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Topic: Medicare

Medicare Part B Benefits, IRMAA, and Tax Impacts

By Bob Palechek, CPA | June 19, 2020

Medicare benefits provided to eligible retirees come in various “parts” that apply benefits to various different health-related services.  Two parts, parts B & D, are funded primarily by general revenues (transfers from the U.S. Treasury) and premiums paid by enrollees.  Premiums paid by enrollees are either deducted from monthly social security benefits or billed separately if the enrollee is currently not receiving monthly social security benefits.

Part B beneficiary premiums are set each year to approximately equal 25% of the average expected Part B program costs for the year.  For 2020, the standard monthly Part B premium is $144.60.   Just for reference, Part B premiums started in 1966 at $3 a month!  The current estimate is for Part B premiums to increase to $234.10 a month by 2029.

Beginning in 2007, people receiving Part B benefits who are considered high-income earners can be subject to higher premiums on their monthly Part B portions.  These higher premiums are designated as income-related monthly adjustment amounts (IRMAA).  Initially, there were four levels, 35%, 50%, 65% and 80%.  So instead of paying 25% of the average expected annual costs, the “co-pay” increases to one of these higher rates, depending on income.  Beginning in 2019, a fifth bracket was added for 85%.  For 2020, the current co-pay monthly amounts for the five higher brackets are $202.40, $289.40, $376.00, $462.70, and $491.60.

For married filing jointly returns, the income test is Modified Adjusted Gross Income (MAGI) and the first tier (35%) currently begins at $174,001.  This is indexed for inflation, but legislation has been passed in the past to lock the thresholds in place.  This has been done to increase revenues, as retiree’s income rises more and more folks run into these thresholds or into higher tiers.  There is no phasing within these tiers, one dollar over the minimum or threshold level subjects you to the whole increase.

The Social Security Administration (SSA) borrows information from the IRS to find out who is subject to IRMAA.  The IRS shares MAGI for each taxpayer from the tax return filed two years in the past.   For example, for calendar year 2020 the SSA will use the MAGI from your 2018 tax return.  MAGI is essentially your Adjusted Gross Income (AGI) plus tax-exempt interest and some foreign earned income.  Once you are subject to IRMAA, it will last the full year but will be adjusted again on January of the next year based upon the amounts from the subsequent years tax return filed  (still two years behind).  There are about eight life-changing events the SSA allows for you to estimate your new current income to escape the IRMAA grasp, but you have to file a form with the SSA and provide support for your life-changing event.

Can you catch a tax deduction for either the standard Part B premium or a higher adjusted Part B premium under IRMAA?  Well perhaps!!  First of all, the premium can be deducted as a medical expense or an itemized deduction on Sch A of your 1040.  There are a couple of hurdles to jump to obtain a tax benefit this way.  Only medical expenses that exceed 7.5% of your AGI (currently expected to increase to 10% in 2021) are counted toward itemized deductions.  And the medical expenses that are allowed plus your remaining itemized deductions have to exceed your standard deduction.  Which as you know has doubled for the years 2018 to 2025.

Another better option is if you have net self-employed income, say from part-time freelance or consulting income.  Then the Part B premiums are deducted as self-employed health insurance, deductions allowed towards computing your AGI, to the extent of your self-employed net income.  This is a valuable tax benefit and should not be missed!

2019 Changes to Income Related Medicare Premiums

By Justin Fundalinski, MBA | July 20, 2018

HSASeveral years ago, I wrote an article about the changes coming in 2018 on income related Medicare premiums. Better known as the Income-Related Monthly Adjustment Amount (or IRMAA), this provision of Medicare rears its head and increases Medicare premiums as individual or couple’s income rises. It’s essentially an added tax, or a way to help fund an underfunded Medicare program.

In the article I discussed the coming changes and how the income thresholds used to determine whether someone is subject to increased Medicare premiums are normally adjusted for inflation. Generally, as a retiree’s income naturally grows due to inflation they are not forced over higher thresholds and thus higher Medicare premiums. At the time of the article those brackets had been intentionally frozen (under the Affordable Care Act) to slowly force more people into higher premiums between the years 2011 and 2019.  However, while the thresholds are still frozen (and always subject to extension), the Bipartisan Budget Act of 2018 (Trump Tax Reform) made some notable changes that require an update and some review.

