A recent column, “What Is the Medicare Annual Enrollment Period and How Does It Affect Federal Retirees?” discussed the opportunities that federal retirees over age 65 and enrolled in Medicare have to enroll in Medicare Advantage plans.
In order to enroll in any Medicare Advantage plan, an individual must be enrolled in Medicare Part A (hospital insurance) and Medicare Part B (medical insurance). Medicare Part A is free (no monthly premium), a result of a Medicare Part A enrollee’s prepaying the premiums by working at least 10 years and having the Medicare Hospital Insurance Tax (HIT) withheld from his or her salary.
But Medicare Part B is not free. There is a monthly premium, usually deducted from an individual’s monthly Social Security check in order to pay the monthly Medicare Part B premium.
Each year the Center for Medicare and Medicaid Services (CMS) sends notices to Medicare Part B enrollees regarding what the cost of their Medicare Part B premiums will be in the following year. The amount to be paid by an enrollee is based on their previous year’s adjusted modified adjusted gross income (MAGI). The notices for 2024 should be sent out by CMS sometime in November 2023.
Therefore, now in October 2023 is a suitable time to discuss why during 2024 some Medicare Part B enrollees will pay the standard $174.70 per month premium while other enrollees pay more, as much as $594.00 per month.
The disparity in monthly premiums can result from an “income-related monthly adjustment amount,” (IRMAA).
For most of Medicare’s history, Medicare Part B premiums were the same for every Medicare Part B enrollee, regardless of his or her income. However, since 2007 following the passage of the Medicare Modernization Act of 2003, individuals with income exceeding certain thresholds pay more monthly for Medicare Part B. The 2010 Affordable Care Act imposed similar rules on higher income Medicare beneficiaries for Medicare Part D (Prescription Drug program).
According to CMS, approximately 7 percent of Medicare enrollees pay an IRMAA in addition to their standard Part B monthly premiums. The impact of the IRMAA can be particularly felt by individuals who have saved vigorously for their retirement. When retirement income strategies are being developed, it is important for individuals to be fully aware of the impact of IRMAA as part of the income planning process.
How IRMAA Works
Whether a Medicare Part B enrollee’s monthly premiums are subject to IRMAA depends on their modified adjusted gross income (MAGI). MAGI is determined by taking the enrollee’s previous year’s adjusted gross income (AGI) (shown on their federal income tax return) plus excluded foreign income plus nontaxable Social Security benefits plus tax-exempt interest and interest.
Those Medicare Part B enrollees with higher MAGI pay an added amount in premiums on a five income- tier increasing scale. The scale is a “cliff” scale. In particular, it only takes one dollar of additional MAGI to push an enrollee into a higher MAGI income tier, resulting in a higher Medicare Part B premium for that year. Table 1 and Table 2 present the 2024 Medicare Part B monthly premiums based on MAGI and tax filing status.
Table 1: Summary of 2024 Medicare Part B monthly premiums for single and married beneficiaries filing jointly with their spouse.
Table 2: Summary of 2024 Medicare Part B monthly premiums for high-income beneficiaries who are married and who lived with their spouse at any time during the taxable year and who file a married filing separate return.
The Two-Year MAGI “Lookback Period”
Since most individuals enroll in Medicare Part B at age 65, and there is a two-year lag between the reporting of MAGI and the imposition of IRMAA, planning for IRMAA ideally should start when an individual is age 63 or earlier.
CMS announces the costs that enrollees will pay in October of each year. CMS then sends in November an annual notice to each Medicare Part B enrollee of the upcoming year’s Part B monthly premiums with any associated IRMAA surcharges imposed for the upcoming year. This notice is referred to as an “initial determination” notice.
Premiums stated in the initial determination notice are based on MAGI from the prior year. In particular, the MAGI is coming from enrollee’s federal income tax return one year earlier.
For example, Medicare Part B premiums for 2024 will be based on the Medicare Part B enrollee’s MAGI from 2022, reported on the 2022 Federal income tax return filed in spring 2023. Next year, for determining 2025 monthly Medicare Part B monthly premiums will be based on a Part B enrollee’s 2023 MAGI as shown on the enrollee’s 2023 federal income tax return (filed in spring 2024).
As shown in Table 1, the standard Medicare Part B premium for 2024 will be $174.70. Higher income Part B enrollees can pay anywhere from $244.60 to $594.00 per month for Part B monthly premiums. For a married couple in which both spouses are enrolled in Part B, the IRMAA hits twice as much.
