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A new paper by HealthView Services, details how Medicare premiums and surcharges are charged to retirees’ Social Security payments.
Medicare uses Modified Adjusted Gross Income (MAGI) to calculate Medicare's premiums.
MAGI is the sum of almost all sources of retiree income, including money earned through work in retirement, Social Security, pensions, distributions from self-directed plans, dividends, realized interest and capital gains.
Once MAGI surpasses $85,000 for an individual, or $170,000 for a couple, Medicare surcharges and premium increases are charged, and withdrawn from monthly Social Security benefits.
The reduced payments could have considerable consequences on retirees’ monthly income in some cases.“These thresholds may seem high, but retirees including those on traditional pensions, are already crossing them,” explained Ron Mastrogiovanni, CEO of HealthView Services.
Because the income brackets for Medicare are not indexed to inflation, as interest rates rise, more retirees will suffer due to higher retirement income.
“Surcharges will not only impact affluent Americans, but practically everyone with a income that is moderate” said Mastrogiovanni.
Those increment premium surcharges could be significant, according to HealthView’s detail of Medicare’s charges. Medicare Part B and D costs increase by about 35 percent when retirees cross the MAGI first threshold. When the top threshold is exceeded ($214,000 for individual, $428,000 for a couple), premium costs can increase by 200 percent, according to HealthView.
Under the Medicare Modernization Act of 2007, means testing was introduced to deal with Medicare liabilities. Health care costs are projected to grow 6 percent annually over the next eight years, according to U.S. Office of the Actuary. That rate of inflation will certainly exceed Social Security adjustments, the latest was less than 2 percent.
“Those whose annual incomes propel them across MAGI thresholds will have to pay significantly more for the same services,” wrote the authors of Health View’s paper. Medicare uses a two-year “look back” period, meaning income earned at 63 is used to assess MAGI at 65. The sale of a house before retirement—an often-advised way of reducing costs after leaving the workforce—could generate capital that is enough to surpass a MAGI threshold.
Required minimum distributions that start after turning age 70 could also increase retiree income, and end up increasing monthly Medicare premiums.
Good News.! Retirees may also be able to move the MAGI gauge in a propitious direction.
Retirees can take strategic action to lower MAGI assessments. Diversifying portfolios with Roth IRAs, HSAs, and annuities can protect and grow assets while affirming income streams—and can all be used to potentially shift a retiree to a lower MAGI bracket, thus maximizing Social Security benefits.
"Pursing the goal of higher retirement income without consideration of MAGI may move a retiree into a higher surcharge bracket and potentially reduce income that is disposable" added Mastrogiovanni.
"In one of the case studies in our paper, it would require a 6 percent return on a $400,000 investment over five years, to equal the savings an advisor would be able to attain by simply adjusting their client's investment mix," he said.
A. When do I start making Medicare decisions?
The first date to sign up for Medicare Parts A and B is the third month before turning 65, if you are not already enrolled. You may be enrolled if you already have started Social Security. If not, you can sign up for Medicare at your local Social Security office or online.
Medicare Parts A (Hospital Insurance) and B (Medical Insurance) together form Medicare and that’s where you should start. File an application at least three months before your 65th birthday, and both parts should begin on the first day of the month. Part A is free for qualifying individuals and Part B costs most people $104.90 per in 2014 month. If you start Medicare before Social Security benefits, Medicare premiums will be automatically deducted from a personal account.
B. Why would the Part B premium be higher than $104.90 per month? If so, is it still advantageous to choose Part B?
If the modified adjusted gross income reported on your federal tax return two years earlier (i.e., in 2012 for 2014 Medicare purposes) is above $85,000 for an individual or $170,000 for joint filers, you will pay more for Part B than $104.90 per month in 2014. There are four MAGI tiers, each with graduated premiums, topping at $335.70 per month for incomes that are high. You can find the 2014 Medicare premium at: http://www.medicare.gov/Pubs/pdf/11579.pdf.
You should choose Part B when you turn age 65 for several reasons.
1. It may not be too costly. The highest monthly premium ($335.70) was built to cover 100% of Part B’s cost.
2. You must have both parts(A & B) to qualify for Medigap coverage.
3. At 65, premiums will be permanently higher if you do not choose Part B. You can always change your part B election later.
C. Should I get a Medicare Supplement (“Medigap”) policy immediately?
Yes. Otherwise, you are subject to paying for gaps that Medicare does not cover. Medigap coverage is not difficult to review and buy, and there are protections during the initial Open Enrollment. This period begins on the first day of the month you turn 65 and are enrolled in Medicare Part B, and it ends six months later. During this period, you can’t be denied coverage or charged a higher premium for pre-existing conditions or health and/or lifestyle reasons.
Each year, you will have an opportunity to change Medigap plans during an Open Enrollment from October 15 to December 7. However, the protections for pre-existing conditions or health and/or lifestyle reasons will no longer apply.
