Medicare Part A and Part B are the primary insurance coverage for many retirees. While people pay Medicare taxes during their working years based on their earned income, Medicare Part B insurance is not free during retirement years. In fact, the cost of Medicare Part B can even increase if you enroll in Part B late or if your earnings reach certain income levels. As you look ahead to Medicare Part B enrollment, be aware of the enrollment deadlines and consider how your income will compare to the income levels that trigger premium adjustments. In evaluating your situation, consider how retirement income planning can play a role in potentially avoiding the premium surcharges for Medicare Part B coverage.
Health care coverage during retirement can be a significant cost for people. Fidelity Benefits Consulting’s latest retiree health care cost estimate for a 65-year-old couple entering retirement is $275,000 in today’s dollars to cover medical expenses. For many people, Medicare is the primary health insurance coverage when they turn 65. Medicare Part A provides coverage for inpatient hospital, skilled nursing facility, hospice care, and eligible home health care. Medicare Part B provides coverage for medically necessary outpatient services, including doctor visits, durable medical equipment, lab tests, ambulance services, mental health care, and preventative services.
During your working years, the Medicare tax is based on your income: you pay 1.45% of your income and your employer pays an additional 1.45%. If you are self-employed, you pay both the employee and the employer portion of the tax, or 2.9%. One might think that because you pay Medicare taxes throughout your working years that Medicare coverage would not cost anything once you enroll in Medicare. Unfortunately, that is not the case.
Medicare Part A is funded from the aforementioned Medicare tax. If you have claimed Social Security benefits by age 65, you are automatically enrolled in Medicare Part A. At age 65, if you haven’t claimed Social Security benefits and don’t have coverage under an employer-sponsored plan, you will need to sign up for Part A coverage. Part A is premium free if you have worked at least 10 years or 40 quarters and paid Medicare taxes while working. If you have paid Medicare taxes for less than 40 quarters, you may still sign-up for Part A and pay a premium of up to $422 per month.
Medicare Part B is financed by the monthly premiums paid by those who are enrolled as well as out of the general revenues from the U.S. Treasury. When you enroll in Medicare Part B, you pay a monthly premium for your coverage. If you retire at 65, you have a 7-month window to enroll in Part B. The 7-month window begins 3 months prior to the month of retirement and ends 3 months after the month of retirement. In 2018, if you enroll on time, your premium will be $134 per month. If you stay employed past age 65 and continue to be covered by an employer-sponsored health insurance plan, the deadline for enrollment in Part B is delayed until you retire. At the retirement date, you have an 8-month enrollment period after you leave your job to enroll in Part B. Similarly, if you enroll on time, your premium will be $134 per month.
There are two situations that can result in higher Medicare Part B premiums during your retirement years. First, if you delay and miss the initial 7-month enrollment period or the delayed enrollment period if you continued to be covered under an employer-sponsored plan, a penalty of 10% for late enrollment will be charged and added to the standard Part B premium. The penalty must be paid every month for the balance of the years that you are covered by Part B. For that reason, be sure to know your deadline and enroll on time.
Second, your Medicare Part B premium can increase as a result of a high-income Part B premium surcharge, also known as an Income Related Monthly Adjustment Amount or IRMAA. The surcharge is based on your modified adjusted gross income (MAGI). MAGI is the adjusted gross income (AGI) on your federal tax Form 1040 plus any tax-exempt income. On reaching certain income thresholds, surcharges are triggered and added to the standard premium.
The following table summarizes the MAGI thresholds and related premium adjustment (IRMAA) amounts.
Referencing the table above, once your MAGI is more than $85,000 but less than or equal to $107,000 as a single person, or more than $170,000 but less than or equal to $214,000 as a married couple filing jointly, you will pay a premium surcharge of $53.50, resulting in a total Medicare Part B premium of $187.50 per month. Likewise, the surcharge amounts increase to $133.90, $214.30, and $294.60 as you reach higher income levels. As such, a high-income single person with a MAGI over $214,000, and a high-income couple with MAGI over $428,000 will pay a Part B premium of $428.60 per month or $5,143 annually per individual.
It is important to note that the income-related adjustment amount is recalculated each year. For example, one year you could be over the first MAGI threshold and incur a surcharge of $53.50. The following year your MAGI could fall below the first threshold so you would only pay the standard premium amount and no surcharge.
Additionally, when your Medicare Part B premium is calculated each year, it is determined based on your MAGI reported 2 years prior. So for 2018, your Part B premium is determined based on your 2016-reported MAGI, which is the latest year’s tax return that the Social Security Administration has provided to Medicare. If you are going to retire and enroll in Medicare Part B at age 65, be sure to do some income planning when filing your tax return at age 63. Take note of the MAGI thresholds to see if you are near an income level that will trigger a premium surcharge. If so, determine if there is any financial planning that you can do to avoid the additional surcharge.
Likewise, if you have a significant change in income during your retirement years, make a point to consider the impact that the change may have on your Medicare Part B premium. The potential impact of being assessed premium surcharges is another reason to develop an effective plan for withdrawing tax-deferred assets. Furthermore, developing a strategy that creates diversified retirement assets in taxable, tax-deferred, and tax-free accounts can provide some needed flexibility to possibly avoid additional Part B premium surcharges.
If you would like to further discuss your Medicare situation or could benefit from reviewing your withdrawal strategy for your tax-deferred accounts, please feel to reach out to Bill or me.