Some older Americans may be all too familiar with sticker shock when it comes to their Medicare premiums.
That is, instead of paying the standard premium for Part B (outpatient care coverage) and Part D (prescription drug coverage), their income is high enough for monthly "income-related adjustment amounts," or IRMAAs, to kick in. However, the surcharge is typically based on their tax return from two years earlier — which may not accurately reflect their current financial situation.
"For some clients, their income from two years prior is significantly higher than it is today or will be when they retire," said Elizabeth Gavino, founder of Lewin & Gavino and an independent broker and general agent for Medicare plans.
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The good news for those beneficiaries is that they can appeal the IRMAAs.
"Most people don't want to wait two years for their lower income to catch up to them in order to get the IRMAA adjusted downward or removed," said Danielle Roberts, co-founder of insurance firm Boomer Benefits.
Of Medicare's 63.3 million beneficiaries, about 7% — 4.4 million people — pay those monthly surcharges, according to the Centers for Medicare & Medicaid Services. This is due to various legislative changes over the years that have required higher-earners to pay a greater share of Medicare's costs.
The reason a tax return from two years earlier is used is that it's usually the most recent one available when the Social Security Administration makes the IRMAA determination ahead of each new year.
For this year, IRMAAs kick in for individuals if your modified adjusted gross income is more than $88,000 (details for 2022 have not yet been formally announced). For married couples filing joint tax returns, the surcharges start above $176,000 this year. The extra charges increase at higher income thresholds.
The standard monthly premium for Part B this year is $148.50, which is what most Medicare beneficiaries pay. (Part A, which provides hospital coverage, typically comes with no premium.) The surcharge for higher earners this year ranges from $59.40 to $356.40, depending on income. That results in monthly premiums ranging from $207.90 to $504.90.
For Part D, the surcharges this year range from $12.30 to $77.10. That's in addition to any premium you pay, whether through a standalone prescription drug plan or through a Medicare Advantage Plan, which typically includes Part D coverage. While the premiums vary for prescription coverage, the average for 2021 is about $33.
The process to prove that your current income is lower involves asking the Social Security Administration to reconsider their assessment. You have to fill out a form and provide supporting documents.
"The best way to appeal is to file your form with as much evidence as possible," Roberts said.
The best way to appeal is to file your form with as much evidence as possible.Danielle RobertsCo-founder of Boomer Benefits
Suitable proof may include a more recent tax return (if one is available), a letter from your former employer stating that you retired, more recent pay stubs or something similar showing evidence that your income has dropped.
The required form includes a list of "life-changing" events that qualify as reasons for reducing or eliminating the IRMAAs, including marriage, death of a spouse, divorce, loss of pension or the fact that you stopped working or reduced your hours.
If your efforts don't work, you can appeal the decision to an administrative law judge, although the process could take time and you'd continue paying those surcharges in the meantime.
Additionally, your situation is reevaluated every year, which means the IRMAAs (or whether you pay them) could change annually, depending on how volatile your income is.