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Understanding IRMAA: The Medicare Surcharge

Health care in retirement can be very expensive. If you are planning for 20 to 30 years of retirement, it is critical to account for healthcare-related expenses. One of these expenses is the Medicare surcharge, which is the additional amount you pay if your income is at or above a certain amount.

Medicare Background

In 1965, President Lyndon B. Johnson established Medicare as the primary health insurance for seniors over age 65. Under Medicare, the federal government pays for 100% of Part A medical insurance, which provides hospital coverage. The government also pays for about 75% of Part B medical expenses, which includes regular medical coverage.

Today, Medicare enrollees also have access to Medicare Part D, which covers prescription drugs in retirement. To receive this coverage, seniors have to pay a monthly premium. For individuals collecting Social Security, the government withholds Parts B and D premiums from your monthly Social Security checks if you elect to receive these benefits. 

For those who delay Social Security but have already enrolled in Medicare, you pay the premiums directly. (For related reading, see: 7 Big Social Security and Medicare Myths.)

The Medicare Surcharge

The Medicare Modernization Act of 2003, which introduced Medicare Part D, shifted the way that Medicare Part B is funded by requiring high-income Medicare enrollees to pay more than the 25% of their Medicare premiums, thus creating the Medicare surcharge. This requirement began in 2007.

As a result of the Affordable Care Act, higher income individuals are now also required to pay a surcharge on their Part D prescription drug benefits. These increased Medicare charges mean retirees can rely less on government entitlements for medical benefits that provide a level of income security in retirement.

Changes to IRMAA

These extra Medicare charges are commonly referred to as the income related monthly adjustment amount (IRMAA). The threshold of income that determines your surcharges has gone through several changes, including one in 2018.

Each of the tiers in this chart is a "cliff threshold," which means $1.00 of income over the threshold results in the entire surcharge amount. The Center for Medicare and Medical Services sets the part B premium for the upcoming year during the current year.

For example, 2018 premiums were set in October 2017. This means that a household’s IRMAA tier for Medicare is determined using a prior- year formula.

For 2018, a household’s Part B and D surcharges are based on 2016 tax year, and the government will use the data from your tax return that was filed by 2017.

How to Reduce Your Surcharge

You may be able to get your surcharge reduced if your income has dropped since the time it was calculated because of a life-changing circumstance. To request your IRMAA surcharges be removed, you will need to file an SSA-44 form. Strategies related to tax management is another way to plan for IRMAA-related expenses.

The modified adjusted gross income (MAGI) that dictates IRRMA’s surcharges is your adjusted gross income (AGI) plus certain deductions that are added back in. It is helpful to be cognizant of whether or not you are close to hitting an IRMAA threshold, where a relatively small shift in the timing of recognizing capital gains or harvesting capital loss can get you below a threshold. Very few tax filers will be affected by IRMAA surcharges, but if you are part of this minorty and a small adjustment can save you $600 or $1,000 a year in surcharges, it's worth it.

(For more from this author, see: 5 Mistakes People Make When Enrolling in Medicare.)


Disclosure: Complete Advisors is an SEC Registered Investment Advisor.