Minimizes Federal Retiree Medical Expenses
• Medicare Open Enrollment Period: What Does It Mean for Federal Retirees?
• Understanding the Three Enrollment Periods for Medicare and the Late Enrollment Penalty
• Deciding on the Right Choice for Medicare Enrollment
• Medicare Part B and Appealing High Premiums
• What Federal Retirees Need to Know About Medicare Part D

However, if a Medicare Part B beneficiary’s 2021 MAGI was above the $97,000/$194,000 MAGI limits, then an additional amount – called an Income Related Monthly Adjustment Amount (IRMAA) – is added to the $164.90. The $164.90 monthly premium is designated as the “first income tier” or “base” Medicare Part B premium. Any additional MAGI could result in an IRMAA. Currently during 2022, an estimated 7 percent of Medicare Part B’s 664.3 million beneficiaries pay an IRMAA. Table 1 and Table 2 summarize the 2023 Medicare Part B income tiers, IRMAAs, and resulting monthly premiums

Table 1: Summary of 2023 Medicare Part B monthly premiums for single individuals and married individuals filing jointly.

Table 2: Summary of 2023 Medicare Part B monthly premiums for married individuals filing separately and who lived with their spouse at any time during 2021.

This column presents some strategies that can help a Medicare Part B beneficiary avoid or minimize the amount of IRMAA. Some suggestions will also be presented on how to minimize the cost of Medicare supplemental health insurance plan premiums. Medicare supplemental health insurance pays for those medical expenses not paid by Medicare Part B.

The Federal Employees Health Benefits (FEHB) program is considered as Medicare supplemental health insurance (in general, those FEHB program plans that are fee-for-service plans and preferred provider organization plans) that pay for the portion of doctor bills, medical equipment, prescription drugs, hospital bills, skilled nursing facility bills, and other medical expenses not paid by Medicare Part A and Medicare Part B.

Strategies to Minimize IRMAA

It is important for employees and retirees to understand that some retirement income is generally “set” in the sense that a retiree has no control as to the amount the retiree receives each year. A retiree qualifies for a certain retirement benefit and will receive a specified amount from year to year that includes cost-of-living allowances (COLAs). For example, a CSRS or a FERS annuity check or a Social Security check.

The key to avoiding or minimizing IRMAAs is to focus on what income streams that a Medicare Part B beneficiary can control. The key to keeping one’s income below the IRMAA brackets is to plan ahead to realize from what source the income is coming from and how much income will be paid out. Note that only $1 of additional income could result in a Medicare Part B beneficiary being pushed into a higher income tier and an IRMAA resulting in a higher Medicare Part B monthly premium.

Employees and retirees are to be reminded that the IRMAA determination is usually based on Medicare Part B beneficiary’s federal income tax returns from two years earlier. If a beneficiary’s income has dropped in the following year, then the beneficiary can appeal the IRMAA decision using Social Security Form SSA-44 (Medicare Income-Related Monthly Adjustment Amount -Life-Changing Event), providing proof that the beneficiary has experienced a “life-changing” event such as the death of a spouse or a divorce resulting in a significant decrease in income in the following year.

For example, for 2023 Medicare Part B monthly premiums based on 2021 MAGI, a significant decease in 2022 income can be the basis for an appeal of 2023 premiums

Four specific strategies and planning strategies that could help avoid or minimize IRMAAs are presented and explained:

(1) Roth IRA conversions.

One way an individual can reduce income included in MAGI is to avoid having all of one’s retirement in accounts whose distributions are taxed as ordinary income. These accounts include traditional IRAs or in a qualified retirement plan, including the traditional TSP. This means that whether an individual is enrolled in Medicare or not, it may be worth converting a traditional IRA or a traditional 401(k) TSP account to a Roth IRA. Roth IRA contributions are taxed at the time they are contributed to the Roth IRA. When a traditional IRA is converted to a Roth IRA, the taxes due on the conversion are paid in full in the year of conversion. In both cases, while taxes are paid upfront, qualified withdrawals are income-tax free.

