Retired clients are often surprised — and sometimes angry — when they receive a notification from the Social Security Administration that their monthly Social Security benefits will decline for the coming year. Naturally, those clients turn to their financial advisers for help.
The culprit? An increase in income one year can result in higher Medicare Part B premiums two years later. As Medicare Part B premiums are deducted directly from Social Security benefits, the result is a smaller net Social Security benefit.
Premiums for Medicare Part D drugs plans also increase when income rises, but those premiums usually are paid directly to the drug plan. However, you can choose to have Part D premiums deducted from your Social Security benefits, too.
Kyle Mostransky, a registered representative with Mostransky Financial Services in Huntington, N.Y., contacted me recently about one of his clients who received such a notice.
“She was receiving a certain amount of income from Social Security, and then in 2013 sold a property that increased her income that calendar year,” Mr. Mostransky wrote in an email. “She just received notice of a decrease in income from Social Security and was asking if she was able to go back to the amount she had prior to the home sale.”
Most retirees pay $104.90 per month for Medicare Part B, which covers doctors' visits and outpatient services. But higher-income retirees pay more. When modified adjusted gross income (MAGI), which includes all income on your tax return plus any tax-free interest, exceeds $85,000 per year for single individuals or $170,000 for married couples filing jointly, monthly Medicare premiums increase.
The income is based on your latest tax return. So a 2013 tax return filed in 2014 is the basis for the Medicare premiums paid in 2015. If your clients experience an increase in income this year, whether due to harvesting investment gains, selling a home, business or investment property, they could see their Medicare premiums increase and their net Social Security benefits decrease in 2017.
There are five Medicare premium brackets with surcharges ranging from $42 to $230.80 per month on top of the standard $104.90 per month premium. These are cliff brackets, meaning if you go over the income limit by just $1, you are going to pay the higher monthly premium all year long.
Mr. Mostransky was anxious to help his client and asked me for guidance in filling out Form SSA-44 to request a reduction in her Medicare premium. The only problem was his client doesn't qualify for a premium adjustment.
The key to qualifying for an income-related monthly adjustment amount, or IRMAA, is whether your income dropped because of a “life changing event” such as retirement, marriage, divorce or death of a spouse. Loss of an income-producing property due to a natural disaster or other event beyond the property owner's control is another qualifying life-changing event. Merely selling property is not.
I gave Mr. Mostransky the bad news that his client would not qualify for a Medicare premium adjustment in 2015 based on her higher income in 2013 that resulted from the sale of her home. (Although single homeowners can exclude up to $250,000 in gains from the sale of their primary residence and married couples can exclude up to $500,000 in gains from federal income taxes, profits above those levels are taxable).
I consulted Katy Votava, president of Goodcare.com, a consulting service that works with financial advisers and consumers concerning health care coverage, and she concurred.
“I agree that she does not qualify for the life changing event criteria to request a reduction in her IRMAA,” Ms. Votava told me via email. “In the absence of a life changing event, SSA will not use her 2014 MAGI to determine her 2015 charges. The 2014 income will be used for 2016 premium.”
Mr. Mostransky said the client expects to sell several more properties this year, netting more than $300,000. He wondered if that will affect her Social Security benefits in the future. Absolutely!
Ms. Votava suggested that the client squirrel away some of those profits to pay higher Medicare premiums in 2017. Given the anticipated profits from the sale of those properties, she is likely to be in the top Medicare premium tier for both Parts B and D.
The income brackets that determine Medicare premium adjustments are not adjusted for inflation, meaning more retirees could drift into the higher premium brackets each year. And those additional premiums are per person, so a high-income married couple could pay more than $670 per month just for Medicare Part B premiums, plus monthly supplemental Medigap insurance premiums that cover Medicare deductibles and co-payments. Medicare Part D prescription drug plan premiums are also subject to high-income surcharges ranging from an additional $12.30 to $70.80 per month.
Together those costs can add up to a huge out-of-pocket health care expense.
(Questions about Social Security? Find the answers in my ebook.)