This is a real case brought to my attention. A retiree, we’ll call her Betty, was notified last week by the Social Security Administration (SSA) that the monthly benefit amount to be deposited in her bank account on January 26, 2022, will be $1,179.20. Here’s her problem: the monthly benefit amount she currently receives is $1,248.50. Betty will collect $69.30 less per month next year.
You may wonder: how’s that work when in 2022 recipients will supposedly receive a 5.9% Cost-of-Living increase in Social Security retirement benefits? What’s going on here?
– Is it because Betty started working, and so received a decrease in her benefit because of Social Security’s earnings test? This can happen if you earn too much in wages while receiving benefits before your full retirement age. Not the case here. Betty is past her full retirement age and is completely retired.
– Is it because her Medicare Part D premium (Prescription Drug Plan) went way up? Individuals on Medicare buy their Part D premiums through individual insurers. Medicare premiums typically come out of the retiree’s Social Security payment, so maybe that has an effect. Betty’s premium did go up, but only by $66 for the entire year. So that’s not the culprit.
– Did something happen that caused her Social Security retirement benefit itself to go down? Perhaps she’s not entitled to a Cost-of-Living increase? Again, negative. In 2021, her monthly Social Security retirement benefit before deductions was $1,485.90, and in 2022 it will be $1,574.20 – this amounts to a 5.9% benefit increase.
– Does the SSA have a bad abacus or perhaps their calculator is low on batteries? Not to my knowledge.
In fact, the culprit in Betty’s case is her husband. He’s still working, and he made more money in 2020 than 2019. That additional income threw their joint income into a higher bracket for what’s called the Income-Related Monthly Adjustment Amount (or “IRMAA”). Because of his additional earned income, the couple’s modified adjusted gross income (or “MAGI”) went up. That put them into a higher IRMAA bracket, causing both of their Medicare Parts B and D premiums to increase. Since Betty’s Medicare premiums come out of her Social Security payment, the increases in her Medicare costs more than cancel out the 5.9% retirement benefit increase. Through no fault of her own (remember, she’s retired), she’ll receive $831.60 less in 2022 from the SSA compared with 2021.
What You See Isn’t What You Get
Welcome to IRMAA. Contrary to what many individuals assume, Medicare is in part means tested. The more you make, the more you pay in premiums. Each year, the SSA talks to the IRS to determine your income (typically using data from your prior year’s Form 1040). If income is too high, you pay a monthly surcharge for your Medicare Parts B and D premiums. In government speak, they “adjust” your premium. For the wealthiest Americans (MAGI of $750,000 or more for married filing jointly), the premium they pay is more than three times the standard premium.
Once retirees start receiving Social Security retirement benefits, their Medicare premiums are deducted from their benefit check. Each December, the SSA sends out a letter letting the recipient know about their next year’s payment – this includes notifying them if there will be an income-related adjustment. That’s how Betty found out about her net loss in payments.
This month, many people who are getting their 2022 benefit letters from the SSA are finding that there will be less in their stockings than they thought. While the 5.9% Cost-of-Living benefit for Social Security retirement benefits is real, this payment can be quickly eaten up by increases in the Medicare costs that are subtracted from the Social Security payment.
This is particularly noticeable for 2022 payments. Even without factoring in the IRMAA surcharge for making too much money, Medicare’s standard Part B premium will increase for next year by double digits – from $148.50 per month to $170.10. And for many individuals who have Part D prescriptions benefits, their premiums are increasing as well.
IRMAA just compounds the hurt. In Betty’s situation, because she and her husband’s income was between $228,000 and $284,000 in 2020, her Part B premium is double what the majority of retirees pay: $170.10 for the standard premium plus $170.10 the IRMAA adjustment. For Betty, the combination of increased Medicare premiums plus the IRMAA penalty will result in a net decrease to her net monthly Social Security payment during 2022.
Can Anything Be Done?
The options for bringing down these costs are limited. The two planning opportunities are Medicare plan shopping and tax timing strategies.
Even though Medicare is a government health care plan, retirees have many purchase options. This should be obvious to anyone who experiences the barrage of Medicare TV commercials that show up this time of the year.
– Every year during open enrollment the retiree should review her Medicare decisions. A switch from original Medicare to Medicare Advantage may lower the overall premium. This is at a cost to flexibility, but because of changed circumstances for some, a switch may be in order. While a switch to Medicare Advantage does not specifically change the Part B premium and IRMAA issue, it still might lower the overall cost of retiree health insurance.
– Even without changing from original Medicare, shopping for a lower Part D premium may save a few dollars, either in premiums or in the net cost of prescription drugs.
– Likewise, if the retiree has original Medicare, they should review their Medigap plan to see if any savings can be wrung out of this voluntary health benefit.
The bigger issue for affluent retirees is the IRMAA surcharge. As Betty experienced, this can double one’s premium. Saving on this charge is a matter of tax planning. Any strategy that can lower MAGI by as little as one dollar below the relevant IRMAA income bracket will pay big dividends. This is because the IRMAA surcharge is not gradual or graded. Going over by a mere dollar into a new income category can increase your monthly premium by more than 40 percent over the next lower category.
– In Betty’s case she and her husband had avoided the higher IRMAA premium for the year 2021 because of tax planning involving their prior year’s taxes. A year-end review of their 2019 tax status revealed they were a few hundred dollars into the next higher IRMAA bracket, so they elected, before April 15 of the next year, to put some earned income into an Individual Retirement Account (IRA). This contribution was just enough to lower their MAGI into the next lower bracket. At the end of 2020 when the SSA looked at the couple’s previous year income, they assessed an IRMAA premium based on the next lowest income category.
– Bunching charitable deductions into a year where the taxpayer will itemize deductions is another way to lower MAGI. The idea is the taxpayer makes larger charitable contributions in a particular year so as to take advantage of itemizing taxes, and thereby lowering MAGI. While this may help get income low enough to duck the IRMAA bullet in one year, it may not help in the following year.
– This kind of tax planning needs to be coordinated with other tax strategies. For example, while Roth IRA conversions are an excellent strategy for saving income taxes in the long run, the taxpayer should consider what her income will be as a result of the added taxation of the Roth conversion. If possible, it would be advisable to avoid having the conversion increase MAGI into a new IRMAA bracket. Again, a one dollar increase in MAGI can result in a 40 percent increase in Medicare premiums.
– There are other opportunities that may apply to a particular taxpayer’s situation, such as using married filing separately status. It all comes down to looking at taxes holistically.
While IRMAA is thought of as a premium, it is essentially a tax assessed on retirees as their income goes up. It is a particularly unforgiving tax because of its lack of grading between brackets. As Betty discovered, the increase in Medicare premiums in general, plus the “adjustment” associated with one’s income can obliterate any gain realized from a Cost-of-Living retirement benefit. A 5.9 percent Social Security benefit increase is a pyrrhic victory when your Medicare health insurance premiums more than wipe it out.