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Be Prepared for Higher Medicare Premiums

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Be Prepared for Higher Medicare Premiums

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Clients may not realize that Medicare premiums can change from year to year based on their reported income. If they had a good year in 2014, they may see higher premiums in 2016.

Now that tax returns for 2014 have been filed and forgotten, you might take one more look at them for your over-­63 clients to see how their 2014 income will affect their 2016 Medicare premiums. If adjusted gross income (AGI) plus tax-­exempt interest is over $85,000 for single taxpayers or $170,000 for married couples, they will be subject to the income related monthly adjustment amount (IRMAA) in addition to their regular Part B and Part D premiums.

Everything that goes into AGI will impact their Medicare premiums. This includes extraordinary capital gains, distributions from IRAs and qualified retirement plans (but not Roth distributions) and bonuses from work, in addition to salary and other regular income. It may not seem fair, but a one-­time jump in income from the sale of a business or other asset will trigger the IRMAA, with no grounds for appeal unless the client experienced one of the specific life-­changing events shown on Form SSA­44: marriage, divorce, death of a spouse, work stoppage, work reduction, loss of income-­producing property, loss of pension payment, or receipt of an employer settlement payment.

The following table shows the IRMAA for 2015 based on the income reported on 2013 tax returns. The amounts may be different next year; 2016 premiums, which look to 2014 tax returns, will be announced in October. Note that these are cliff brackets. If income is $1 over the threshold, the client will pay the higher amount.

Medicare Part B and Part D 2015 monthly premium
MAGI: Single MAGI: Joint Part B monthly premium Part B IRMAA Part D IRMAA Total Medicare premium
≤$85,000 ≤$170,000 $104.90 $0.00 $0.00 paid to Medicare +
plan premium paid
to insurer
$104.90
$85,001- $107,000 $170,001- $214,000 $104.90 $ 42.00 $12.30 paid to Medicare +
plan premium paid
to insurer
$159.20
$107,001- $160,000 $214,001- $320,000 $104.90 $ 104.90 $31.80 paid to Medicare +
plan premium paid
to insurer
$241.60
$160,001- $214,000 $320,001- $428,000 $104.90 $ 167.80 $51.30 paid to Medicare +
plan premium paid
to insurer
$324.00
>$214,000 >$428,000 $104.90 $230.80 $70.80 paid to Medicare +
plan premium paid
to insurer
$406.50

 

When clients first enroll in Medicare, at age 65 or at retirement if remaining on an employer plan after age 65, they will receive a letter from the Social Security Administration (SSA) explaining their Medicare premium.

Each year thereafter, SSA will review tax returns from two years prior and adjust the premium as necessary. If income goes down, the premium will go down. This might suggest a strategy of bunching income into one year—after biting the bullet and paying high premiums two years hence, premiums would go down the following year.

However, this premium­-saving strategy would have to be balanced against the actual tax impact, including the alternative minimum tax (AMT), the 3.8% surcharge on investment income, and the “PEP” and “Pease” limitations on the personal exemption and itemized deductions.

Let your clients’ tax advisors sort it all out. They can guide you and your clients in decisions to sell appreciated assets, take large IRA distributions (perhaps for the purpose of Roth conversions), or otherwise recognize an extraordinary amount of income in one or more years.

Your job is to remind CPAs and clients that tax decisions also impact Medicare premiums. A couple in the top tier could pay as much as $600 a month—over $7,000 a year—in additional Medicare premiums if they have an extraordinarily high-­income year.

The future of the IRMAA

The trend in legislative “offsets,” which is government-­speak for how new programs will be funded, is to extract more money out of higher-income people. An example is the new “doc fix,” which permanently repealed the outmoded formula by which doctors are paid by Medicare.

Since 2003, Congress has staved off a drastic reduction in payments to doctors by overriding the formula one year at a time. Each patch averted the need to address the long-­term cost of a permanent fix.

This year, with doctor payments set to fall by 21% on April 1, Congress passed a permanent fix. Doctors will get a 0.5% bump in each of the next five years as Medicare transitions to a payment system designed to reward physicians based on the quality of care provided rather than the quantity of procedures performed, as the current payment formula does.

The new payment system will add $141 billion to the federal deficit over the next 10 years, according to the Congressional Budget Office. To help offset some of the costs, starting in 2018, the IRMAA will be going up for individuals with incomes over $133,500 and couples with incomes over $267,000. To understand how much more your clients might pay for Medicare premiums in the future, let’s look at how Medicare premiums are determined.

Determining Medicare premiums

Each year, the Centers for Medicare and Medicaid Services (CMS) sets the Part B premium amount based on projected health care costs for the coming year. Most beneficiaries pay 25% of this amount, while the remaining 75% is paid out of general revenues.

If we take the $104.90 base premium for 2015 and divide by .25, we see that the full, unsubsidized Part B premium would be $419.60. About 6% of beneficiaries—those with incomes over $85,000 if single or $170,000 if married—pay more than the 25% share of this premium. Their share may be 35%, 50%, 65%, or 80%, depending on their income.

