Set expectations about IRMAA for your high-income clients
by Marcia Mantell, RMA®
Ms. Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors, and their clients. She is author of “What’s the Deal with Retirement Planning for Women,” “What’s the Deal with Social Security for Women” and blogs at BoomerRetirementBriefs.com. Part II in a four part series. Read the first article here.In 1965, then President Lyndon Johnson signed the Medicare Act into law. “Original Medicare” covered both hospital charges for in-patient care (Part A) and payments to doctors and specialists who provide that care (Part B). From the beginning, this universal health insurance for retired Americans proved complex.
Part B Basics
Under the Medicare Part B side of the law, specific retirement healthcare costs would be covered. Other costs were specifically excluded. Part B was designed to pay the majority of costs for:
- Physicians, specialty doctors, and those who provide hands-on care,
- Outpatient services received at a hospital or clinic,
- Durable medical equipment, and
- Certain home-health support.
But providing any insurance or coverage for dental, hearing, vision, and most podiatry was specifically excluded from the law.
For entry into Part B, each individual must be 65 years old, or have a specific covered illness, or has received Social Security Disability Insurance (SSDI) for 24 months. If clients claim Social Security before 65, they will be automatically enrolled in premium-free Part A and in Part B. Part B can be postponed if an individual is still covered by a large-employer group health insurance plan.
When clients retire before 65, they may have gaps in their health insurance coverage. A younger spouse or partner may be left without insurance and must find alternative coverage.
Advisor Tip: When clients approach age 60 (not 65), start Medicare discussions. Identify any periods where one or both could be without large employer group coverage and discuss alternatives such as COBRA or ACA Marketplace plans.
Part B Comes With A Monthly Premium
Since Medicare’s introduction in 1965, Part B has always come with a premium. This is a shock to many clients. They believed Medicare was free, and budgeting for a monthly health insurance premium wasn’t in the plans.
Part B is a cost-sharing arrangement between the Federal government and each individual. (Only Part A is prepaid via FICA taxes.) Part B is a separate insurance plan with a monthly premium. In 2022, the base premium for Part B is $170.10 per person per month.
In return for enrolling in Part B and paying the monthly premium, bills for covered services are split: 80% paid by Medicare and 20% by the client.
Advisor Tip: Begin budgeting real costs of Medicare premiums into clients’ retirement income plans by the time they reach age 60. Use an inflation rate 2.5 to 4 times the standard inflation assumption.
Understanding The Cost-Sharing Arrangement
Financial advisors who understand the underlying construct of the law are better prepared to address a client’s surprise about Part B premiums. How these premiums are determined is based in the law.
Initially, the Medicare law set Part B premiums at a fixed-dollar amount. In 1966—Part B’s first year—beneficiaries paid a fixed $3.00 per person per month. Same in 1967.
Congress then changed premiums to be a percentage of expenditures. In the Medicare Enrollment Act of 1967, Part B costs were split equally between Medicare and individuals. That resulted in a 33% increase in 1968 when Part B premiums jumped to $4.00 per person per month. And another 33% increase in 1970 when Part B premiums increased to $5.30.
The 1972 Social Security Amendments added cost-of-living-adjustments (COLA); Part B premiums were tied to those COLA limitations. Then, in 1982, under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Part B premiums were readjusted to cover 25% of expenditures.
Each year, “the expected average total cost of Part B services for enrollees” is determined based on actual expenditures throughout the system. Each client enrolled in Medicare Part B receives a 75% subsidy toward their out-of-pocket health care costs. Their share is 25% of the average Part B costs for the year.
But Wait! There’s More!
As health care costs soared over decades, the cost-sharing arrangement wasn’t sufficient. Congress’ solutions were offered in the Medicare Modernization Act of 2003. In this sweeping reform bill, monthly premiums would become subject to means testing. Higher-incomes clients would pay more for Part B than the standard rate.
Rather than receiving a 75% subsidy of the average cost of Part B-covered expenditures, the Federal subsidy would be reduced for higher income retirees. The new cost sharing model was effective in 2007 and Tier 5 added in 2018:
Medicare “Tier” | Federal Subsidy | Client’s cost-sharing |
“Standard” or Basic | 75% | 25% |
Tier 1 | 65% | 35% |
Tier 2 | 50% | 50% |
Tier 3 | 35% | 65% |
Tier 4 | 20% | 80% |
Tier 5 | 15% | 85% |
Meet IRMAA, The Unwanted House Guest
This new Part B cost-sharing model, based on income in retirement, is the Income-Related Monthly Adjustment Amount, or IRMAA. She’s no friend of your high-income clients.
It’s hard enough for most clients to include a line item in their retirement budget for health insurance. For those with high incomes, IRMAA blind-sides them.
“Income” for retirees is clearly laid out on the front of IRS Form 1040-SR. For most clients nearing and in retirement, income includes wages or self-employment earnings, pension payments, Social Security or Railroad Retirement Benefits, distributions from retirement plans and IRAs, annuity payouts, etc.
However, IRMAA is assessed based on Modified Adjusted Gross Income, MAGI. In addition to income, any non-taxable income such as interest earned on municipal bonds or state muni-bond funds and such will be considered when determining a client’s MAGI. The result is the Part B IRMAA table (for 2022):
Married clients, both with Part B, filing jointly with a MAGI of $250,000 fall in IRMAA tier 2. They receive a 50% subsidy toward their Part B premium and will pay $340.20 per person per month. Or $8,165 in 2022.
A single filer with a MAGI of $250,000 falls in IRMAA tier 4, receives a 20% subsidy, pays $544.30 per month, and must budget $6,532 for the year.
Advisor Tip: Each December, find the updated IRMAA table. Discuss the changes during your Q1 client review meetings. Update cost estimates for Part B in each client’s retirement income plan.
How Clients Meet IRMAA
Each year, the dollar amount a client will pay for Part B premiums can change based on any or all of the following:
- Adjustments within the IRMAA tiers
- Recalculation of the expected average total cost of Part B services
- Client’s MAGI
- Life events such as becoming a widow or retiring
The Social Security Administration (SSA) pulls client data together and redetermines their Part B premium every year. The timing is important to understand. Looking forward to the upcoming 2023 determination of Part B premiums, this is the general approach the SSA will take in October or November 2022:
- SSA will run calculations after 2023’s Social Security COLA is announced
- For MAGI, most recent IRS tax returns for each client are pulled—income data will be as of December 2021 as reported by the April 2022 tax filing deadline
- Therefore, the income used to determine 2023’s Part B premium will be two years in arrears
Each client receives an annual “Determination Letter” from the SSA before year-end. Their letter states their new Social
Security benefit payment (including COLA and any adjustments for additional work/wages). And, it shows the base premium for Part B plus any IRMAA they owe.
Advisor Tip: Help prepare clients for annual benefits. Advise them to look for their annual determination letter. Explain that Social Security benefits will increase for COLA and decrease for Medicare Part B premiums and IRMAA.
Bottom Line: Medicare Discussions For High-Net Worth Clients Should Begin Well Before Age 60
Because Part B premiums and IRMAA may be such a surprise for your clients who have saved millions, it’s imperative you begin setting expectations early. Ideally, you’ll want to start Medicare conversations when establishing a baseline plan for retirement income in their early 50s. You don’t want clients meeting IRMAA out of the clear blue.
Advisor Tip: Warn clients they may meet IRMAA. Encourage them to spend time on Medicare.gov to start learning the basics of Part B, including means-testing.
Coming Up Next…
In the next article in the series, you’ll learn how clients can better manage their 20% share of Part B costs and help defray some of the Part A costs as well. Make sure to come back!
