How are Medicare premiums determined?
Not everyone pays the same amount for Medicare premiums. Medicare premiums are determined by your income. The question is, “How?”
As you are planning for retirement or already in retirement, it is important to understand the effects your financial decisions can have on your Medicare premiums. It could be the difference of hundreds of dollars a month.
The cost of Medicare B and D (prescription drug coverage) premiums are based on your modified adjusted gross income (MAGI). If your MAGI is above $103,000 ($206,000 if filing a joint tax return), your premiums will be subject to the income-related monthly adjustment amount (IRMAA).
How are Medicare premiums determined?
Medicare premiums are determined through a combination of standardized rates set by the government and adjustments based on individual circumstances, primarily income. Including:
Standard Premiums
- Medicare Part A (Hospital Insurance): For most beneficiaries, Part A premiums are $0, assuming they or their spouse have paid Medicare taxes while working. If an individual hasn’t worked enough to qualify for premium-free Part A, they may have to pay a monthly premium.
- Medicare Part B (Medical Insurance): Part B premiums are set annually by the government and apply to most beneficiaries. As of 2022, the standard premium for Part B is $170.10 per month. This premium is the same for all beneficiaries who are subject to it.
Income-Related Adjustments
- Medicare Part B Premiums: Higher-income beneficiaries may be subject to income-related monthly adjustment amounts (IRMAA). This means that if an individual’s modified adjusted gross income (MAGI) exceeds a certain threshold, they may pay an additional amount on top of the standard Part B premium. The income thresholds determining IRMAA are based on the beneficiary’s tax return from two years prior.
- Medicare Part D Premiums: Part D premiums for prescription drug coverage can also be subject to IRMAA adjustments for higher-income beneficiaries. These adjustments are based on income tiers, with higher earners facing progressively higher premiums.
Medicare Advantage and Part D Plans
- While Medicare Advantage (Part C) plans and standalone Part D prescription drug plans are offered by private insurance companies, they must provide at least the same level of coverage as Original Medicare (Parts A and B). Premiums for Medicare Advantage and Part D plans vary depending on the specific plan, coverage options, and geographical location. Some plans may charge additional premiums based on income, but this varies by plan.
Late Enrollment Penalties
- Beneficiaries who don’t enroll in Medicare Part B or Part D when they’re first eligible and don’t have creditable coverage (coverage that is at least as good as Medicare’s) may face late enrollment penalties. These penalties are added to the standard premium and can increase the overall cost of Medicare coverage.
Certain life events or circumstances can also affect Medicare premiums. For example, beneficiaries may qualify for adjustments to IRMAA based on life-changing events such as retirement, marriage, divorce, or the death of a spouse. Additionally, beneficiaries with limited income and resources may qualify for assistance programs that help cover Medicare premiums and other healthcare costs.
What are the premiums for Medicare Part B?
|
File individual tax returns with modified adjusted gross income: |
File joint tax returns with modified adjusted gross income: | Income-Related Monthly Adjustment Amount | Total Monthly Premium Amount |
|
Less than or equal to $103,000 |
Less than or equal to $206,000 |
$0.00 |
$174.70 |
|
Greater than $103,000 and less than or equal to $129,000 |
Greater than $206,000 and less than or equal to $258,000 |
$69.90 |
$244.60 |
|
Greater than $129,000 and less than or equal to $161,000 |
Greater than $258,000 and less than or equal to $322,000 |
$174.70 |
$349.40 |
|
Greater than $161,000 and less than or equal to $193,000 |
Greater than $322,000 and less than or equal to $386,000 |
$279.50 |
$454.20 |
|
Greater than $193,000 and less than $500,000 |
Greater than $386,000 and less than $750,000 |
$384.30 |
$559.00 |
| Greater than or equal to $500,000 | Greater than or equal to $750,000 | $419.30 |
$594.00 |
Costs are for 2024. Costs may vary depending on if you are currently enrolled in Medicare. Source: Medicare.gov
What are the premiums for Medicare Part D?
| Beneficiaries who file individual tax returns with modified adjusted gross income: | Beneficiaries who file joint tax returns with modified adjusted gross income: | Income-related monthly adjustment amount |
| Less than or equal to $103,000 | Less than or equal to $206,000 | your plan premium |
| Greater than $103,000 and less than or equal to $129,000 | Greater than $206,000 and less than or equal to $258,000 | $12.90 + your plan premium |
| Greater than $129,000 and less than or equal to $161,000 | Greater than $258,000 and less than or equal to $322,000 | $33.30 + your plan premium |
| Greater than $161,000 and less than or equal to $193,000 | Greater than $322,000 and less than or equal to $386,000 | $53.80 + your plan premium |
| Greater than $193,000 and less than $500,000 | Greater than $386,000 and less than $750,000 | $74.20 + your plan premium |
| Greater than or equal to $500,000 | Greater than or equal to $750,000 | $81.00 + your plan premium |
Costs are for 2024. Costs may vary depending on if you are currently enrolled in Medicare. Source: Medicare.gov
As you can see, at the highest level, you could experience a significant monthly increase over the base premium with the combination of Part B and D. Before any premium increase occurs, the Social Security Administration will send you a letter stating the amount of the premium and the reason behind their decision. There are exceptions to a premium increase, such as divorce, the death of a spouse, work stoppage, work reduction, loss of certain types of income, etc.
Note that untaxed Social Security is added back when calculating MAGI. The most common item we see that impacts retirees is the inclusion of non-taxable interest.
As you plan to meet your retirement income needs, it will be important to consider these MAGI thresholds. Many retirees are unaware of the adverse consequences that excess IRA withdrawals or capital gains can have on their healthcare costs and overall financial plan.
If you have received a letter stating that you are affected by IRMAA, please contact a Brighton Jones advisor for assistance in disputing the increase in premium.
This article was originally published on February 12, 2018.
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