Whenever I mention IRMAA to someone, I usually get a quizzical look in return. “What?! You don’t know IRMAA?!”, I then reply with a smile.
IRMAA isn’t even a person. IRMAA is an acronym for Medicare’s Income Related Monthly Adjustment Amount. Many retirees are surprised when they learn about IRMAA and how much it can add to their monthly Medicare Premiums. So what exactly is it?
First, let’s review what Medicare Part B is used for and how the Federal government and Medicare participants fund it. Part B provides Medical Insurance and covers the following:
doctor and other health care provider services
home health care
preventative services (screening, vaccinations, wellness visits)
Determining the Part B Premium Amount
To set the Part B premium that a Medicare participant must pay each month to cover the above services, the Centers for Medicare and Medicaid Services (CMS) estimates what the total expense for providing these services will be in the upcoming year. It is important to remember that Part B covers 80% of the above services’ cost, while the participant pays:
Part B deductible - $198/year
Coinsurance - 20% of the approved Medicare-approved rate
Once the CMS has its estimate for the 80% that Part B will have to pay for the upcoming year, it divides this amount by the total number of Part B enrollees to determine the average cost for Part B services per participant. The Part B premium is calculated to be 25% of that amount. For example, in 2020, the Part B monthly base premium is $144.60 per participant. $144.60 is 25% of $578.40. That means that the CMS estimated the average monthly cost for Part B services (the 80% that Medicare pays for) in 2020 would be $578.40 per month. The Part B participant pays $144.60 per month, while the Federal government pays the remaining $433.80 per month.
Sharing the Burden
The cost of providing Medicare Part B coverage had become a major strain on the Federal Budget. So in 2003, Congress passed, and President George W. Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act (MMA). Before the passage of MMA, the Federal government paid the entire cost of its 75% share of Medicare Part B premiums out of general revenues. The Medicare participant paid the remaining 25% via their Part B premiums. To reduce this government subsidy, IRMAA was established in 2007. The result was a reduction in the subsidy that higher-income earners received from the Federal government. The effect of which was to raise their Part B premiums in relation to the lower-income earners. The amount of IRMAA that a Part B participant pays is based on their Modified Adjusted Gross Income (MAGI), as reported on their tax return. To get a sense of the impact of IRMAA on Part B participants, I have included a table of the Part B premiums paid in 2020 across the various MAGI ranges below.
Part B Monthly Premium
MAGI SINGLE FILER
MAGI JOINT FILER
MAGI Married filing separately
Part B monthly premium
PART B income-related adjustment
Total PART B MONTHLY PREMIUM
|< $87,000||< $174,000||< $87,000||$144.60||$0.00||$144.60|
|$87,001 - $109,000||$174,001 - $218,000||
|$109,001 - $136,000||$218,001 - $272,000||
|$136,001 - $163,000||$272,001 - $326,000||
|$163,001 - $499,999||$326,001 - $749,999||$87,001 - $412,999||$144.60||$318.10||$462.70|
|> $500,000||> $750,000||> $413,000||$144.60||$347.00||$491.60|
For example, a Medicare participant who files a joint tax return with a MAGI of $220,000, will pay a monthly Medicare Part B premium of $289.20. Note, if their spouse is also a Medicare participant, they will also pay a monthly premium of $289.20. That’s a total of $578.40 per month!
Who Ever Said Medicare Was Free?
As you can see from the above table, a person who finds themselves in the highest MAGI tier no longer pays 25% of the Part B cost. They end up paying 85% of Part B cost, leaving the Federal government only covering the remaining 15%! These added medical costs will undoubtedly put a strain on even the best retirement plans. It is essential that you are able to cover these expenses during your retirement.
How Is IRMAA Determined?
The good news is that IRMAA is not sprung on you from out of the blue. A Medicare participant’s total Part B monthly premium is disclosed to them when they enroll in Medicare for the first time - either when they turn 65 or when they leave employment. Each year after that, they are notified in November what their Part B premium will be in the upcoming year.
Where a Medicare participant falls in the table above is based on their most recent tax information available from the IRS. In this case, the most recent tax return is the one from two years earlier. So in 2020, the IRMAA was based on the participant’s 2018 tax return, which was filed in 2019. Likewise, this year’s (2020) income will determine the 2022 total Part B monthly premium amount.
As I said previously, the premium is based on the participant’s MAGI. So what exactly is MAGI? For Medicare Part B purpose it is the following:
Adjusted Gross Income (AGI) from line 8b of Form 1040 + Tax-Exempt Interest (line 2a) = MAGI
The good news is that the income tiers are now adjusted annually for inflation. The bad news is that this inflation adjustment is based on the Consumer Price Index for all Urban Consumers (CPI-U) and not the national health care inflation rate used to set Medicare premiums. There is a major difference between these two inflation rates, as the CPI-U is 0.6% and the health care inflation rate is approximately 5%!
One final point about IRMAA that must be kept in mind - the income brackets in the table above are known as cliff brackets. This means that if your MAGI is $1.00 over the threshold, the higher IRMAA applies to you. This is very different from the income tax brackets that are graduated. For example, if you earn $1.00 more than the top of your current tax bracket, you do not pay the higher income tax rate on all of your income. You only pay the higher rate on that last dollar.
Fear not. There are some things that can be done to manage IRMAA. In my next blog post, I will discuss what you can do to control or mitigate the financial pain caused by IRMAA. Stay tuned.
If you are finding that Medicare is just too confusing or want to discover the best way to navigate the process in a way that maximizes your benefit, I would love to help you. Nobody likes to pay more than they have to for anything and you want to make sure that you have the adequate coverage that you need during your retirement years. If you’d like to learn more, or if you want help in reviewing your current situation please feel free to contact me. I have a deep understanding of Medicare and Social Security. I’d love to help you build the financial security you deserve.
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