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Medicare Premiums, Your Income, and Being “Held Harmless” - Pinnacle Investment Management, Inc.

Medicare Premiums, Your Income, and Being “Held Harmless”

September 7, 2016 / Blog

The 2016 Annual Trustees report for Social Security and Medicare are projecting that the Cost of Living Increase (COLA) on Social Security for 2017 will be only .2%, following no increase in 2016. It is also projected that Medicare Part B premiums could increase by as much as 22% for some enrollees in 2017. While these are just projections—and Congress could potentiality intervene before year end—the trend of rising medical costs and low to non-existent inflation adjustments for Social Security is expected to continue.

The possible good news is that premium increases on Medicare do not affect everyone. To understand why some people will be affected and why others won’t and, importantly, if you may be one of those that will be impacted, there are a few important aspects to understand.

Medicare Income Brackets

Medicare Parts B (medical insurance) and D (drug coverage) premiums are means tested, meaning that enrollees with higher incomes are required to pay more for their Parts B and D premiums.

The amount you pay for your Medicare Parts B and D are based upon your income from 2 years prior. So for 2016, they look at your 2014 tax return to see what income bracket you will fall into.

Part Bmedicare-part-b-brackets

For instance, a new enrollee in Medicare in 2016 that is single who had an income less than $85,000 in 2014 will pay the base rate of $121.80/month for their Part B Premium. If they instead had income of $100,000 in 2014, they will pay a premium of $170.50/month. The higher the income, the higher the premium.

The technical term for the increased premium is Income-Related Monthly Adjustment Amount (IRMAA).

Importantly, the chart above only applies to new Medicare enrollees in 2016. If you were enrolled in Medicare in 2015 and were “held-harmless” (as described below), then your premium would have stayed the same from 2015 to 2016, at $104.90.

The Part D (prescription drug coverage) premium has a similar income bracket structure:

Part D

medicare-part-d-brackets

 

Hold Harmless

The Social Security Act has a provision called “Hold Harmless,” which states that the premium increases on Medicare Part B (just Part B, not Part D) can not be greater than the COLA for Social Security. What this rule does is prevent your Social Security payments from being reduced due to large increases in Part B Premiums.

In most years hold harmless has been irrelevant, since the COLA on Social Security has been enough to match the rise in Part B Premiums. However, over the last number of years, where we have seen low or no COLA coupled with rising Part B Premiums, hold harmless has kicked in. This occurred in 2016.

In 2016 Part B premiums increased from $104.90/month in 2015 to $121.80/month, a 16% increase. However, since there was no Cost of Living Adjustment to Social Security for 2016, most Medicare enrollees were held harmless and were therefore able to keep the old Part B premium of $104.90/m in 2016. Those that were not held harmless had to pay the new base premium amount of $121.80/m.

The hold harmless provision protects about 70% of Medicare enrollees. What this means is that any Medicare premium increases are spread across the remaining 30% of enrollees that aren’t protected.

So who is protected by hold harmless and who isn’t? The hold harmless provision will NOT protect you if:

  1. You are a new enrollee to Medicare or
  2. You are subject to IRMAA (higher premiums due to income, as we outlined above) or
  3. You are not collecting Social Security.

Here are general examples to illustrate these points:

Jack, age 66, enrolled in Medicare in 2015 and paid the base rate premium of $104.90/m. Jack was held harmless in 2016 from the Medicare premium increase because  he was already enrolled in Medicare, ‚ he is not subject to higher Medicare premiums due to income (IRMAA) and ƒ he is collecting Social Security. So in 2016, Jack will continue to pay $104.90/m.

Mary, age 65, just retired and enrolled in Medicare at the beginning of 2016. She will not be subject to IRMAA.  Her Medicare premium will be the base rate premium for 2016: $121.80/m.

Ralph will be 65 in January 2017 and will enroll in Medicare. If the projections from the Trustees Report come to pass, Ralph will have to pay a Medicare Part B Premium of $149/m in 2017.

Tom, 68, is retired , single, and had an income from 2 years prior of $100,000. Since he is in a higher income bracket, Tom paid a Medicare premium of $170.50/m in 2016. Because he is subject to IRMAA, Tom will not be held harmless and therefore  his 2017 premium is projected to increase by about 20%, to $204.40/m.

 

Final Thoughts

Rising medical costs are well documented and there is strong reason to believe that those costs will continue. It’s important to account for these costs when planning for your retirement

A good first step is to look at what sources of income you will have in retirement. This will entail looking Social Security, pensions, and any distributions from retirement accounts.  When you have a grasp of the income streams, you can then look at where your income will fall in the Medicare brackets.

There are a number of different ways to help lower your taxable income in retirement. Some options include saving in a Roth IRA/401k, using a Health Savings account, or making charitable contributions with your MRD. It is worth speaking with a Financial Planner to see if any of these may work for you.

 

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About the author

John Shanley: CFP ® is a Financial Advisor with Pinnacle. He joined in 2015 after previously working as a Financial Consultant for Fidelity Investments. John is a Certified Financial Planner, a graduate of Fordham University and is currently pursuing his Masters degree in Financial Services. John is a native of Pawling NY and currently resides in Suffield with his wife, Jennifer, who is an Immigration Attorney. In his free time, John enjoys reading and is an avid hockey fan.


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