Why are my Medicare Part B premiums so much higher than my sister’s?
It can be confusing making the adjustment from employer or private health insurance to Medicare as the structure and determination of premiums are unique to the program. Medicare is composed of several parts: Part A or hospital insurance, Part B or medical insurance and Part D or drug coverage. You have the option of participating in original Medicare and purchasing a private Medigap or supplemental policy or participating in Part C which is also known as Medicare Advantage.
Most people do not pay any premium for Part A whereas everyone pays a premium for Part B. If you participate in original Medicare, your Part D and Medigap policy premiums will depend on which plan you select. If you participate in Medicare Advantage, your premium will depend on which plan you select as well.
The most likely reason your premiums are higher than your sisters is that you are subject to something called IRMAA (income-related monthly adjustment amounts). Even though everyone must participate in Part B and Part D, the premiums are not standardized across all participants. Part B has a baseline premium of $164.90 for 2023 (down from $170.10 in 2022) and Part D has no additional premium on top of the plan you select. However, for those with higher income there are premium adjustments for both Part B and Part D.
Medicare uses a two year look back period for your tax return and then determines the adjustment based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income (AGI), found on line 11 of the 1040 tax form, that has had a few specific items added back including excluded interest from US savings and municipal bonds. The following chart shows how your IRMAA payment increases for increasing MAGI:
If you are currently paying an IRMAA premium, it’s important to evaluate whether that is due to what Medicare calls a “life-changing” event. Medicare lists the following as qualifying life changing events: marriage, divorce, death of spouse, work stoppage, work reduction, loss of income-producing property, loss of pension income or employer settlement payment. A common example that we see with our clients is work stoppage- otherwise known as retirement.
For example, let’s say that Jane retires at age 64 from full time work and her MAGI decreases from $200,000 to $50,000 as a single person. When she transitions to Medicare at age 65, she will start out with an initial Part B premium of $527.50/mo and a part D add-on premium of $70/mo. The total additional IRMAA premiums she will pay for a full year come out to $5,191. However, Jane underwent a qualifying life-changing with her retirement and has the ability to submit a form to the Social Security office (https://www.ssa.gov/forms/ssa-44-ext.pdf) in order to have Medicare re-evaluate her IRMAA. With the proper adjustment, Jane will avoid IRMAA and simply pay the baseline Part B premium of $164.90/mo. We recommend talking with your financial advisor or tax professional if you are over 65 and experience a life-changing event so they can help you to correctly complete this form. As you can see, it can end up saving you thousands!
If you are experiencing higher levels of IRMAA but have not undergone a life-changing event, you can still evaluate if you have any options to potentially reduce your MAGI. There are several potential strategies to help reduce MAGI, if they fit within your financial plan and goals. Some options are various methods of charitable giving (qualified charitable distributions or a donor-advised fund), planning tax efficient withdrawals from accounts in retirement and considering Roth conversions. We recommend speaking with your financial advisor to determine if these might be beneficial strategies in your situation.
In summary, it is important to review your Medicare premiums annually to determine if you are subject to IRMAA and if there is anything you can do about it.