The following example illustrates:
George and Cecelia, both aged 67 and married, are each enrolled in Medicare Part B. They sold their vacation home during 2022 and the capital gain resulting from the sale, together with their other income during 2022, resulted in George’s and Cecelia’s 2022 MAGI equaling $258,010. The second Medicare Part B income tier for a married couple filing their taxes jointly starts at $258,001 of 2022 MAGI. Both George and Cecelia have to pay $349.40 per month for their monthly Part B premiums, or an additional $4,180.80 for the year 2024. Had their 2022 MAGI equaled $258,000 ($10 less), each would have to pay $244.60 per month. The additional $10 of MAGI during 2022 has resulted in George and Cecelia paying an additional $2,503.20 for the year 2024.
Requesting a Decrease of Medicare Part B Premiums
Many financial-related events can happen in the two-year period after MAGI was determined to cause a spike in premiums caused by the IRMAA. In the example above with George and Cecelia, George and Cecelia may be paying steep Medicare Part B premiums from a modest retirement income without the cash flow from the sale of their vacation home.
Fortunately, a request for a new initial determination may at least partially reduce the amount of the IRMAA surcharge. To request a new initial determination, a Part B enrollee needs to complete and submit Form SSA-44 (Medicare Income-Related Monthly Adjustment Amount – Life Changing Event). This can be downloaded here. Proof that income has changed since the initial determination must be provided. The enrollee should FAX or mail the completed Form SSA-44 with supporting evidence to a local Social Security office.
Qualify life-changing events include:
(1) Marriage, divorce or the death of a spouse;
(2) Earned income (salary/wages) stoppage from retiring or reduction in work hours;
(3) Loss of income-producing property but not due to the sale or transfer of property;
(4) Loss of pension income; and
(5) Employer settlement payment due to employer’s bankruptcy or reorganization.
All IRMAA-reduction requests from this list must be substantiated by furnishing proof that a life-changing event has occurred and that MAGI has subsequently gone down since the tax year on which the initial determination was based. Medicare enrollees who have recently divorced should be prepared to submit a copy of the divorce decree and proof that income has subsequently decreased.
Other potentially viable causes for successfully requesting a new initial determination are a change in tax filing status or an error in data provided by the IRS to the SSA. If any of these apply, Medicare enrollees can contact the SSA by making an in-person or a phone appointment to discuss the situation.
Part B Monthly Premium Modifications and Refunds
Once the request and a completed Form SSA-44 and accompanying documentation is submitted, the sooner surcharges can be lifted or reduced, and a refund of excess premiums can be paid to the Part B enrollee. It is important that in the case of a married couple in which both spouses are enrolled in Part B, each spouse must file Form SSA-44 separately to have the surcharges removed.
If the enrollee’s request is approved, the SSA will send a confirmation letter. An enrollee making a successful request can expect surcharges to be adjusted and refunded within 30 days of receiving the approval notice.
However, according to the SSA, one-time MAGI spikes from certain events such as capital gains, property sales, IRA withdrawals or Roth IRA conversions are not grounds for requesting a new initial determination. That said, such a spike will lead to a Medicare premium increase, but likely for only one year. This assumes the MAGI subsequently returns to lower levels. An appeal can be requested in writing via Form SSA-561.pdf, available here.
Medicare Part B Premium Planning
The following are some suggestions for individuals to avoid IRMAA surcharges:
• The process to avoid IRMAA surtaxes should start before an individual becomes age 63.
• Converting pre-tax retirement accounts such as traditional IRAs and traditional TSP, to Roth IRAs in years in which income is low in order to build a source of potentially tax-free distributions. Ideally, full conversion of traditional retirement accounts to Roth retirement accounts should happen at least three years prior to Medicare enrollment if the converted amount would otherwise bump the future enrollee into IRMAA territory.
• Those individuals aged 70.5 and older who are charitably inclined should consider taking advantage of qualified charitable distributions (QCDs) from traditional IRAs to reduce MAGI and satisfy all or a portion of any required minimum distributions (RMDs).
• Withdraw from Roth IRAs and designated Roth accounts or taking loans from cash value life insurance in years in which MAGI may increase to the extent that IRMAA may occur, or
• Before making withdrawals from a pre-taxed retirement account such as the traditional TSP in order to make a large purchase at age 63 or older, consider “straddling” the withdrawal over two tax years to reduce or eliminate the impact of IRMAA.