Changes as of 2018 Bipartisan Budget Act

Most notably, the Bipartisan Budget Act of 2018 piled on top of the changes that took effect in 2018 and added an additional threshold/tier of surcharges that will be introduced in 2019. Currently, there are five different Medicare premium levels based on the income levels of the Medicare recipient. In 2019 there will be six.

The graph above outlines the transgression of Medicare Part B premiums from 2017 through 2019. It illustrates what premium you would pay in 2017, 2018, and 2019 dependent on the amount of Modified Adjusted Gross income you have. You can see how from 2017 to 2018 the thresholds that force people into higher Medicare Premiums began to be compressed into lower thresholds once income was greater than $133,500 (this was discussed in detail in the previous article). From 2018 to 2019 they will be maintaining those compressed thresholds but also adding a new tier of premiums once income is beyond $500,000.

Married Filing Jointly

What is interesting about the new 2019 brackets is when you look at them for someone who files their taxes married filing jointly. In all previous cases, the thresholds illustrated here for a single filer would double for a married couple. However, to reach the highest threshold in 2019 as a married filing jointly person your income will have to be greater than $750,000 (not $1,000,000 had the normal trend followed suit). That’s only a 1.5X increase instead of the normal 2X.  I interpret that as a penalty for being married.

Although, this won’t affect most households it is important information to know. Why? Well if these thresholds continue to be frozen, then over time more and more people will be forced into higher premium levels simply because their income grew with inflation (this is above and beyond the normal adjustment for increased insurance costs).  Currently, the thresholds are scheduled to begin getting adjusted for inflation again in 2020, however I wouldn’t count on it. My argument on why I believe this is thoroughly outlined in a previous article I wrote in 2016 called, “Trickle-Down Taxes” In this article I argue how sneaky policy that is presented to tax the rich is really designed to very slowly increase taxes on the masses.

If you have any questions or comments on this article, please feel free to reach out to the office.

Delaying Medicare Enrollment

By Andrew Johnson and Justin Fundalinski, MBA | November 21, 2016


Recently, we had a few questions come in regarding delayed Medicare Part B enrollment. Because Medicare can be a complex topic and these questions are common, we wanted to share some of the concerns these folks had with you. What happens if you delay your enrollment into Part B of Medicare because you are still working and covered by your current employer’s health plan?

These are some of the things folks were wondering.

Special Enrollment Period

I delayed enrolling because of current employer coverage. Will I face a penalty for late enrollment when I stop working and enroll?

Functionally no. If you or a spouse are currently working and you receive your health care benefits through that employer group plan, you are eligible for a “Special Enrollment Period” (SEP) while you are working  as well as an additional 8 months following the end of that coverage. This is not the case if you are relying on retiree benefits or COBRA benefits that you or a spouse earned while working but have since retired or left your job (“currently working” are the keywords).

During your SEP you can enroll into Medicare and are eligible for “Premium Surcharge Relief.”   This means that enrolling during the SEP will offset your Part A and Part B late enrollment penalty by as many months as you were eligible but covered under a group plan of a current employer of any size. Essentially, you can enroll without penalty as long as there was no lapse of coverage while you were working.

Small Employer

We want to note that the employer can be of any size.  There are differences in how Medicare interacts with employer group plans for employers of different sizes.  Unfortunately, there is a lot of ambiguous, conflicting, and confusing information out there regarding the eligibility for an SEP if you are covered by a small employer group plan that pays secondary to Medicare.  Having a small employer (less than 20 employees) plan does not preclude one from an SEP and the protections it provides from Medicare’s late enrollment penalty, but is does throw a substantial wrench into things.

Read the Fine Print

Does that mean that I can delay my enrollment while working without worry?

No, it means only that the late enrollment penalties, which can increase your monthly premiums for life, will not impact you if you were covered by a current employer’s group plan.

What can be much worse than a 10% premium penalty is your employer sponsored insurance denying claims because you didn’t read the fine print.  Small group employers (20 or less) often require that you sign up for Medicare when eligible.  This is because small employer plans often become the secondary payer to Medicare for insurance claims and they are certainly not going to step in as the primary payer because you decided not sign up for Medicare. This creates a situation where you believe you are covered for health care because you are paying premiums on the same policy you have had your entire working career, but functionally you may as well not have any insurance.

Required to Enroll?

I work for a small employer and delayed my Medicare enrollment. What should I do?

