As people plan and budget for Medicare, they are frequently told that the Medicare Part B monthly premium is $170.10 (for 2022). And for most people, that is what they will pay.
However, for people with incomes above $91,000 (or $182,000 as a couple), the Part B premium faces the “Income Related Monthly Adjustment Amount,” or IRMAA. This additional Medicare premium is based on what the IRS reports as their income.
Because of how it’s designed, IRMAA often comes as an unpleasant surprise after seniors have reached age 65, have signed up for Medicare Part B and maybe even retired.
Here’s why that happens: in deciding if you owe IRMAA, Medicare looks back at your income two years earlier instead of your current income. So the ideal time to know about IRMAA would have been at least two years earlier – when you could still have made efforts to defer certain income or implement strategies that lowered your tax return.
So, what do you need to know?
What is IRMAA, and how does it work?
Medicare Part B covers most of your doctor’s services. And the federal government assumes that you can afford to pay higher premiums if you have a higher income.
In some cases, that higher income could be a one-time thing. For example, as you approach the end of your career, you might receive a lump sum payment that covers deferred compensation, a bonus or accumulated sick and vacation days. Maybe you sell your house as you downsize in preparation for retirement and take a one-time capital gain. Or maybe you adjust your investment portfolio to provide the income you expect to have after you retire.
Whatever the case, anything that pushes your Modified Adjusted Gross Income (MAGI) above the threshold can trigger IRMAA. Yet the impact is not immediate. IRMAA is designed to reflect your income two years earlier because of reporting delays. The income you earn one year is reported to the IRS by the following April. Then, the IRS reports it to Medicare, which must give you advanced notification of increasing premiums.
That cycle can take up to two years. So, for example, your 2022 Part B premiums depend on your MAGI in 2020. The problem is that by 2022 you may no longer have that higher income level.
How much can IRMAA affect your Part B premiums?
IRMAA has five premium brackets once your MAGI crosses the first threshold.
Married beneficiaries filing separate returns will have different brackets.
The impact of an IRMAA can be considerable. For example, if your income is over $500,000 (or $750,000 as a couple), your monthly premium in 2022 will be $578.30. So, for the year, you would pay $13,879.20 as a couple, compared to $4,082.40 for a couple whose income is under $182,000.
It might be easy to say that someone earning that much money can afford to pay such high premiums. But what if the high MAGI was just a one-time peak in income shortly before retirement? In that case, IRMAA could hit two years later when you are living on your lower retirement income.
What else does IRMAA affect?
Medicare Part D (private prescription drug coverage) also has a means-tested premium. If your income exceeds certain thresholds, a monthly adjustment will be paid in addition to the Part D plan’s premium.
Your plan’s premium is paid to a private insurer offering either a standalone plan or a Medicare Advantage plan (if drug coverage is bundled into that plan). On the other hand, the Part D IRMAA is paid to Social Security, usually as a deduction from your monthly Social Security benefit checks.
Social Security will contact you if you are required to pay a Part D IRMAA and update the amount each year, as needed. Failure to pay this adjustment amount will lead to losing your Part D coverage.
The income brackets determining the amount of an IRMAA for Part D premiums are identical to those for Part B. However, the amounts are much smaller. For example, as a single person with a MAGI between $91,000 and $114,000, your monthly IRMAA would be $12.40. And in the highest bracket (more than $500,000), the monthly IRMAA would be $77.90.
How can you contest an IRMAA?
If you disagree with Social Security on an IRMAA related to Part B or Part D premiums – or if your circumstances have changed – you can appeal the IRMAA determination through Social Security Administration Form SSA-44. You can use the form to register a life-changing event that has lowered your income. Typical events include divorce, death of a spouse or the loss of various forms of income – including due to retirement.
And remember that qualifying for IRMAA does not qualify you for life. The IRMAA income brackets change periodically, and your income can vary yearly. But you will want to monitor the situation and request a redetermination or IRMAA appeal as needed.
Takeaway Action Step: Once you get into your 60s, start researching the elements that will determine your income and well-being for the rest of your life: Social Security and Medicare. As part of that research, monitor your income as you approach age 65 so IRMAA doesn’t catch you by surprise.