For your high net worth and upper middle class clients, Medicare planning has become a critical component of a well-executed retirement income plan. New rules put into effect under the Patient Protection and Affordable Care Act (PPACA) can impact these clients’ retirement income planning in ways they might not yet realize by increasing their Medicare premiums proportionally as income increases. The new rules will expand the pool of clients to which these monthly increases will apply. In today’s environment, it is more important than ever to consider Medicare premiums when planning for retirement expenses.
Medicare Income-Based Premiums
Under Medicare’s income-adjusted premium system, clients with income that exceeds certain threshold levels pay a higher monthly premium for Medicare Parts B and D. Individual taxpayers with income that exceeds $85,000 ($170,000 for joint filers) are subject to income-based premium adjustment.
Premiums increase incrementally based on a client’s income level. For example, a married couple earning more than $170,000 will pay a Medicare Part B premium that is $42 higher than the standard premium level ($104.90 in 2013) and an additional $11.60 above the monthly Medicare Part D premium. Married couples earning more than $428,000, however, will pay $230.80 above the standard premium level in 2013 (and $66.60 above the Medicare Part D monthly premium). The difference can be substantial—a Medicare beneficiary in the highest income bracket will pay over $3,500 more in annual premiums than a beneficiary who does not exceed the income thresholds.
See also: Explaining Medicare supplement products
Before PPACA's rules became effective, the income thresholds were indexed annually for inflation to ensure that lower income households did not become subject to Medicare’s income-based premiums. PPACA froze the thresholds at the 2010 level so that more clients will become subject to higher premiums each year. It is projected that approximately 10 percent of all Medicare beneficiaries will become liable for income-adjusted premiums by 2019. The administration budget proposal for 2014 would continue the freeze until approximately 25 percent of all beneficiaries pay income-adjusted premiums.
Retirement income planning for higher Medicare premiums
The income threshold is based on the income reported on a client’s most recent federal tax return, which may not reflect a client’s current income (for example, 2013 premiums are based on the tax return your client filed in 2012, which is based on 2011 income). Clients who have recently retired and fallen into lower income tax brackets may be eligible for a premium reduction by contacting Social Security with documentation confirming their new income level.
Further, clients who may be close to the next highest income threshold that would generate a premium increase should consider the potential increase when selling assets or taking retirement account distributions that might push them over the threshold. The additional premium costs can essentially amount to an additional tax to reduce the value of the additional income.
Clients who are considering Roth conversions should be advised that these conversions will increase their income in the year of conversion, so it might be advisable to convert smaller amounts over multiple years rather than executing a single large conversion.
While many of these clients may already be paying attention to the income thresholds that might subject their income and investments to higher taxes, some may be unaware of the Medicare thresholds. For these clients, income-based adjustments to Medicare premiums should be factored into a comprehensive retirement income plan.
For previous coverage of planning for postretirement medical care in Advisor’s Journal, see Post-Retirement Healthcare: A Quarter-Million Dollar Dilemma.
For in-depth analysis of the Medicare system, see Advisor’s Main Library: B—Medicare.
Your questions and comments are always welcome. Please contact the Panel of Experts.