It is very important that you check with the current employer plan to see if it requires you to enroll in Medicare in conjunction with the group health plan in order for the group plan to pay on claims.  If they do require you to enroll in Medicare then your best plan is to take advantage of your Special Enrollment Period for Medicare and enroll now!  Fortunately, you will not be subject to premium penalties because you are in an SEP. Remember though that you are essentially not insured until your Medicare kicks on.  If it is not a requirement, we suggest you request the section of your insurance contract that clearly states the exemption from becoming secondary payer, record your conversation with the representative you speak with, and enroll in Medicare anyway, just to hedge your bets.

What About Medicare Supplements?

Do I need to enroll in Medicare Supplements while I have my employer coverage?

Generally the way Medicare Supplement enrollment works is when you first enroll in Part B you receive a six month window for guaranteed enrollment into Medicare Supplemental Insurance.  After that, your guaranteed issue right (which means an insurance company can’t refuse to sell you a Medigap policy) no longer exists unless you fall into a limited set of situations. Fortunately, one of the situations is that you have Original Medicare (Parts A and B) and your employer group plan that pays after Medicare (small group plans) is ending. You have 63 days after the date your coverage ends (limited exceptions apply) to enroll in a Supplemental policy.   So if you sign up for Medicare under your SEP and then later lose your small group coverage due to retiring, you have a guaranteed issue right to obtain a Supplemental policy.

You might not have substantial changes in your working or home life from when you were 64 years old, but turning 65 can have invisible impacts on your health care coverage. Make sure to check any coverage you are relying on to make sure you know how Medicare eligibility can affect it. If you have a unique situation or questions that require clarification beyond these generalities, our office is here to help people make sense of situations like these, which many face heading into retirement.

Medicare Part D Plans: Moving the Goal Line

By Andrew Johnson and Justin Fundalinski, MBA | October 20, 2016

Medicare Part D

With autumn upon us it is rather easy to see and feel the changes of a new season: the air gets crisper, the days get shorter, leaves change colors and baseball gives way to football. Unfortunately, Medicare Prescription Part D Plans are subject to change soon too.

Some Medicare changes we can set the clock to, such as the annual reset for deductibles and the coverage gap known as the “doughnut hole”. However other changes, such as changes in what prescription drugs are covered, are not as obvious as the start of Monday Night Football. When it comes to prescription drug coverage, Medicare may move the goal line on you by not continuing to cover some of your medications. This month, we’d like to look at some reasons why you may need to review your Prescription Part D Plan playbook and discuss some basic steps to avoid overpaying for your prescriptions.

Changes within your personal situation:

Reviewing your Prescription Drug/Part D Plan (PDP) can be particularly important if, in the last year:

  • You had a change in your prescription drug use.
  • You moved or changed your primary legal residence.
  • Your carrier altered or discontinued your plan from the previous year.
  • You were unhappy with paying more than you may have had to for the prescriptions you use.

Changes within your prescription plan:

Even if your personal situation has not changed, the formulary (the drugs covered by your prescription drug plan) can change right out from under you.  To make things more complex (because it is so simple already), depending on when the prescription drug plan changes, the drug plan provider can notify you in different ways.

  • If changes are made during your coverage year, the insurance company is required to identify specific drug changes that impact you personally. They give you a 60-day notice that the changes are happening and you will typically be able get a 30 day supply of your current prescription drugs within 60 days of the change taking place to help you transition over to different prescriptions covered under the new formulary. It’s nice that the insurance provider lets you know of the changes so you can make prescription changes… too bad it does not allow for special enrollment period so you can shop around for a new plan.
  • If the changes are made on the upcoming year of coverage (when your plan renews for an additional year) you can throw out those courtesies of the insurer letting you know that changes will impact you personally. Yes, you will receive an Annual Notice of Change (ANOC) letter in September, but this letter will not outline if a drug you are currently using is removed, re-tiered to be more costly, or has an increase to its copay. It is up to you to review that the coverage of the drugs you will use has not changed for the coming year, and unless you read/analyze your ANOC carefully each year, you may experience some negative impacts.

The best ways to avoid overpaying:

Since the plans offered and the drugs covered change from year to year along with your health and personal situation, reviewing your plan each year can save you money.  Avoid making a costly mistake by following these simple tips:

  • Don’t assume that you are already in the best available plan for your needs.
  • Compile a comprehensive list of your prescriptions; their dosage, as well as how often and where you fill them.
  • Visit Medicare.gov to compare different plans that are available to you. You can use the “Find Health & Drug Plans” tab on their website and search using your zip code to find plans and local or mail-order pharmacies.
  • Don’t focus on premium alone. Deductibles and increased copays on your select drugs can outpace the monthly savings on premium.

