If you are at or nearing Medicare age, you are well aware of its underlying complexities. We frequently work with clients as they navigate this program – but always recommend the inclusion of a Medicare insurance advisor/broker as well, given the intricacies and considerable nuances.

One such nuance that a client just ran across this week is IRMAA, or Medicare Income-Related Monthly Adjustment Amount. She wanted to understand what this was and why she was being charged the added premium. It was a great question and one I know will apply to others, so I thought it would be a perfect topic for this week.

Before we jump into the specifics of IRMAAs, let’s back up and cover a few Medicare basics.

Medicare Basics

Medicare is a US government program that provides health insurance protection when you are over 65 (or sooner if you are disabled or have chronic kidney disease).

Medicare is broken into four “parts” which are described at a very high level below (again – this is a summary, please consult an advisor for detail as it relates to your specific circumstance)

• Part A is called “hospital insurance” and covers hospital room and board and other services. If you have worked in the US, you and your employer(s) have paid into Medicare Part A over time via your Payroll (FICA) taxes, so it is “free” for most workers once you reach Medicare age. (If you don’t meet work requirement, premiums will apply)

• Part B is called Supplemental Medical Insurance and covers medical bills inside and outside of the hospital, such as visits to doctors office and some inpatient care. Part B is paid for by the Medicare participant either by check/ACH or more commonly, as a deduction from social security benefits. It is means adjusted to income, so this is where IRMAA comes into play

• Part C consists of Medicare Advantage plans. These private insurance plans approved by Medicare essentially reinforce and replace Part A and B’s services and often Part D and other additional services as well. (Alternative is to obtain a Medicare Supplement policy that covers the gaps in Medicare without quite as many features as Advantage plan)

• Part D is Medicare provided drug coverage, also available from private companies (Note, Part D also impacted by IRMAA but this article will focus on Part B)

Part B and IRMAA

As noted above, a premium is paid to Medicare for Part B coverage. This premium is indexed to your modified adjusted gross income on your tax return on a two year lag (ie: IRMAA you’ll pay in 2022 is based on 2020 income tax numbers).

In 2022, the standard Part B premium (paid no matter your income level) is $170.10 per person. However, if your income is above the levels set by Medicare, you will pay more (known as Income Related Monthly Adjustment Amount, or IRMAA).

Here is the full chart of adjustments for 2022. As you can see, as a single filer, adjustments start at $91,000 and for married couple, adjustments kick in above $182,000. These adjustments can become very material, with the highest IRMAA adjustment amount being ~$400 per month per person.

As noted above, IRMAA is based on your modified adjusted gross income (MAGI). So let’s refresh what is included in MAGI.

It includes all income sources – wages, investment income, capital gains, business income, retirement income (like pensions), alimony, rental income, and distributions from pre-tax IRAs as examples. This amount is then “adjusted” for certain expenses you can deduct on your taxes such as health savings account contributions, pre tax IRA deductions, and student loan interest as examples.

Few Things to Keep in Mind Re: IRMAA

Remember its purpose – first and foremost, I think it’s important to remember IRMAA’s purpose. It is a way for the government to means adjust Medicare – charging more to individuals who earn more. If you are paying an IRMAA adjustment, you have earned more in a recent period and can likely afford to pay a bit more premium

Do what you can to manage it – In some cases, you can’t do anything about your MAGI – if you have a set salary or rental income, if you have a recurring pension, if you own mutual funds or other investments with large imbedded unrealized gains (that you therefore don’t want to sell) that pay meaningful dividends/capital gains, or if you have a one-off transaction generating a large gain (such as a business sale).

However, in some cases, you can manage your income. Perhaps you can split IRA distributions between traditional and Roth, allowing you to stay below MAGI limits. Or perhaps you can take some unrealized losses in taxable accounts to offset gains elsewhere. Do what you can, taking all factors into consideration

Time large income events – If you are approaching Medicare age, keep in mind that your income in the year you turn 63 will be the first one “in play.” So if you are planning a material income generation event (like sale of stock or IRA withdrawal/conversion), just keep that timing in mind. Of course, this is only one factor and all inputs need to be evaluated for any major event/transaction. However, all else equal, moving a large one-time income event to age 62 (or earlier) may be worthwhile. Again, consider ALL elements – not just IRMAA implications

Report Life Changes – Medicare is sympathetic to material changes in your life during the two years between the reporting of income in a return and the processing of the IRMAA. There is a form you can fill out – SSA44 – where you can report Life Changing Events. These changes include marriage, divorce,, death of spouse, work stoppage/ reduction, and a few others. By certifying a life change, Medicare may adjust your income and the resulting IRMAA.

As an example, consider an individual that retires just before turning age 65. His Part B premium in first year of Medicare will be based on his income from when he was 63 – which is likely much higher as prior salary (before retirement) would have been included.

By filing this form, Medicare will adjust and remove that salary amount. It can be a real game changer! But please note, there is no checkbox on the firm for outsized investment gains. If you have a big year in the market, Medicare likely won’t be inclined to help you out

Take it Year by Year – Keep in mind – the IRMAA is updated every year. If you do have an unusual event or year, you may not be happy about your added premium. However, if your income levels off the following year, your IRMAA will follow

Compare to Alternatives – Even at the highest level, a medicare part B premium is likely lower than a private pay policy premium – ask anyone paying for their own private policy prior to Medicare! Again, IRMAAs can be frustrating but sometimes, comparisons and knowing the alternative is much more costly can help ease that annoyance!

Like I said at the beginning, Medicare is definitely a puzzle! Hopefully this article helped explain IRMAA to some degree but as always, I strongly encourage you to consult with your various financial, tax, and insurance advisors regarding your own situation.

Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as Medicare or insurance advice and are not responsible for any actions taken based on this article. Consult your financial advisor before taking any actions as it relates to your own investment portfolio