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.