There are typically a few dozen plans available and based on your prescription needs you may be overpaying for the same drugs bought from the same pharmacy solely because of the plan you selected.  Every year the plans get the chance to move the goal line on you, and you have between Oct 15th and Dec 7th to check your playbook and confirm that you are still in the best plan that meets your needs prior to getting locked into it for another year. If you feel like Medicare moved the goal line for you and want some help with your playbook, please feel free to reach out to the office and schedule a time to meet with Andrew.


Colorado PERA Options for Medicare Part A

By Justin Fundalinski, MBA | September 20, 2016

PERAWe recently came across a case in which a retired PERA employee worked many of her years during the time when employees did not contribute to Medicare taxes, but also worked some of her years during a time that they did contribute to Medicare taxes. The end result was that she did not earn her 40 quarters of credit to qualify for “free” Medicare Part A insurance (the hospital insurance side of Medicare), but instead fell short by just a few credits.  While PERA has some options available to employees who do not qualify for free Part A, the options are not clear cut from a financial position and we were forced examine them deeply.  It came down to a couple factors and in this month’s newsletter we want to share some of our findings for those who participate in PERACare for retirees currently or for those who may be faced with some of the same options in the future.

Quick Rundown

Insurance for hospital care is pretty much a necessity as a short layover in the hospital could create catastrophic medical bills. Since many PERA employees may not qualify for free Medicare Part A, PERA has included a Part A “replacement” in all of its healthcare packages for retirees over the age of 65.  So, PERA employees have several choices:

  • Opt to pay Medicare Part A premiums.
  • Go back to work in the private sector and earn the credits needed to get premium free Medicare Part A.
  • Use one of the three supplemental PERACare plans that offer replacement Part A.
  • Use one of the three HMO PERACare plans that offer hospital coverage within them.

Paying for Medicare Part A Premiums:

Paying for Part A premiums out of pocket is not the most attractive option.  Depending on how many “credits” or “quarters” you earned by paying Medicare taxes determines your premium. It’s not hard to earn the 40 credits that you need to get free Medicare Part A, but we will touch on that later. The premiums are structured like this:

  • If you have 40 or more credits you get Part A premium-free
  • If you have 30 or more credits but less than 40 you pay a reduced Part A premium currently at $226 per month.
  • If you have less than 30 credits then you pay the full premium currently at $411 per month.

While the premiums are high there are some piece-of-mind benefits.  The top benefit that comes to mind is that you’re enrolled in Part A, so there will not be any penalties if for some reason you opted out of Part A initially and are forced/or want to get Part A later on.  For example, while we don’t think this is a likely event, PERA does not guarantee that they will provide their retired employees with health benefits.  What if that benefit was taken away in the future and replacement Part A recipients are forced to purchase Medicare Part A now having to pay the premiums and a penalty for late enrollment. Or what if the coverage that they do offer becomes subpar and paying for Part A looks more attractive.

Earn The 40 Credits:

Ideally, we would all like to receive Medicare Part A premium free.  Going back to work at a job that pays Medicare taxes is the only way to earn the credits to qualify you for premium-free Part A.  The question is – how long do you have to work and do you even want to go back to work?  It’s not hard to earn credits or quarters.  You can earn a maximum of four per year and in 2016 one credit is earned for each $1,260 of earnings.  So, hypothetically you could earn $5040 in January, never work the rest of the year and still get your four credits for the year. If your already close to the 40 credits you need, earning the additional credits may be an attractive way to get premium-free Part A, but if you have little or no credits this could become a ten year endeavor.

