As you approach age 65, you’ve probably already heard about Medicare’s alphabet soup of benefits (Part A, B, etc.). You hope the premiums will be less, but you’re not sure how they’re calculated.
To an extent, Medicare premiums are what they are. You’ll end up paying the advertised premium, a little (or even a lot) more, or somewhat less, without much room to negotiate.
Paying the Advertised Premium
As prescribed by the 1997 Balanced Budget Act (BBA 97), the government typically calculates “regular” Medicare Part B outpatient care premiums at 25% of total program costs, with the rest financed through general revenue. There have been exceptions. In 2020, for example, program costs were so steep that Congress stepped in, limiting the premium increase … for that year, anyway.
Paying Less: Medicare and Social Security
Under a hold harmless provision, Social Security recipients who qualified for payments in November and December of the prior year won’t see their Medicare premiums increase to the advertised rate if it causes their net Social Security benefit to decrease. So, when the annual Social Security Cost of Living Adjustment (COLA) increase is 0%, your Medicare premiums won’t increase either.
But, while I’ll spare you the details, know that the government can “catch up,” with higher Medicare premium increases once COLA is back on the rise. Also, you are not protected by the hold harmless provision until you actually start taking your Social Security benefits, regardless of age.
Paying More: IRMAA
Neither the advertised premium nor the hold harmless provision applies if you earn too much and end up subject to the Income-Related Monthly Adjustment Amount (IRMAA). For example, the Medicare Part B advertised premium is $148.50/month for 2021. But if you file single and reported income between $88,000–$111,000 on your 2019 income tax return, your 2021 premium will be $207.90/month, and upward from there. The same types of IRMAA surcharges also apply for Medicare Part D.
Again, there is not much you can do about your Medicare premium. But now that you know your annual income can influence the premium, you may be able to plan accordingly. For example, you may factor this in when taking IRA distributions, to avoid ending up in a higher IRMAA bracket. Every little bit helps.