Also, Roth IRAs do not have required minimum distributions (RMDs) during the Roth IRA owner’s lifetime. RMDs are amounts that must be withdrawn from traditional IRAs and qualified retirement plans (including the TSP) once the account owner reaches age 72. When RMDs from traditional accounts start, a Medicare Part B beneficiary’s taxable income will increase, possibly resulting in the Medicare Part B beneficiary becoming subject to IRMAAs, or to a higher amount of IRMAA if already paying IRMAA.

Many retirees make no withdrawals from traditional retirement accounts and traditional IRAs until they are required to (that is, when they reach their “required beginning date”) and take their first RMD. The result is that RMDs put many Medicare Part B beneficiaries in one of the higher income tier brackets resulting in larger IRMAA.

(2) Minimizing capital gains exposure.

If an individual owns assets that could generate a taxable profit when sold – for example, investments held in a brokerage account – then it makes good financial sense for the individual to evaluate how well he or she is monitoring potential capital gains resulting from the sale of these assets in order to limit capital gains resulting in additional income.

While the sale of certain appreciated assets (like stocks) can be controlled and timed, some mutual funds surprise their shareholder at the end of the year with distributions of capital gains and dividends, both of which are included in taxable income and could affect the IRMAA determination.

Depending on a Medicare Part B beneficiary’s situation, it may be worth considering owning exchange-traded funds (ETFs) instead of mutual funds in a brokerage (non-retirement) account. ETFs tend to be tax-efficient because they typically do not pay out capital gains and dividends.

(3) Utilizing Health Savings Accounts (HSAs).

HSAs can benefit Medicare Part B beneficiaries in several ways. When employees contribute to an HSA, the contributions are tax deductible. Earnings in the HSA grow tax-deferred and withdrawals from the HSA are tax-free if they are used to pay IRS qualified medical expenses.

Since qualified HSA withdrawals are not taxable and they do not affect adjusted gross income, they do not affect IRMAA calculations. Qualified HSA withdrawals also include reimbursement for Medicare Part B monthly premiums. That is, a Medicare Part B beneficiary who is an HSA owner can request a reimbursement from his or her HSA for Medicare Part B monthly premiums.

(4) Using Qualified Charitable Distributions (QCDs).

An individual who is over age 70.5 can make a Qualified Charitable Distribution (QCD) of up to $100,000 in a single tax year. The QCD must be made to a 501(c)(3) charity and from the individual’s traditional IRA. The QCD will satisfy an individual’s RMD and if the QCD is done properly, it will not be included in income and therefore the individual’s adjusted gross income. IF the individual is a Medicare Part B beneficiary over age 72 and subject to RMDs, then a QCD can minimize MAGI and perhaps eliminate any IRMAAs.

Minimizing Medicare Supplemental Insurance Premiums

When a federal retiree enrolls in Medicare Part A and Medicare Part B (Original Medicare) together with their Federal Employees Health Benefits (FEHB) program health insurance, Medicare becomes the primary insurance payer, and the FEHB program health plan will be the secondary insurance payer (Medicare Supplemental insurance). Medicare pays on average 60 to 80 percent of a Medicare beneficiary’s doctor and hospital bills.

The other 20 to 40 percent is paid by the Medicare Supplemental Insurance. A federal retiree enrolled in the Original Medicare may want to consider changing the type of FEHB insurance they have to reflect the fact that the FEHB insurance is secondary insurance. For example, if before enrolling in Medicare, the retiree was enrolled in an FEHB “low deductible” (and therefore more costly) health insurance plan, then after enrolling in Original Medicare, he or she may want to consider enrolling in an FEHB “high deductible” health insurance plan in which the premiums are less expensive. Or switch from a “standard” coverage to a “basic” coverage health insurance plan.

A federal retiree need not wait to switch until the next FEHB open season (held every year from the second Monday of November until the second Monday in December) in order to change his or her FEHB health insurance plan. Enrolling in Medicare is considered to be a “life event.” The retiree is therefore allowed to change his or her FEHB insurance within 30 days of enrolling in Medicare. In so doing, the retiree will be decreasing the amount of his or her monthly FEHB premium expense.