PERAcare’s Supplement Plans/Part A Replacements

For those who don’t qualify for free Medicare Part A, PERA’s supplemental plans function as a replacement to Part A . But don’t let the word “replacement” fool you, this is not a one-to-one identical replacement of the hospital coverage under Medicare Part A.  These Replacement Plans are structured closer to a PPO where you have the in-network and out-of-network providers which many are familiar with, but have a various pros and cons:

  • Replacement Plans can have deductibles similar to Part A and up to over 5 times higher. Just like Part A, these plans deductibles are based on the “benefit period” rather than annually as most are accustomed to with employer sponsored plans.
  • The highest deductibles are for care received “out-of-network,” while original Part A does not have networks or changes based on provider affiliation. So, there might be more flexibility in who you choose to receive care from on traditional Part A.
  • Replacement plans are more like 70/30 plans (insurance pays 70% you pay 30%) and have a maximum out of pocket limit (MOOP) that ranges from $4,500 to $27,000 depending on the plan selected and whether care is received in or out of network. Conversely, Part A does not have a MOOP, the benefits are generally structured based off the number of days that you are in the hospital plus typically 20% of the cost of medical services provides (i.e. surgery). With Part A and there is no cap on the total costs you could pay should you require extensive care for a long period of time.

The benefits of these Supplement/Replacement Part A policies key off of which of the three offered Supplement Plans you enroll in.

PERAcare’s HMO Plan with Hospital Coverage Offerings

There are three HMO offerings through PERAcare that have hospital coverage built into them and replace Part A, but keep in mind not every plan is available in every county of Colorado. These HMO plans have more stringent provider networks than the Supplemental plans described above.  When covered under these plans, your primary physician becomes the quarterback for you in all your healthcare decisions and in order to see a specialist you will need a referral from your primary.  Maybe it’s a hassle, but some find it nice to have a central primary care doctor directing care in a coordinated manner.

Instead of having a deductible and then paying 30% of the costs as described with the Replacement Plans, these HMO plans have fixed dollar amount co-pays. That means instead of you paying the first couple thousand dollars of your care before your coverage kicks in, you pay a fixed rate depending on the service (from $20 per visit up to several hundred dollars for some hospital procedures every time the service is provided).  These plans do offer MOOP’s as low as $2,500 annually; however even with such a low MOOP it would take a lot of visits to doctors or hospitals to reach the maximum.  Finally, the premiums for the HMO plans are very comparable to the Replacement Plans.


In the end we felt that paying Part A was not financially savvy purely because of the premium expense. If going back to work to earn some credits is not in the cards, the only options are to stay within the PERACare umbrella. At face value, the HMO options appeared to be the most cost effective, but we are always worried that premiums, copays, and maximum out of pocket limits could be altered on future policies making it not as attractive. Fortunately, for those covered by PERACare, at every annual enrollment you can swap from the any of the plans offered without underwriting.  So, whether you chose one plan and just don’t like it, you are getting hit with surprise expenses that were not expected, or you know you have an upcoming medical situation that warrants different coverage, you can just sign onto another insurance plan at the next annual open enrollment.  This is a luxury that Medicare recipients do not have with their HMO and Supplemental counterparts.

The ability to move plans without underwriting (especially when coupled with a MOOP) is a benefit that few in retirement enjoy.  The benefits can embolden people in the PERA system to try out different plans and even roll the dice with lower premium plans, while still having the security a MOOP in place for catastrophic events and still maintain the flexibility to move on to a more appropriate plan the following year as their needs change.


Medicare Part D (Prescription Drug Plan)

By Justin Fundalinski, MBA | August 20, 2016

Medicare Part DWith open enrollment for Medicare around the corner (October 15 through December 7th) maybe it’s time to start talking a bit about some important things to be looking out for.  Rather than trying to write an all-encompassing article about Medicare, let’s start with one part of Medicare, specifically prescription Part D.

What is Medicare Part D?

As you may already know, Medicare has its many parts. Part D is specific to prescription drugs. An easy way to remember it is that D is for drugs.  The intent of Part D is to subsidize the costs of prescription drugs and insurance for Medicare beneficiaries.

Part D comes in a couple different forms.  One can either enroll directly into a Part D plan (of which there are many different insurance providers that provide Part D insurance plans) or they can indirectly be enrolled in a Part D plan by joining a Medicare Advantage Plan[1] (Part C) that includes prescription drugs as a benefit.

In order to be eligible for a Part D plan one must be enrolled in the traditional Medicare Parts A and B (essentially insurance for hospital and doctor’s visits).

What is a formulary?

The Centers for Medicare and Medicaid Services (CMS) does not have a set list of drugs (aka formulary) that must be covered in a Part D insurance product.  What they do have is a list of drugs that are not covered[2] by Part D. That said, one of the most important aspects of choosing the right Part D insurance provider to understand what drugs the plan will cover.  The best thing you can do when shopping for a prescription drug plan is not to focus primarily on premium cost, rather to first ensure that the drugs you need are covered under the insurance plan’s formulary.

