I’ve been working with a family for years and finally this year they have decided to pull the trigger and retire. Both will retire now that they are 65, and we spent a lot of time discussing healthcare, and specifically Medicare. They both decided on a Medigap G policy and we figured the total cost including a prescription drug plan to be about $290 per month per person. Needless to say they were shocked when they received their first premium payment and it was nearly $300 more per month than they expected! This article discusses how you can avoid this costly Medicare mistake.
Medicare premiums are based on income
The Medicare part B monthly premium in 2018 is typically $134 per person. What the couple I was working with though realized, is that the more that you make, the higher your monthly premium.
Here is a chart of the monthly premium given your yearly income.
Now, for many of us, in retirement our income goes down and we don’t have to worry about the higher premiums. This issue though with this couple was not how much they are going to make in retirement, rather how much they were making while they were working.
Premiums can be based on income from two years ago
Medicare sets your monthly premium based on the most recent tax forms that they have on file. This couple retired at the beginning of 2018, and was basing the premium on earnings from 2016. Of course, they were still working in 2016 and had income over $250,000. Truthfully, even if they had their most recent 2017 tax return, they still would have shown this much income. Like most of us, their income won’t decrease until this year, the year in which they retire.
The $10,200 penalty
Based on the clients very high 2016 income, Medicare was claiming that the couple would have to pay $348 per person per month for their Medicare premium. A $214 monthly penalty even though their retirement income would be much less, and they should qualify for $134 per month payment. Worse, this issue would persist for 2 years. Remember, Medicare bases your income on the most recent tax filings they have on record. This year, they are paying the higher premium based on 2016 income. Next year, the premium is based on 2017 income, which they were still working and still will have that same penalty. It wouldn’t be for two years until their monthly premium decreased to where it should be.
How to get your monthly premium lowered
When you initially apply for Medicare, or approaching age 65, you should receive an Initial IRMAA Determination letter. IRMAA stands for Income Related Monthly Adjustment Amounts and you will receive it if you are subject to the higher monthly premium.
Thankfully, Medicare allows you to appeal this higher monthly premium if you have a life changing event. One of those life changing events is work reduction or stoppage, a.k.a retirement. You will need to write a letter to the Social Security Administration, and include this form, to appeal your decision. I would also suggest getting a letter from your employer, stating that you are now retired. You may also want to go to your local social security office, to make sure that you are completing the form correctly. That may seem like a hassle but still, appealing the IRMAA adjustment could save you thousands, and worth your time.
If you are retiring after age 63, and your income is above the threshold in which your Medicare part B premium is higher, you may be in for a rude awakening when you get that first Medicare bill. The good news is that you can appeal this high premium, and can potentially save you thousands in the process.