IRMAA’s Expensive Little Secret

You cannot talk about Medicare without talking about the Income Related Monthly Adjustment Amount - otherwise known as IRMAA. In my last blog post, I discussed the history of IRMAA as well as how much it can potentially add to your monthly Medicare premiums. If you missed that blog post, you can check it out here.

“Is There Anything I Can Do About IRMAA?”

I hear this question from many frustrated retirees who are shocked by the Medicare premiums that they need to come up with each month. They are often under the false perception that Medicare is free. This misconception stems from the fact that Medicare taxes have been taken out of their paychecks for as long as they can remember. It is true that workers do have a portion of their pay withheld for Medicare, but this does not cover their entire Medicare cost once they enroll.

If a worker or a spouse has paid Medicare taxes for at least 10 years, then Part A will cost them $0 per month. But not everyone enjoys “no-cost” Part A premiums. If a worker only paid Medicare taxes for 30-39 quarters, their monthly Part A premium jumps from $0 per month to $252 per month. If they paid in for less than 30 quarters, their Part A premium is $458 per month. These amounts are per person and are current in 2020.

So while Medicare Part A may be “free” for some, Part B is where you will experience the more substantial premiums - especially if the IRMAA is involved. I detailed the Part B premiums - including IRMAA - in my last blog. Remember, Part B premiums are determined by the participant’s Modified Adjusted Gross Income (MAGI). Is there anything that can be done about the IRMAA? Or is it totally out of your control?

There are certain situations that allow a Medicare recipient to appeal the IRMAA that is incorrect for one of the qualifying reasons that I will review below. These reasons fall into two categories:

Inaccurate or out-of-date tax return
Life-changing event that causes a reduction in the recipient’s MAGI

When determining a Medicare recipient’s Part B premium (including the IRMAA if any), the most recent tax return is the one from two years prior. For example, the 2020 premiums were based on 2018 tax return information. If the 2018 tax return was later amended and the recipient’s MAGI decreased, they would way qualify for a new Part B determination. Likewise, if there was an error in the IRS data and the correct data would cause the MAGI to be lower, the Medicare recipient would qualify for a new Part B determination.

With regards to life-changing events, there are 8 that qualify:

Death of a spouse
Marriage
Divorce or annulment
Work reduction (self or spouse)
Work stoppage (self or spouse)
Loss of income from an income-producing property
Loss or reduction of pension income
Employer settlement payment

It is important to note what is NOT listed above as a qualifying event. A one-time capital gain or an unusual IRA distribution (e.g., for a Roth IRA conversion) is not grounds for an appeal. But if you recently experienced one of the above life-changing events and your MAGI is now lower than it was two tax years ago, it will behoove you to file an appeal. Let’s take a look at an example of a listed qualifying event and how to go about initiating an appeal.

Retirement Time

So you finally decided to retire. Congratulations! Here is something very important to remember. I have heard of retirees who enroll in Medicare, get their initial premium notice - which is based on their income earned during their working years two years prior, and assume that they will have to pay the IRMAA for the next two years until their lower retirement income shows up on the tax return used to determine the IRMAA. DO NOT MAKE THIS ASSUMPTION!

Work stoppage is one of the eight life-changing events that qualify for a new Part B determination. Retirement is stopping work. Therefore, you can appeal the IRMAA and have your Part B premium recalculated and based on your current income. Let’s go through the process.

You will need to get the Medicare Income-Related Monthly Adjustment Amount - Life-Changing Event Form SSA-44 from the Social Security Administration. (Caution - a new version of this form is released every year in November/December. So make sure that you have the most recent form.)

The first thing you need to do is enter your name and Social Security Number on page 1 of Form SSA-44.

The next step is to check the “Work Stoppage” box and provide the date of the life-changing event in STEP 1. This applies to both you and your spouse. For example, if your spouse has been paying the IRMAA based on your income and then you retire, both of you need to file Form SSA-44 claiming the retiring spouse’s work stoppage as grounds for appeal. It is important for both to file this form if both are Medicare recipients.

Next, in STEP 2, you will specify the tax year that your income was reduced by the life-changing event. STEP 2 will refer you to the instructions on page 6. Those instructions can be confusing, but basically you would enter the year that income was, or is expected to be reduced. For example, if you were retiring in 2020 you would put 2020 as the year the reduction in income took place. Since your 2020 AGI is not yet known, you would enter an estimate of your 2020 AGI, plus any tax-exempt interest that you expect to receive. You would also check the box next to the appropriate Tax Filing Status for this Tax Year.

STEP 3 asks you if your MAGI will be lower than the amount entered in STEP 2 in the following year. So, in our example, will your MAGI in 2021 be lower than the new MAGI reported for 2020. 2021 would be the first year that you would be fully retired, so you would check “Yes” and enter an estimate of your 2021 AGI, plus any tax-exempt interest that you expect to receive. You would also check the box next to the appropriate Tax Filing Status for this Tax Year.

STEP 4 has to do with providing documentation of your life-changing event. This might be an original signed statement from your employer or copies of recent pay stubs. The form does state that your original documents will be returned to you. Or you can take your completed form and your original documentation to your local Social Security Administration office. The SSA will base your appeal on the income estimates you provide, but they will follow up by checking tax returns, either the signed return submitted by you or the transcript obtained directly from the IRS.

Some Final Thoughts

The important thing to understand about the IRMAA table that is displayed in my previous blog post, is that the income brackets are cliff brackets. This means that if your MAGI goes over the threshold by one dollar, your Medicare Part B premium could go up anywhere between $60 and $90 per month, per person, depending on which tier you jump into. With Medicare premiums now being a larger chunk of retirees’ monthly expenses, managing the IRMAA is just as important as managing your taxes - both now and into the future.

It is also important to remember that the IRMAA assessment is done annually, so if you are charged the IRMAA due to an unusual income event, such as a capital gain or Roth conversion, it will be for that year only. This is why it may make sense to bite the bullet and do the Roth conversion and pay the IRMAA for one year in order to reduce your future RMDs which could trigger the IRMAA for many years into the future. Or better yet, complete your Roth conversions more than two years before you start Medicare.

Retirement income planning is a very important and necessary function in developing a comprehensive retirement plan. The adverse impact of not performing this detailed planning is paying much more in taxes and Medicare premiums than you need to in retirement. You’ve worked hard and saved diligently for your retirement. Don’t give Uncle Sam any more than you need to.

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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