Examine the formulary annually:

Choosing the right prescription plan in the first place does not mean you are good to go.  Prescription drug plans can and do change their approved drugs from year to year[3], not to mention you may be prescribed new drugs throughout the year. Come open enrollment, it is imperative you check that all drugs prescribed to you (or possibly will be prescribed) are on the approved list. If not, you can consult your doctor to see if there are alternative drugs that are offered in the formulary will meet your needs, or you can begin shopping for a new Part D plan.  You can ease the process of comparing each and every Part D insurance plan by entering the drugs you take at medicare.com and letting them search for programs that cover your prescriptions.

Remember, insurance companies strike deals with prescription drug companies to lower costs and they may require substitutes (generic or brand name) for the current drugs that you and your doctor feel comfortable with.  Always consult your doctor about substitute drugs that may lower your costs without affecting your health.

Manage the Doughnut Hole:

The doughnut hole is a point in prescription drug coverage when your 25% co-insurance ends (a feature of Part D plans) and you no longer receive any assistance from the insurer until you reach a point called “catastrophic coverage.”  During this middle ground your prescription drug plan does not cover any of your costs and you pay entirely out of pocket.  While this hole in coverage is getting phased out with the Affordable Care Act, it still exists and could be cause for substantial out of pocket expenses.  Some plans mitigate the doughnut hole but will manage the risk for loss in other ways like raising your premiums or co-payments.  Shop for a plan that not only fits your prescription drug needs best, but also manages all of the costs behind them.

In Conclusion:

As a quick update to what’s happening in the office – Andrew, who was hired on because of his Medicare background, has been studying with the Medicare Rights Center to bring to the office a new level of knowledge on various Medicare topics. While we are not currently selling or servicing any Medicare insurance products, we are happy to discuss this topic in more depth, review your current coverage and formularies, walk you through the Medicare website, etc….  Please do not hesitate to call if you have any questions or need help with Part D or other Medicare issues. We are always happy to point you in the right direction.

[1] Medicare Advantage plans are beyond the scope of this article.  We can save that discussion for a later date.

[2] This includes drugs for weight loss or gain, fertility, erectile dysfunction, cosmetic purposes, symptomatic relief of cough and colds, prescription vitamins and mineral products.

[3] Those enrolled in Part D receive an Annual Notice of Changes (ANOC) each September.  The ANOC details changes in formulary to the existing plan for the coming year.


By Justin Fundalinski, MBA | October 15, 2015


October in the office is synonymous for Medicare.  Open enrollment is discussed rather frequently considering it begins on October 15th and certainly could impact any of our clients who are on Medicare. This month however, I would like to diverge into something that is likely to have a big impact in the long run.  Ever heard of MACRA? How about the Doc Fix Bill?  Well, the Medicare and CHIP Reauthorization Act (a.k.a MACRA, a.k.a. Doc Fix) was passed in an overwhelming Senate and House majority (92 to 8 and 392 to 37, respectively) in essence to prevent a pay cut to physicians, to keep physicians from dropping Medicare as an insurance provider, and to add funding to Medicare.

One Sentence Summary of MACRA:

MACRA is a new law that is intended to replace the current payment system for physicians from a quantity based payment structure to a quality of care payment structure with provisions that increase Medicare premiums paid by beneficiaries to help offset the costs that come along with the new system.

How the changes from quantity to quality based payments rolls out in the end will be subject to scrutiny over the coming years with likely opposition to the final structure from both physicians and Medicare beneficiaries.  However, there are some pretty clear estimates of how premiums will be impacted and some indirect effects to people’s premiums when this law is viewed in conjunction with the Affordable Care Act (a.k.a ACA or ObamaCare)

The Obvious:

Medicare premiums are based off of income levels. For instance, currently single individuals with $85,000 or less in Modified Adjusted Gross Income  (MAGI) (double this figure for married couples) pay a “standard premium” of about $105 monthly for their Medicare premiums. What this means is that if you make $85,000 or less you pick up 25% of your health insurance premium and the government picks up the other 75% (much like when you work for an employer you pay a part of the health care premium and your employer pays a part of it).  Anyone who makes more than this will pay more than the standard premium of 25%, and the amount they pay depends on how much more they make.  These are called income related premiums and depending on your income you will pay 35%, 50%, 65% or 80% of the premium.

