How Do the Extra Medicare Premiums for High Earners Work?

Q: I received a letter from the Social Security Administration saying that because my income for 2015 was above the limit of $85,000, I will pay an additional fee of $53.50 per month for Medicare Part B. I then read that this will not be changed even if I have a much lower income for 2016, and that the only way the administration will make a new decision is if I marry, divorce, become a widow, my spouse lost his pension, or a few other circumstances. If I am reading this right, then many more seniors may get into this problem also.

A: Medicare beneficiaries whose income exceeds certain thresholds must pay more in monthly premiums for Part B doctor coverage and Part D drug coverage.

These income-adjusted premiums apply to single tax filers (and those married filing separately) with incomes of more than $85,000 and married couples filing jointly with incomes of more than $170,000. Fewer than 5% of Medicare beneficiaries have incomes above these thresholds and thus pay these higher rates, which are known as income related monthly adjustment amounts, or IRMAA.

Your modified adjusted gross income (MAGI) for Medicare purposes is generally determined by adding your adjusted gross income and tax-exempt interest (lines 8b and 37 of your IRS Form 1040), says Sean Stein Smith, a certified public accountant and a member of the AICPA’s National Financial Literacy Commission.

To determine your MAGI, Social Security uses the most recent federal tax return you filed to the IRS. That means that the premium you pay usually reflects your income from two years ago—for example, your 2017 premium will reflect your 2015 income, because that’s what you filed with the IRS in 2016. The government typically notifies beneficiaries each fall of their premium for the following year.

The good news is that your premiums are not fixed forever. “It’s reevaluated annually,” says Katy Votava, founder and president of Goodcare.com, which advises consumers on Medicare plan selection. Typically, if your MAGI in 2016 is below the threshold, you won't owe a surcharge in 2018.

Further, as you note, there are several specific circumstances under which the government may reverse the surcharge determination for the current year.

You should contact the Social Security Administration if you have a life-changing event that might affect your income-related premium, a spokeswoman says. That might be if you lose your part-time job, for example, and your income will fall below the threshold. You’ll need to provide documentation of your change for the agency to make a new determination of your premium, which if approved will be retroactive to January of the current year.

If you don’t notify the Social Security Administration of your loss of income and wait until it hits your tax return, then your premium will reflect the change two years later. You generally won’t get any retroactive credits for any overpayments.

The Medicare Part B premium—including any applicable income surcharge—is typically deducted from your monthly Social Security check. (Those not yet on Social Security generally write a quarterly check to the government for their Part B coverage.) For those whose earnings are above the thresholds, the Social Security Administration uses a sliding scale to adjust the Part B premium upward, based on your MAGI. Everyone else pays the standard rate for Part B, which for 2017 ranges from $109 to $134 monthly, depending on when you joined Medicare.

Higher-income beneficiaries with Part D drug coverage have a Part D surcharge deducted from their Social Security check regardless of how they pay their premium, while those not yet on Social Security get a separate bill for their Part D surcharge.

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