 

MedicareOverviewIllustration

Starting in 2018, beneficiaries with a modified adjusted gross income of $133,500­$160,000 ($267,000­$320,000 for a couple) will pay 65% of their premium costs for Part B (outpatient services) and Part D (prescription drugs), up from 50% now. Those earning $160,000­$214,000 per year ($320,000­$428,000 for couples) will see their share of the premiums increase to 75% from 65%.

Based on the 2015 full premium of $419.60, a 15% increase (to 65% from 50%) would raise premiums for those in the $133,500­-$160,000 tier ($267,000­-$320,000 for couples) by $62.94 to $272.74. For those in the $160,000­-$214,000 tier ($320,000­-$428,000 for couples), premiums would rise by $41.96 to $314.70.

By the time these increases are put into effect in 2018, Part B costs will likely be higher. Note that Medicare premiums do not go up by an established inflation index such as the Consumer Price Index (CPI), which determines the Social Security cost-­of­-living adjustment (COLA).

Rather, premiums are determined each year by the actual cost of care as projected by CMS. That’s how the Medicare base premium has escalated to $104.90 per month from the $3 per month when Medicare was first established in 1965.

Health care costs have risen much faster than the rate of inflation.

Looking toward the future, we might also expect the income tiers to be lowered so that more people are paying the IRMAA. Currently, about 6% of Medicare beneficiaries pay the IRMAA. By 2020, when the income tiers are due once again to rise with inflation (after being frozen through 2019 under the Affordable Care Act), the share of beneficiaries paying the IRMAA is expected to rise to 8.3%. Under Obama’s 2016 budget proposal (which is not law) the income tiers would remain frozen until 25% of beneficiaries are subject to the IRMAA.

Social Security and Medicare go together

Some of your clients may not realize that if they apply for Social Security, even if they suspend their benefit under the increasingly popular file-­and-­suspend strategy, they will automatically be enrolled in Medicare Part A, retroactive six months. This is not optional. It has been the law since 1993, when the federal government changed the procedure by which Social Security and Medicare benefits are administered.

Unless clients are contributing to a health savings account (HSA), there is no downside to being enrolled in Part A. It’s free for anyone who qualifies for Social Security under their own or a spouse’s work record, and it offers better hospitalization benefits than many employer plans. But if the employer plan is a high-­deductible health plan paired with a health savings account, contributions to the HSA would have to stop. Medicare beneficiaries are prohibited from contributing to an HSA.

We have analyzed the trade-offs between the extra cash benefits that may come with the file­-and­-suspend strategy (such as four years of spousal benefits) versus the tax and insurance benefits of maintaining an HSA. It pretty much comes down to who is making the contributions to the HSA.

If the beneficiary is making the contributions, the cash payments from Social Security are worth more than the tax benefits from the additional HSA contributions (the existing HSA may continue to grow tax free). But if the employer is making the contributions, it’s a more complicated analysis and requires some assumptions about health care usage versus the tax-­free buildup of cash in the account.

One advisor I know was faced with this very situation. Wanting to take advantage of the spousal benefits, he asked his employee benefits manager if there was an alternative plan. There was: The advisor switched from an HSA to a flexible savings arrangement (FSA) and was able to keep the Social Security, the Medicare Part A, and the employer plan.

The mandate applies to Part A only. Part B is optional and has its own set of rules. Every American citizen and legal resident over the age of 65 may enroll in Part B and maintain coverage as long as they pay the monthly premiums. If receiving Social Security, premiums are deducted from the benefit check. If not, beneficiaries are sent a quarterly bill and may pay by check or credit card.

Because Medicare is the primary payer for people over 65 unless they are covered by an employer plan that covers 20 or more employees, people turning 65 pretty much have to sign up for Medicare Part B. If they don’t, their medical bills may not get paid. Medicare is the primary payer, but only if the patient is enrolled in Medicare. And the secondary insurer (such as COBRA, a retiree plan, or a small employer plan that covers fewer than 20 employees) won’t pay until Medicare pays. Furthermore, for every 12­-month period a person goes without Part B after age 65, a permanent 10% penalty will be added to the premium.

As more baby boomers continue to work past age 65, confusion reigns. Employees are not receiving proper guidance from their workplace or health plan representatives. Many are not being told they need to sign up for Medicare to avoid coverage gaps and late-­enrollment penalties. Others are encouraged to take COBRA, not realizing that by the time the COBRA coverage ends the special enrollment period for penalty­-free Part B enrollment has passed.

It is recommended that every person turning 65 call the Social Security Administration (800-­772-­1213) to ask if they need to enroll in Medicare Part B. They may not always be given correct advice (some SSA representatives are confused, too), but if the misguidance comes from an SSA representative (as opposed to a health plan representative or employee benefits administrator), they can seek equitable relief.

Information in this article was provided by by Horsesmouth.com

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