The new law clearly makes some changes to this and on its surface level it appears that it will only affect higher income individuals or couples. It shifts some of the thresholds around so that only those that make over $133,500 (double for couples) will be impacted by premium increases caused by the law (remember this is on top of any normal premium increases that all Medicare beneficiaries are affected by).

An easy way to think about this is that some of the higher income earners that used to pay 50% of the total premium will now have to pay 65% and similar adjustments are made all the way up to the top where more people will be paying 80% of the total premium. Below you will find a chart from ObamaCare Facts that illustrates all of these bracket changes if you are interested in more details (I have put the changes in bold for easier reading).

Current MAGI limits Premium percentage MAGI limits beginning in 2018 Premium percentage
Less than or equal to $85,000* 25% Less than or equal to $85,000* 25%
Greater than $85,000 and less than or equal to $107,000* 35% Greater than $85,000 and less than or equal to $107,000* 35%
Greater than $107,000 and less than or equal to $160,000* 50% Greater than $107,000 and less than or equal to $133,500* 50%
Greater than $160,000 and less than or equal to $214,000* 65% Greater than $133,500 and less than or equal to $160,000* 65%
Greater than $214,000* 80% Greater than $160,000* 80%

*Limits for married couples are twice the limits listed here. Starting in 2020, all income thresholds will be updated (indexed) annually for inflation. 

The Not So Obvious:

Unfortunately, the percentage of people that must pay income related premiums is forced to increase due to the Affordable Care Act.  Currently, the brackets that were discussed above have been frozen since 2011, they will not be adjusted due to normal inflation, and are intended to remain frozen until 2019 (cross our fingers it does not get pushed out any further).  This “freezing” causes the brackets to remain the same while people’s income naturally grows due to inflation adjustments. So what is the effect of this?  Well, a Kaiser Family Foundation study estimated that between 2013 and 2019 the percentage of Medicare beneficiaries that must pay income related premiums will nearly double from 4.6% to 8.3%.  Undoubtedly, some groups of people are now going to be pushed above the $133,500 bracket and be directly affected by MACRA.

The Even Less Obvious:

A little off topic from MACRA but a perfect transition from the previous paragraph; because most readers of this will probably not care too much about the premium increases since they do not have a Modified Adjusted Gross Income greater than $133,500 (double for couples) there is a hidden affect that is often overlooked.  What people are missing is a little known rule that was built to protect only those that do not have income adjusted premiums.  This rule is called the hold harmless rule and in a very general sense exists so that a raise in Medicare premiums cannot reduce the amount of Social Security income that you take home (remember premiums are subtracted from your Social Security benefit).

Well for those who are anywhere near the brink of $85,000 in annual income this hold harmless provision may quickly be stripped from you.  As stated earlier the percentage of people that must pay income related premiums is expected to nearly double by 2019.  Every person that is forced into an income related premium bracket (due to the freezing of brackets under the Affordable Care Act) will lose the hold harmless provision that protected their Social Security take home pay from ever decreasing.

What does this mean?  Well, Social Security benefits inflate at a rate much slower than Medicare premiums so it is quite possible that Social Security benefits will be chewed up by Medicare premiums for anyone that was forced into these higher brackets.  When could this happen?  Really it could happen any time a Medicare premium increase is greater than the cost of living adjustment for Social Security.  It is not likely to have a substantial impact in the near future because Medicare premiums are not a large percentage of Social Security benefits. However, many years down the road when Medicare premiums have inflated to levels substantially higher than today significant impacts to Social Security benefits may be realized.  What’s the likelihood that this occurs? Who knows what the future holds, but historically it happened as recently as 2010, 2011, 2013, and is likely to happen again in 2015.

What Does It All Mean?

When it comes to MACRA the proof will be in the pudding when doctors implement the quality of care based payment structure and abandon the current quantity of care structure.  That is, having less doctor’s visits and better care given sounds great to me, but let’s not assumes this patch is the panacea to an already broken Medicare system.  Time will tell and more patches will be applied over the years to Medicare as well as this specific law itself.

When it comes to the ACA’s freezing of the Medicare income brackets (another patch), what’s done is done and more people will be paying income related premiums and losing the hold harmless provision that protects their take home Social Security from ever going down.  Something to keep an eye on is whether or not the freezing of the Medicare income brackets gets extended beyond 2019 and forces even more people into income related premiums.