Here’s the scenario: your client, turning 65 this year, is going to retire on his birthday. He’s been making a comfortable living; he and his wife together have an annual income of a little more than $400,000. But now that they are retiring, it is time to put the financial plan you’ve been preparing with them for the last 10 years into effect.
They prepare to shift their income stream away from work income to investment income. Their earned income is expected to drop down to $50,000 or less. But as your client and his wife enroll in Medicare, they get a letter from Social Security stating that they made over $400,000 two years ago, and as a result their Medicare part B premium will be increased from the planned-on $121.80 to a whopping $389.80! This is neither a joke nor a mistake: Your client’s Medicare Part B premium just increased threefold because, two years ago, he and his wife earned more than the average American.
In 2003, the Medicare Modernization Act, the same act which created the Part D Prescription Drug program, also established that, beginning in 2007, people with incomes above a certain threshold, would be required to pay increased costs for their Medicare Part B premium.
These increased costs are called the “Income-Related Monthly Adjustment Amount,” or IRMAA. The Affordable Care Act expanded IRMAA to also include a surcharge for Part D premiums.
This amount, set in 2007, has been subject to cost of living increases every year. The intent of the rule was to make the top 5 percent of all income-earners on Medicare contribute a greater share to the public pool. However, because Social Security generally receives income information by the IRS from 2 years past, many people get trapped into having to pay the IRMAA at a time when their income has taken a noticeable drop. These are not the people the IRMAA is intended to be paid by.
Fortunately, Social Security came up with a way to remove this extra charge from your clients who have transitioned from high income earners to retirees living off a sound financial plan. This form, called SSA-44, is readily available on Social Security’s website and is easy enough that you or your client’s accountant can assist your clients in preparing.
The key to getting the IRMAA removed is declaring a life-changing event. At the time of this writing, Social Security lists eight possible things that could happen which would qualify to eliminate or reduce the IRMAA, and all your client needs to do is qualify for one of them. Almost every client we have ever helped with this situation can attest either to “work reduction” or “work stoppage.” However, there has also been a “death of a spouse” and “loss of pension income” to qualify them.
This declaration is step one on the form. Steps two and three are simply a statement of their current income. Have your clients be as accurate on this as they can. More on that later. From this estimation, Social Security will determine the new reduced IRMAA amount, or if they should remove it completely.
Step four requires a little advance planning on behalf of your client. It’s the documentation which accompanies the work reduction or work stoppage declaration. Social Security’s (and ours, when we assist) preference is to receive a copy of a signed statement from your client’s employer/former employer accompanying the form stating the loss or reduction in work. Failing that, copies of pay stubs showing the income reduction, or documents showing that a business has been sold or transferred, if clients owned their business, are acceptable. However, only about half the people we have helped with this form have been able to obtain such proof. Therefore, Social Security will also take a signed statement from your clients, given under penalty of perjury, in which they swear that they have had a reduction of income due to one of the stated reasons in section one.
And that’s it! Hand the form and the accompanying documentation in to Social Security as soon as you can. They’ll adjust the IRMAA accordingly within four to six weeks.
Finally, a word about estimating income. Once officials have approved the SSA-44 form, they will usually take your client’s word for what the income is expected to be that year. However, if the actual income turns out to be incorrect, and your client really did make enough to be charged the IRMAA, or charged a higher IRMAA than the adjusted amount, then once Social Security receives this information (usually about a year later), the agency will go back and charge your client the difference.
This emphasizes the importance of being as accurate as possible with your client’s estimated income for that year. If the estimation is close to the threshold where they might receive a charge, or a higher charge, it is best to have your client set aside monies temporarily just in case their income comes in at the higher amount when everything is tallied up at tax time the following year.
Medicare is a fantastic health insurance program, and encompasses most of the major medical services your client will need to utilize in their golden years. But it is not free. It is important for clients of every income level prepare for the premiums that will be levied at them. Our highest income clients do not always remain highest income. And when they transition away from high income earners, it is important that we be there for them to make sure they are not accidentally charged higher premiums when they’ve transitioned to retirement.
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