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If you have a question about IRMAA or recently got a letter from Social Security about it, let me know. You can write to beth.pinsker@marketwatch.com.
Craig Cheney travels the country making people mad.
He runs a consulting company that analyzes whether an individual’s financial situation is going to trigger surcharges on Medicare Parts B and D called Income-Related Monthly Adjustment Amounts (known affectionately as IRMAA). He gives presentations where he runs numbers for audience members with his company’s proprietary IRMAA Solutions calculator to give them a sense of what they will pay — and that’s what triggers the outrage.
“They’re not seminars, they’re like revival meetings. People get worked up. One guy threw a book at me,” said Cheney, who notes that he’s 6’8” tall and usually scares people off from such behavior.
The way IRMAA works is that if an individual has modified adjusted gross income in 2023 of more than $97,000, or $194,000 for a couple, they get surcharges added to their Medicare Part B and D premiums. Modified adjusted gross income for this purpose includes annual adjusted gross income plus nontaxable interest from investments like municipal bonds added back in.
The brackets are set each year and there are six tiers for each filing type. For 2023, the standard Part B premium is $164.90 per individual. The first IRMAA tier adds an additional $65.90 per month, adding up to $230.80. For Part D it’s an additional $12.20 on top of the premium, which can vary. The highest income tier pays $560.50 for Part B and $76.40 extra for Part D.
If you are claiming Medicare at 65 but haven’t started Social Security yet, you owe this money out of pocket. But if you have started Social Security, the money comes out of your payments before they are issued. In some cases, the premium amount ends up being more than a person’s whole monthly Social Security benefit, so you could end up owing the government a check.
“It feels like death by a thousand cuts,” said Harry Sit, founder of the blog TheFinanceBuff.com.
Sit usually tackles topics related to saving for retirement, including Roth conversions, but started digging into IRMAA because it requires careful planning of income tax brackets to avoid it. The IRMAA calculation is particularly unforgiving and automatic, so it’s the individual’s responsibility to work around it.
The formula is based on your taxes from two years prior. If you’re 65 in 2023 and starting Medicare, the government will be looking at your taxes from when you were 63 in 2021. If you go over the current prevailing income cliff, you’ll get a letter in the mail that says you’ll owe IRMAA surcharges and will provide you information if you want to appeal.
“You don’t know where the goal post is,” said Sit. “Your Medicare premium in two years is based on your income this year but the thresholds won’t be published until late next year. You can only shoot in the dark. The cliffs make it worse. If you overshoot an unknown threshold by a small amount, you get into the next tier and that will cost you $1,000 or more.”
Rare circumstances
Still, only a fraction of Medicare recipients will come up against IRMAA. According to the latest Medicare Trustees Report, since IRMAA started in 2007, only about 7% of Medicare recipients pay some amount of IRMAA each year. Today there are 65 million or so Medicare recipients, and the number paying a Part B surcharge was 4.4 million and 3.6 million paid Part D surcharges in 2022, which was lower than projected.
But the numbers are expected to rise at least 3% a year, according to Medicare projections. According to Cheney, it’s just inevitable given the demographics of the country hitting “peak 65” when 10,000 people turn 65 each day. Also, the IRMAA income cliff doesn’t keep up well with inflation and wage growth, so more people are going to hit the thresholds as time goes on.
“When you see the 2023 batch of IRMAA letters go out this fall, it’ll be staggering,” Cheney said. “People have no idea they’re coming.”
Here’s what this looks like in real life: Last year, Cheney helped a retired postal worker in Arkansas who had taken out a large sum from his qualified retirement plan previously to purchase the dream house where he’d spend the rest of his life. The $297,000 was added to his taxable income in the year he took it out, and then two years later, he got a letter from the Social Security Administration saying that he wouldn’t be getting any more Social Security checks. His monthly Medicare premium was going to be $527.50 and his monthly Social Security payment was less than that, so he’d owe money. “We find that we must bill you for $1,357.60,” the letter said.
Say what now?
“Many people trigger IRMAA when they have a one-time income spike – sold a home, sold some stocks, withdrew more from an IRA to help their kids – and they were mentally prepared to pay more taxes when they filed their taxes the next year,” Sit said. “They thought they were done with it. Now IRMAA comes another year later. No one likes a negative surprise. It feels like a second dip of the government’s hand into the cookie jar.”
How to plan around IRMAA
One easy way to get around surcharges is to try to time major cash infusions so that they hit your taxes before IRMAA calculations. “You should be working with a financial adviser before age 63,” said Danielle Kunkle Roberts, co-owner of Boomer Benefits, a company that helps older Americans with their Medicare insurance. That goes for home sales, stock option redemptions and Roth conversions, and especially if you are working at 63 and are retired two years later with a much lower income.
Another fix is to file an appeal with form SSA-44 if your circumstances have changed or your income was temporarily high. There are a handful of circumstances that qualify, such as a divorce, death of a spouse, job loss and illness. Roberts helped her own mother file an appeal. “She retired, and we were able to show them documentation of her retiring and got that lowered sooner,” Roberts said.
If your retirement income kicks you over the threshold, or it goes over because of investment decisions like making a Roth conversion that would be worth it to you for your overall financial picture, you can also just live with it and pay what’s owed. Sometimes IRMAA can be temporary and if your income changes, it can go away.
Cheney said he does not see that as being a very satisfying answer to the people he meets on the road.
“I’ve not seen this kind of palpable anger and frustration before,” he said. It’s not just about the money, it’s about the rules constantly changing. So Cheney fully expects to see a lot of people coming to his meetings waving IRMAA letters and being very mad about them in the next few months. “We need to at least educate people about what is going to happen to them,” he said. “That’s better than nothing at all.”
