For the first time in a decade, the income brackets used to determine Medicare premium surcharges for high-income retirees will be indexed to inflation starting Jan. 1. As a result, some retirees may experience a reduction in their Medicare surcharge costs next year.
Beginning Jan. 1, the income related monthly adjustment amount brackets used to determine high-income surcharges for individuals and married couples will be indexed to the consumer price index based on the 12-month CPI change from September 2018 through August 2019.
In August, inflation increased 1.7% over the previous 12 months, according to the CPI data released last Thursday.
As a result, the income brackets used to determine Medicare surcharges in 2020 will increase by 1.7%, rounded to the nearest $1,000.
In general, that means income tiers will increase by $1,000 to $3,000 for individuals and by $2,000 to $6,000 for married couples filing jointly, according to a new analysis by HealthView Services, a leading provider of retirement health care cost data for the financial services industry. Medicare premium surcharges for 2020 will be based on income reported on 2018 federal tax returns.
Currently, there are six income tiers that determine high-income surcharges for Medicare Part B, which covers doctors' fees and outpatient services, and Medicare D, which covers prescription drugs.
Individuals with modified adjusted gross income of $85,000 or less, and married couples with joint MAGI of $170,000 or less are not subject to IRMAA surcharges in 2019. They pay the standard Medicare Part B premium of $135.50 per month. MAGI includes adjusted gross income plus any tax-exempt interest from municipal bonds.
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In 2019, individuals with incomes above $85,000 and married couples with joint income above $170,000 pay combined Medicare premiums and surcharges ranging from $189.60 per month to $460.50 per month per person.
The income thresholds that determine who pays the Medicare surcharges have been fixed at their current levels since 2011. As a result, a growing share of beneficiaries have been subject to the income-related premiums over this time period.
But in 2020 and subsequent years, the income thresholds will be indexed to general price inflation, except for the top-level income thresholds of $500,000 for individuals and $750,000 married couples filing jointly that were added in 2019. Those top tiers will be indexed to inflation starting in 2028.
HealthView's new white paper analyzes the impact of indexing through several case studies. For example, a single, healthy 65-year-old woman who lives to age 89 with $100,000 in current annual income and starts retirement in the second IRMAA income tier ($85,001-$107,000 in 2019) would save more than $50,000 on the surcharge over her lifetime with inflation indexing, according to the white paper. Her lifetime surcharge would be $201,432, compared to $253,516 without indexing.
"Lower surcharges from indexing seem like welcome news," said Ron Mastrogiovanni, CEO of HealthView Services.
But he warned that reduced revenues from Medicare surcharges as a result of indexing could put added pressure on the Medicare Trust Fund, which is expected to run dry in 2026 unless Congress acts.
"We believe that given pressure on the Medicare Trust Fund, retirees should expect additional changes and cost shifting to make up for lost revenue," Mr. Mastrogiovanni said.
The white paper also highlights how important it is for advisers and clients to understand the impact of required minimum distributions on surcharges and other events that can impact MAGI in retirement, as well as the opportunities to manage and even reduce surcharges by incorporating financial products in portfolios that don't count toward MAGI.
For example, distributions from Roth IRAs and Roth 401(k)s are tax-free, as are distributions from health savings accounts used to pay for qualified medical expenses in retirement. Distributions and loans from cash value life insurance, proceeds from a reverse mortgages and direct qualified charitable distributions also do not affect income taxes.
Although the Centers for Medicare and Medicaid Services have not yet announced new Part B premiums for 2020, the latest Medicare Trustees' Report forecast an increase of $8.80 per month in the Medicare Part B premium in 2020, to $144.30.
In addition, high-income premium surcharges in 2020 will be based on the following new IRMAA brackets for individuals, according to the HealthView Services analysis.
|2020 brackets||2019 brackets|
|1st tier||$86,000 or less||$85,000 or less|
|6th tier||Above $500,000||unchanged until 2028|
The new 2020 brackets for married couples filing jointly will be as follows, according to HealthView Services.
|2020 brackets||2019 brackets|
|1st tier||172,000 or less||$170,000 or less|
|6th tier||Above $750,000||no change until 2028|