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Life Health > Health Insurance > Medicare Planning

Medicare Surcharge Changes: What Advisors Should Know

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Here’s some good news for advisors with clients on Medicare earning more than $85,000 as individuals and $170,000 as couples filing jointly: Starting next year, the income brackets linked to surcharges for Medicare Parts B (medical services and supplies) and D (prescription drugs) will be indexed to inflation for the first time since 2010.

There are five income brackets linked to different surcharge percentages, ranging from 33% to 201%, which are applied as an additional cost to the base premium. The top income bracket, above $500,000 for individuals and above $750,000 for couples, won’t be indexed to inflation until 2028. The surcharges are officially known as the Income-Related Monthly Adjustment Amounts (Irmaa).

Surcharges on Medicare Part B and D Premiums

The inflation indexing of the surcharge, which uses the Consumer Price Index for All Urban Consumers (CPI-U), was previously in effect from 2007 through 2010, then temporarily ended by the Affordable Care Act until 2020.

With the renewed indexing of incomes, “Americans will need to have higher income levels to be subject to the added cost of surcharges — a positive development for current and future Medicare recipients,” according to a new report from HealthView Services.

But, says the firm’s CEO, Ron Mastrogiovanni, “given the pressure on the Medicare Trust Fund, retirees should expect additional changes and cost shifting to make up for lost revenues.”

The Trust Fund will collect less money from Medicare beneficiaries as a result of the inflation indexing while health care costs continue to rise, putting even more pressure on the program.

“To maintain the solvency of the Medicare Trust Fund, revenue no longer generated from surcharges must be recovered from other sources,” the report notes.

According to the latest Medicare Trustees report, the trust fund for Medicare Part A, for hospital insurance, will be exhausted in 2026, resulting in an 11% cut in spending if no financing changes are made.

Medicare Parts B and D funds are not projected to be exhausted because the government can simply raise the premiums paid by beneficiaries to cover the programs’ rising costs.

The HealthView Services report notes that reductions in Medicare benefits are already underway. The government has already eliminated the Supplement insurance Plans F (the most popular supplemental plan), to and Plan C, beginning on Jan. 1, 2020. Both plans cover help beneficiaries cover the gaps in costs that they are required to pay for.

“A series of smaller changes will add up over time, affecting Americans’ retirement,” Mastrogiovanni tells ThinkAdvisor, adding that Medicare beneficiaries in the lower income bracket who struggle to pay out-of-pocket costs and deductibles will be most affected.

He also notes that it’s important for retirees and their advisors to be careful about  drawing down assets in retirement because some assets, such as certain types of life insurance and annuities, can provide tax-free retirement cash flow that can produce a lower modified adjusted gross income and therefore help reduce Medicare surcharges.

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