If you’re age 65 or older, Medicare is likely a key component of your health care coverage. So, it’s important to be aware of upcoming changes to Medicare premiums, as well as how Part B premiums tie
into the social security cost-of-living adjustment (COLA) and how the income-related monthly adjustment amount (IRMAA) can affect how much you pay for Part B and Part D.
In 2023, the Medicare Part B standard monthly premium will be $164.90, a decrease of $5.20 from the $170.10 premium in 2022. This decrease happened because of lower-than-projected spending on the
Alzheimer’s drug Aduhelm (along with other Part B items and services), which resulted in a large reserve. Keep in mind, however, that while most beneficiaries pay the standard premium for Part B, higher-income
earners may pay more under IRMAA rules (more on that later).
Understanding the Hold Harmless Provision
Social security versus Medicare premiums. Generally, once someone is enrolled in social security and Medicare, Medicare Part B premiums are withheld from their social security benefits, reducing the overall
monthly benefit they receive. Be aware, though, that increases in social security benefits and changes in what individuals pay for Medicare don’t always match up. Why?
Increases in social security benefits come from COLAs (based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers). Medicare, on the other hand,
uses specific increases in health care costs to determine appropriate premium increases. As a result, the increase in monthly charges for Medicare premiums can sometimes be higher than the increase in
monthly social security benefits.
This difference could result in a decline in monthly social security benefits, and it’s exactly where the hold harmless provision comes into play. This provision ensures that recipients’ social security checks do not
decline year-over-year due to increases in Medicare Part B premiums. (This provision does not apply to the Medicare Part D premium.)
Who’s protected? The hold harmless provision will protect against having the prior year’s social security benefit reduced by an increase in the Part B premium, provided certain requirements are met:
• The Part B premium must be deducted from an electronic deposit of a social security check.
• You must be entitled to social security benefits for November and December of the current year.
• Have your Medicare Part B premiums for December and January deducted from your monthly benefits.
• You don’t already pay higher Part B premiums because of IRMAA.
• You don’t receive a COLA large enough to cover the increased premium. (The rule focuses on whether the specific dollar amounts, rather than the percentage, outpace the COLA.)
Who isn’t protected? The hold harmless provision will not protect you if:
• You are new to Medicare for 2023.
• You are subject to IRMAA.
• You are enrolled in a Medicare Savings Program (MSP). (The MSP should cover your full Part B premium.)
• You were enrolled in an MSP in 2022 but lost the program because your income increased or you failed to recertify. If you qualify for the hold harmless provision but pay a Part B late-enrollment penalty, the penalty will not be waived. In fact, it may increase because it will be calculated based on the new, higher premium, even if you’re not paying that higher amount.
What You Should Know About Changes to Medicare Premiums in 2023
What’s new for 2023? The hold harmless rule will work as follows:
• The Part B premium will decrease by $5.20 to $164.90 per month.
• The social security COLA for 2023 will be 8.7 percent.
With the monthly decrease in the Part B premium and the 8.7 percent COLA increase, the hold harmless provision will not apply in 2023. Keep in mind that the hold harmless provision does not permanently reduce monthly Medicare premiums. When future-year COLAs exceed the increase in Medicare costs, the difference will be made up with
additional Medicare premium boosts that were temporarily avoided because of the rule.
The 6 Tiers of IRMAA
IRMAA is an additional surcharge that may be added to monthly Medicare premiums based on yearly income. IRMAA, enacted in 2003 as part of the Medicare Modernization Act, applied only to high-income
enrollees of Medicare Part B. But in 2011, IRMAA was expanded under the Affordable Care Act to include high-income enrollees of Medicare Part D.
What’s new for 2023? IRMAA uses modified adjusted gross income (MAGI) from two years before to determine whether a surcharge is owed. (For Medicare purposes, MAGI is adjusted gross income plus any tax-exempt interest.) For 2023 Medicare premiums, 2021 income tax returns will be used to determine if a surcharge applies. (This amount is recalculated annually.) The surcharge will vary based on income bracket and filing status. The Social Security Administration (SSA) will send a notice if a surcharge is being assessed. The Part B surcharge is added to the Part B premium automatically, whereas any Part D surcharge is paid directly to Medicare, not to the plan provider.
IRMAA has six income-based tiers (see Figure 1). IRMAA assessments begin if the MAGI is greater than $97,000 (single tax filers) or greater than $194,000 (for married filing jointly). The SSA determines if an IRMAA assessment is necessary based on MAGI as reported on the tax return from two years ago (i.e., two years before the year an individual is assessed an IRMAA surcharge). Figure 1. The 6 Tiers of IRMAA for 2023
Source: The Social Security Administration
Disputing an IRMAA surcharge. If you believe you shouldn’t have to pay IRMAA because you experienced a life-changing event that reduced your income, you may file Social Security Form SSA-44 to request the surcharge be reduced or removed. Life-changing events include marriage, divorce, death of a spouse, work stoppage, work reduction, loss of income-producing property, loss of pension income, and receipt of an employer settlement payment. SSA states that anything not on this list does not qualify as a life-changing event.
Planning considerations. The IRMAA surcharge is a cliff penalty—$1 over the limit and the surcharge must be paid for the entire year. If you are close to a cliff point that would make you subject to the surcharge or move you into a higher surcharge tier, keep the following planning considerations in mind:
• If your MAGI is close to one of the tier cliffs, consider accelerating income into the current year if you believe you will be above that tier the next year. Likewise, if you’re close to a tier income limit, consider deferring income or taking losses in the current year to avoid going over the cliff.
• A Roth IRA conversion strategy can help minimize the effect of RMDs from large IRAs that may increase MAGI above the next tier, resulting in potentially thousands of dollars of increased Medicare premiums. Since Roth IRAs are tax free and not subject to RMDs, converting an IRA to a Roth can both reduce future RMDs and create a source of tax-free funds, which will not affect MAGI. Keep in mind that converting an IRA to a Roth is a taxable event and increases MAGI in the year of conversion; as such, it could potentially increase Medicare premiums.
• If you’re older than 70½ and charitably inclined, consider making a qualified charitable distribution of up to $100,000 from an IRA instead of taking an RMD for that year. It will not be included in income or increase MAGI.
• If you’re close to one of the IRMAA tier cliffs but need liquidity for living expenses, consider tapping into a tax-free source (e.g., borrowing against the cash value of life insurance or accessing home equity before taking a taxable distribution from a retirement plan).
Integrating Medicare Costs into the Financial Plan
As you can see, Medicare recipients need to be aware of factors that can affect their Medicare premiums. More costs are being passed on to recipients through annual adjustments to premiums, as well as potential surcharges, depending on income levels. We can work with you and your tax advisors to take appropriate steps to help mitigate the effects of these added costs and integrate Medicare considerations into your overall financial plans.