Understanding the Premiums You Pay for Medicare

Authored by D. Scott Foret, Senior Financial Advisor, and Adam Larkin, Associate Financial Advisor

As retirement approaches, one consideration that looms large is that of health insurance and its associated costs. During your working years, this is typically provided, at least in part, by your employer(s). So, once you are no longer employed, where will it come from and how will you pay for it?

What is Medicare?

Medicare is a federal government program that provides medical coverage to those aged 65+. This program is funded by Social Security and Medicare taxes that are generally paid from your income. Medicare is made up of four parts: Part A, B, C, and D.

Simply put, the four parts cover four different medical needs. Part A provides inpatient hospital coverage (which is typically provided for free for those that have paid into the program). Part B provides outpatient medical coverage (this cost is variable depending on your income). Part C gives an alternative option to receive Medicare benefits. Part D covers prescription drugs.

We will focus our attention on how and why the variable costs of Part B are determined.

What is IRMAA?

IRMAA, the Medicare income-related monthly adjustment amount, refers to Part B premiums that are determined by your two-year prior tax returns (i.e. in 2023, they will be determined based on your 2021 tax filing). If your income, as of two years ago, exceeds a given level, a surcharge will be applied to your Medicare premiums.

The IRS uses your “modified adjusted gross income” (MAGI) to determine your IRMAA premiums. MAGI is a combination of your adjusted gross income and your tax-exempt interest (such as interest from Series EE/Series I bonds, municipal bonds, treasury securities, or other bonds issued by government entities). Note that exceeding the bracket limit by as much as a dollar will push you into a higher bracket, and thus a higher monthly premium.

The 2023 IRMAA Premiums are as follows:

Once you’ve become eligible and have enrolled in Medicare, the Social Security Administration will mail you a predetermination notice each year explaining that IRMAA will apply and how they came to that determination. IRMAA surcharges are recalculated every year. This will be based on the income level on your tax return from two years ago. As a result of the lookback, it takes two years for your premiums to adjust to your reduced income levels in retirement. Ultimately, you will be refunded for the amount you overpaid, but it will take some time for that to work itself out based on the two-year lookback. To avoid having to potentially overpay your premiums, you can file an appeal. This process is explained in more detail below.

Appealing IRMAA

If you feel that the information that was used to make this calculation was incorrect, you can file an appeal or a “reconsideration.” In doing so, you’ll have to prove that your tax return was either out of date or that the data used contained an error.

There are also income-related exceptions that may make you eligible for an appeal. You may appeal if your income has decreased significantly as a result of the death of a spouse, marriage, annulment or divorce, reduction or loss of work, loss of income from income-generating property, and reduction or loss of certain types of pension income. To file an appeal, you would need to complete a form SSA-44, upon which you would have to provide proof of your life-changing event, as well as the effect that it will have on your income.

Managing Income

Because the Medicare premiums are determined based on a given tax-year's income level, you might be able to manage your income level in that year with these premium income levels in mind. This might include deferring certain receivable income until the next tax year, not realizing certain types of gains on the sale of assets, or possibly even not taking on a new contract for work until after January 1^st. Different roles or income-generating activity are more easily managed on a specific year basis than others.