Medicare, being a social insurance program, takes a pragmatic approach when it comes to determining premiums.
Rather than solely relying on individual incomes, the program primarily considers program costs as the basis for setting premiums. IRMAA ensures the financial burden is distributed fairly among beneficiaries. It also takes into account the overall sustainability and affordability of the program.
What Is IRMAA in Medicare?
The acronym IRMAA stands for "Income-Related Monthly Adjustment Amount." The Social Security Administration (SSA) is the authority that determines your IRMAA. They rely on information provided by the Internal Revenue Service (IRS) to make this determination.
Individuals with higher incomes are subject to a surcharge that is applied to their premiums. This specifically applies to beneficiaries who are enrolled in Medicare Part B, which covers outpatient services such as doctor visits. It also applies to Medicare Part D premiums, which cover prescription drugs.
IRMAA was enacted by Congress in 2003, and then it was expanded in 2011. In 2023, the tax brackets for IRMAA increased. Congress has taken this action to decrease the federal subsidy for higher-income individuals by implementing higher premiums based on income.
What Is IRMAA for 2023?
The starting point for IRMAA for single filers is $97,000. Married couples must have a modified adjusted gross income (MAGI) of at least $194,000 to enter the brackets. Identifying which bracket you fall into is essential in accurately assessing your Medicare costs. You can view the tax brackets for IRMAA for 2023 here.
What Income Is IRMAA Based On?
Your IRMAA is based on your MAGI. The SSA will use the MAGI reported on your IRS tax return from two years previous (i.e. your MAGI for 2021 is used in 2023) to determine your IRMAA. This is because the IRS has provided them with the most up-to-date tax return information.
Remember that your MAGI consists of your total adjusted gross income and any tax-exempt interest income you may have. It's essential to understand this calculation to accurately assess your financial situation.
What is IRMAA Reimbursement?
IRMAA reimbursement allows employers or retiree health plans to reimburse individuals for the extra premiums they pay as a result of the IRMAA. Unfortunately, not every retiree will meet the criteria for IRMAA reimbursements. The eligibility requirements may differ depending on the organization or the terms of your retirement benefits.
Different entities may have varying procedures and timelines for claiming and receiving the IRMAA reimbursement. It is important to familiarize yourself with their specific submission process and adhere to any designated timelines when requesting reimbursements.
How Does IRMAA Affect You?
Apart from the added IRMAA surcharge when you pay a monthly premium, there are other factors to consider for your financial planning:
Financial Planning for Retirement
Retirees who have incomes near or above the IRMAA thresholds need to be aware of the potential for increased Medicare premiums in their retirement financial planning. It can be difficult to plan for the IRMAA surcharge, but you should seek other strategies to save your hard-earned money.
This includes either increasing your budget for healthcare costs or adopting strategies to decrease your modified adjusted gross income (MAGI).
If certain life events or financial decisions lead to a higher taxable income, this could push you into a higher IRMAA bracket.
Some situations that can have a notable impact on your finances include selling a property and making a substantial profit, as well as taking withdrawals from tax-deferred accounts to boost your income for a specific year. Working with a financial advisor can help you minimize your overall tax liability so you can save elsewhere if you are subject to IRMAA.
Appeals and Adjustments
You might be eligible to avoid IRMAA if you meet the Medicare IRMAA Life Changing Event form criteria. Suppose you experience a major life event, which significantly reduces your income. This could be marriage, divorce, or the death of a spouse. In that case, you can appeal for an adjustment to your IRMAA.
This is particularly important for retirees whose financial situation undergoes major changes. It would be best if you took advantage of this opportunity to ensure that your benefits accurately reflect your current circumstances.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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