Did your Medicare Part B premium increase 270% in 2016 from what you paid in 2015? Assuming that your health status hasn’t changed, how is that possible? What about the fact that there was no increase in Part B premiums for Social Security recipients since there was no cost-of- living increase for 2016 benefits?
Medicare Part B Basic Premium
There are two potential basic Part B premiums in 2016: a hold-harmless premium and a standard premium. Approximately 94% of Medicare enrollees pay the basic premium with 70% paying the hold-harmless premium and 30% paying the standard premium. The 2016 hold-harmless monthly premium is $104.90 and the standard premium is $121.80.
The hold-harmless premium comes into play in any year in which the Social Security cost of living adjustment, or COLA, is insufficient to cover the amount of the Medicare Part B premium increase. Since there’s no Social Security benefit COLA in 2016, the basic Part B monthly premium remains at the 2015 amount of $104.90 for most Medicare enrollees.
As previously stated, approximately 30% of those paying the basic premium aren’t protected by the hold-harmless provision in 2016, paying the standard premium of $121.80. This group includes Medicare beneficiaries who are also eligible for Medicaid, new enrollees, enrollees not receiving Social Security benefits, and higher-income enrollees.
Medicare Part B Premium Surtax
Medicare Part B premiums, unlike private health insurance premiums, are determined by the amount of your income. Your modified adjusted gross income, or MAGI, as reported on your federal income tax return from two years ago is used to determine the amount of your current year Medicare Part B premium. MAGI is often the same as adjusted gross income for most people.
Once again, the 2016 basic premium is either $104.90 or $121.80, depending upon whether or not you qualify for the hold-harmless provision. You will pay the basic premium if (a) your 2014 filing status was single and your MAGI was $85,000 or less or (b) your 2014 filing status was married filing joint and your MAGI was $170,000 or less.
A surtax known as the “Income Related Monthly Adjustment Amount,” or IRMAA, will be added to the standard premium, to the extent that your 2014 MAGI exceeded the foregoing amounts. If this is the case, your Medicare Part B monthly premium will range from $170.50 to $389.80 depending upon your 2014 filing status and MAGI. The highest premium applies for MAGI over $214,000 for single filers and $428,000 for married filing joint.
Income Spike Can Result in Premium Increase of 270%
Let’s assume that your 2015 Medicare Part B monthly premium was $104.90 and you’re single. This means that your 2013 MAGI was $85,000 or less. Let’s further assume that you sold a rental property in 2014 and realized a capital gain of $200,000 in addition to other income, for total adjusted gross income of $250,000.
Since your 2014 MAGI exceeded $214,000, your 2016 Medicare Part B monthly premium is $389.80. This represents an increase of 272% compared to your 2015 premium of $104.90. You will pay a total of $4,677.60 in 2016, or $3,418.80 more than the total premium of $1,258.80 that you paid in 2015. Welcome to the Medicare Part B premium two-year look back rule.
Medicare Part B Premium Appeal
Medicare has a process in place for appealing Part B premium increases. There are two types of situations that qualify for a reconsideration of the initial determination from Social Security Administration as follows:
- Tax return is inaccurate or out of date
- Life-changing event that results in a decrease in modified adjusted gross income
Generally speaking, an abnormal spike in income isn’t appealable. Inaccurate or out-of-date tax return situations include the filing of an amended tax return, correction of IRS information, IRS use of three or more year old data, and a change in living arrangement.
Life-changing events that result in a decrease in modified adjusted gross income include the death of a spouse, marriage, divorce or annulment, spouse or you stop working or you reduce the number of hours that you work, involuntary loss of income-producing property, loss of pension, and receipt of a settlement payment from a current or former employer due to the employer’s closure or bankruptcy.
There’s Always Next Year
If you’ve been paying the basic Medicare Part B premium all along, your 2016 premium amount spiked, and you don’t qualify to appeal your Medicare Part B premium, if it’s any consolation, you will once again pay the basic Medicare Part B premium in 2017 if you didn’t have any abnormal amounts of income included on your 2015 federal income tax return.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.