D. Which Medigap plan should I choose, and what are the premiums?
Except for Massachusetts, Minnesota and Wisconsin who have their own Medigap systems, Medigap current programs fall into one of 10 standard designs each identified by a letter.
The 10 standard plans available for new sales are: A, B, C, D, F, G, K, L, M and N. Plan F is available in both a standard and a version that is high-deductible.
The basic policy of Plan A is usually the least expensive – costing from $130 to $260 per person per month. Premiums are influenced primarily by the cost of health care delivery in the plan’s geographic area.
Premiums are low in the high-deductible version of Plan F, and also in Plans K and L, which pay only 50% (Plan K) or 75% (Plan L) for several benefits. Plans D and G are expensive because they cover the full realm of benefits – .
Although standard plans make it easier for consumers to comparison shop, premiums can vary widely. The average premium for Medigap in the U.S. is about $2,000 per person.
If you are unsure about the design that is best for you, give special consideration to Plans F (standard) and C. These are the most popular, selected by 51% and 14% of the market, respectively. They offer comprehensive benefits, and their popularity helps to increase scale and make premiums more affordable.
E. Should Medicare Prescription Drug Plan (Part D) be elected immediately?
Yes, as the 2014 Part D National Base premium is only $32.42 per month, although each plan is allowed to charge geographically competitive rates. Like Part B, premiums go up as MAGI increases. Part D is subsidized by the government at about 89%, so for most retired people it’s a good deal . Under the Patient Protection and Affordable Care Act(OBAMACARE), enhanced Part D benefits will phase in through 2020, so benefits will keep improving.
Note, premiums will go permanently higher if you don’t participate in Part D by the third month after you turn 65. Remember,you can shop around and switch plans each year during the Open Enrollment period from October 15 through December 7. Part D plans' premiums have become very competitive, so it pays to shop for the best deal available each year . If you do not need prescription drugs when you turn 65, a prospective strategy is to choose the lowest-cost Part D plan as a proxy, to prevent future premiums from going higher. Then upgrade to a more comprehensive plan if you need more prescription drugs later.
F. What is Part C Medicare Advantage?
All Medicare participants who have Parts A and B are able to receive treatment through private health insurance plans. The premiums charged by these plans are paid directly by Medicare, and some Medicare Advantage plans add an additional premium that is paid directly by members. Almost 12 million people, about 25% of all Medicare participants, now choose Part C.
Medicare Advantage plans must provide all benefits of Part A and Part B coverage, including emergency and care that is urgent. They also may add benefits that are extra included in Parts A and B, such as prescription drug, vision, hearing, dental, and wellness programs. People who participate in Medicare Advantage do not need separate coverage that is medigap and by law Medigap can’t be sold to Medicare Advantage participants.
G. What are the drawbacks to Medicare Advantage plans?
Yes. Medicare Advantage plans may have different deductibles and co-pay arrangements than original Medicare, and they may charge premiums that are extra. Their costs that are out-of-pocket will increase in the future due to changes mandated by the Patient Protection and Affordable Care Act(OBAMACARE).
Since Medicare Advantage participation has increased, the cost of the “Part C subsidy” has escalated for the U.S. Government. The government now estimates that its cost per Part C participant is about 13% higher than in traditional Medicare. The primary cause of higher cost is the county-level formula that benchmarking uses to reimburse private health care organizations. Benchmarking rates for Part C are up to 40% above comparable fee-for-service cost, effectively creating a national government subsidy for Medicare Advantage.
The Patient Protection and Affordable Care Act(OBAMACARE) will reduce the benchmark rates to between 95% and 115% of fee-for-service costs, which is expected to save Medicare $136 billion over a decade. However, it also will cause Medicare Advantage plans to reduce benefits and increase co-pays and deductibles. The Congressional Budget Office has projected that benefit cuts and fee increases will cause enrollment in Medicare Advantage to decline by 35-50% over several years.
H. Are Medicare and Medigap premiums deductible?
For taxpayers who itemize income tax deductions, Medicare Part B and D premiums, Medigap premiums and any out-of-pocket costs are deductible to the extent that they exceed 7.5% of adjusted income that is gross AGI. Since 2010, the IRS has allowed self-employed individuals to claim Medicare Part B and D premiums for purposes of the health deduction, to the extent that premiums exceed net income from self employment less 50% of the self-employment tax and any retirement plan contribution.
I. Is there a smart Medicare strategy?
Most people should consider:
1) Apply three months before age 65
2) Enroll in in Parts B and D;
3) Choose affordable plans for Medigap and Part D; and
4) Keep shopping for better Medigap and Part D coverage and, if favorable, switch plans during the Open Enrollment period from October 15 through December 7.
For 2014-2015 expect to spend about $3,000 to $4,000 per person per year for the total realizing that comparable private insurance could cost three to four times more. The Medicare trust fund is scheduled to run out of money in 2026, so it’s also smart to expect the total cost of medicare/Medigap to increase gradually during retirement, as seniors are forced to pick up a larger share of the bill.
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