Note: Investors below age 65 may skip this assuming it does not apply to them or Medicare is too far away. Be aware that over time the portion of our national budget dedicated to entitlement spending for Medicare, Medicaid, Affordable Care, and Social Security is growing. As that portion of our budget grows, means testing is becoming more prominent.

Many of those aged 65 or older with higher incomes are sometimes surprised at the amount they have to pay for Medicare medical insurance (Part B) and their Medicare prescription drug coverage (Part D). Most people didn’t realize Medicare started means testing in 2007 to determine your Part B premium. In 2011 Medicare also began means testing for Part D.

Means testing is another way of saying they are assessing your annual income. Those with higher incomes will be forced to bear a larger portion of Medicare expenses.

Medicare uses a cost sharing formula. The intent is a tax payer will pay approximately 25% of their Medicare premium. The government pays the other 75%.

The shared cost for those impacted by means testing ends up rising from 25% to 35%, 50%, 65% and potentially 80% if their income meets the highest income threshold. Accounting for healthcare costs is a critical component of your retirement financial plan. How much will you pay for Medicare?

 

How does Medicare assess my income?

The income reported is taken directly from your 1040 tax return filed with the IRS. They use your Modified Adjusted Gross Income (MAGI) number. The MAGI is essentially your Adjusted Gross Income (AGI) from line 37 of your 1040 added to line 8b (any tax-exempt income). Note, these are gross income numbers. Unlike on your tax return they are not reduced by personal exemptions or deductions.

How often do they review my income?

This is reviewed annually. Typically there is a two-year time lag. For example, I am writing this in 2016, but Medicare likely reviewed your 2014 income (reported on your 2015 tax return to the IRS) to determine your 2016 premiums.

What factors impact my income for the purposes of determining my Medicare premium?

Medicare is most retirees second largest expense. How much will you pay?

How much is reasonable to pay for Medicare premiums?

There are a number of potential situations or events that could increase or decrease your income from year to year. For example the following situations may impact your Medicare premium:

  1. If you retire near age 65 with high earned income, your initial premiums may be initially higher until the 2 year time lag of tax returns shows a lower income in retirement.
  2. A large Roth IRA conversion could increase income.
  3. If you experienced a large amount of capital gains via stock sales or a property sale, you may have a higher MAGI.
  4. If you sold stock options near – or in -retirement your income could rise.
  5. If you take large IRA distributions in retirement, or beginning at age 70 ½ when IRA distributions are mandatory.
  6. If you receive large deferred compensation distributions in retirement.
  7. If you receive a sizeable annual pension distribution.

Do they inflation adjust the income thresholds?

The Affordable Care Act of 2011 eliminated inflation adjustments from 2011 to 2019. Thus the income threshold brackets will remain the same for a period of time longer. The end result being more and more Medicare recipients will potentially be forced to pay higher premiums as their income slowly increases via inflation and they are pushed into the higher Medicare income threshold brackets.

What are the additional Medicare Part B and D charges by income threshold?

Individual MAGI

Married Joint MAGIPart B Monthly PremiumPart D Prescription Drug Monthly Premium

Total (B + D) Over Base Premiums Monthly

<$85,000

<$170,0002016 standard premium = $121.80

Your plan

premium

Up to $107,000

Up to $214,000Standard premium

+ $48.70

Your plan premium

+ $12.70

+$61.40

Up to $160,000

Up to $320,000Standard premium

+ $121.80

Your plan premium

+ $32.80

+$154.60

Up to $214,000

Up to $428,000Standard premium

+ $194.90

Your plan premium

+ $52.80

+$247.70

>$214,000

>$428,000Standard premium

+ $268

Your plan premium

+ $72.90

+$340.90

How do I pay for these additional monthly charges above base premiums?

The additional monthly charges will be deducted from your monthly Social Security check. If you are not yet receiving Social Security benefits, you will receive a separate bill for these charges each month.

What if I experience a life event that causes my income to go down?

On a case by case basis Social Security will consider reducing the monthly amount you pay over the base premium for certain life events. Those events are:

  1. You were married, divorced, or widowed.
  2. You or your spouse stopped working or reduced your work hours.
  3. You or your spouse lost income producing property due to disaster or other event.
  4. You or your spouse had an employer’s pension plan impacted by termination, reorganization, or cessation.

How do I confirm how much of a premium I will have to pay?

The Social Security Administration will automatically send you a letter notifying you of any additional amounts above base premium(s) you may be charged for Part B and Part D, with an explanation of their determination.  

What if I disagree with Social Security’s decision about my monthly extra charges?

You have the right to appeal any of Social Security’s decisions by doing so in writing and filing a “Request for Reconsideration” (Form SSA-561-U2). You can find the appeal form online at www.socialsecurity.gov/online, request a copy through your local Social Security office, or call them directly at 1-800-772-1313.

 

About The Author

Dave Fernandez, CFP® is a guest contributor to the RetireWire blog. He’s a native of Arizona and has over 20+ years of experience in the financial services industry. He started his financial services career in 1995. As a NAPFA Registered Financial Advisor Dave owns a fee only financial planning and wealth management firm in Scottsdale, Arizona called “Wealth Engineering”.