There's a new Grinch in town and her name is IRMAA. That's shorthand for the Income-Related Monthly Adjustment Amount notices that the Social Security Administration sends at the end of each year to inform Medicare enrollees how much they will pay in premiums the following year.
This year's IRMAA notices are dampening the holiday spirit of a lot of retirees.
One reader wrote to me about the "unconscionable" increase in the Medicare premiums that his 84-year-old father will have to pay next year resulting in a 23% reduction in his net Social Security benefit in 2018. Unfortunately, the premium amounts cited in his IRMAA notice are correct based on new income tiers that take effect next year.
PREMIUMS and COLAs
In 2018, most Medicare enrollees will pay $134 per month for Medicare Part B, which covers doctors' visits and outpatient services. In most cases, Medicare Part B premiums are deducted directly from monthly Social Security benefits.
For many retirees who had been paying a $109 per month premium for each of the past two years, the new Medicare Part B premium represents a $25 per month increase. The premium hike will virtually wipe out the 2% cost of living adjustment in their Social Security benefits next year.
Some Medicare enrollees who were not protected by the "hold harmless provision" have already been paying $134 per month for Medicare Part B in 2017 so their premiums will remain the same in 2018. They will see a net 2% increase in their Social Security benefits next year.
But high-income retirees, defined as individuals with incomes above $85,000 and married couples with incomes topping $170,000, will pay even more next year for Medicare Part B and Medicare Part D prescription drug coverage. These are the people who receive IRMAA notices.
There are five income tiers based on modified adjusted gross income (MAGI), which includes adjusted gross income from the latest tax return plus any tax-exempt interest. Medicare Part B and D premiums in 2018 are based on 2016 tax returns. If MAGI exceeds the top limit of an income bracket by just $1, clients will be catapulted into the next tier.
Premium surcharges in 2018 range from an additional $53.50 per month to an extra $294.60 per month per person—the same level as in 2017. That is on top of the standard $134 per month Part B premium.
But upper income tiers that trigger those premiums have changed, meaning some retirees will pay even more for Medicare Part B and D next year even if their income remained the same. Those affected by the higher surcharges in 2018 include individuals with incomes that topped $133,500 in 2016 and married couples with incomes that exceeded $267,000 in 2016.
In the case of the reader's elderly parents, the sale of a house in 2015 increased their income from $70,000 to $267,000. The higher income boosted the Medicare Part B and D premiums in 2017 which were deducted from their Social Security payments. As a result, the father's net Social Security benefit declined from $1,554 per month to $1,361.80 per month in 2017—a loss of more than $2,000 a year in net Social Security benefits.
The following year, the father sold some bonds, boosting his income to over $276,000 in 2016. With the new income triggers, that pushed him in the fourth income tier, triggering even higher premiums for Medicare Parts B and D in 2018. His net Social Security benefit will drop to $1,193.20 per month—a decline of more than $4,300 per year since 2016.
In some cases, clients can appeal a Medicare premium surcharge if they have experienced a life-changing event that caused their income to decrease or if they can prove that the income information that Social Security used to determine the IRMAA premium is incorrect or outdated.
The Medicare Rights Center offers a free downloadable guide for financial advisers to help their clients appeal Medicare premium surcharges.
However, a one-time boost in income due to the sale of a vacation home or large portfolio distribution does not qualify as a life-changing event and would boost the client's Medicare premium for at least a year.