What is IRMAA?
The Income Related Monthly Adjustment Amount, better known as IRMAA, is a surcharge that is added to the current year’s Medicare Part B (hospital coverage) and Part D (prescription drug coverage) premiums for those who have earned “too much” income in a given year.
The income that used to determine IRMAA is defined by Medicare as ““adjusted gross income plus any tax-exempt interest” or everything on lines 2a and 8b of the IRS form 1040.
Some examples of income are: Wages, Social Security Benefits, Capital Gains, Dividends, Pension and Rental Income and distributions from tax-deferred investments like a Traditional 401(k) or IRA.
IRMAA is broken into 6 different income brackets which each bracket having its own income levels and surcharges for the current year.
The IRMAA brackets in 2021 are:
When did IRMAA start?
IRMAA was created in 2003 through the Medicare Modernization Act of 2003 as it was a way, according to the Act, for Congress and the people “to begin to address the fiscal challenges facing the Medicare program”.
The first year of implementation was in 2007 with a surcharge being placed upon only the Medicare Part B premium.
The IRMAA Brackets in 2007 were:
Have there been any changes to IRMAA over the years?
There have a been couple, with the biggest change being in 2010 with the passing of the Affordable Care Act (ACA) as it called for the IRMAA surcharges to include Part D (prescription drug coverage) too.
The IRMAA Brackets in 2011 were:
The other change to the IRMAA brackets happened in 2018 with the passing of the Bi-Partisan Budget Act. This Act created a 5th bracket to IRMAA while also stipulating that this new additional IRMAA bracket would not be adjusted for inflation until at least the year 2028.
The IRMAA Brackets in 2019 were:
As it can been seen since 2007 the IRMAA surcharges have grown over time and in some ways they have grown substantially. On average the IRMAA Brackets have inflated from 2007 to 2021 as follows:
- 1st Surcharge Bracket: 4.94%
- 2nd Surcharge Bracket: 6:42%
- 3rd Surcharge Bracket: 7.36%
- 4th Surcharge Bracket: 8.02%
- 5th Surcharge Bracket: 4.73% (2019 – 2021)
What are the projections of IRMAA?
When it comes to Medicare and future projections, thankfully, the Medicare Board of Trustees releases an annual report detailing what to expect in terms of future costs and since 2007, when Medicare Part D and IRMAA were first implemented, when it comes to Part B premiums as well as IRMAA surcharges they have been extremely accurate.
This issue with the projections from the 2020 report, though, is that due to the Coronavirus the Trustees have stated “that it is not possible to adjust the estimates accurately at this time”, but by looking at the 2019 MBT Annual Report the IRMAA brackets in 2028 are projected to be:
This is roughly a 6.20% rate of inflation for Part B and a 6.58% inflation rate for the Part D surcharge annually from 2021 to 2028.
Another factor in terms of IRMAA and the projections of where they may be headed is with the incoming administration.
When President Elect Joseph Biden was Vice President with President Barack Obama the Budget in 2014 called for the IRMAA surcharges beginning in 2017 to be restructured “by increasing the lowest income-related premium five percentage points, from 35 percent to 40 percent and also increasing other income brackets until capping the highest tier at 90 percent”.
The goal of this Budget was to “maintain these income thresholds associated with income-related premiums until 25 percent of beneficiaries under Parts B and D are subject to these premiums”.
In the same year, the Bi-Partisan Policy Center also called for the IRMAA brackets to be reduced by 11% for individuals and 46% for couples in order for Medicare to remain solvent.
If the legislation was allowed to pass in 2017 the IRMAA Brackets today, in 2021, could have been:
By 2028, if the projections of a 6.20% rate of inflation for Medicare Part B held for the next 7 years the projected brackets may be:
But can this actually happen?
Unfortunately, according to the last few MBT Annual Reports the Health Insurance (HI) Trust Fund for Medicare is projected to become insolvent by 2025 and that is pre-Coronavirus.
With the Coronavirus now wreaking havoc on the nation’s healthcare system as well as the economy in order for Medicare to maintain its financial strength there appears to be only a few options on the table which include:
- Increasing the taxes on all U.S. citizens to fund Medicare. This may not be prudent given the current economic state the United States
- Increase the Medicare Part B Premiums. This too may not be prudent as it would place the burden of funding the Medicare system on both retirees within the program and the individual State governments who pay for retired public employees’ health benefits.
- Lower the monetary amounts that are re-imbursed to healthcare professionals who provide services to Medicare beneficiaries. This too may not be the most effective way too fund Medicare as hospitals who are dealing with the affects of the Coronavirus need more revenue not less.
- Change the IRMAA brackets to place a higher burden on those Medicare beneficiaries who have higher than average incomes which is what was proposed by the previous administration.
With the new incoming Administration already stating that there would be big changes for IRMAA back in 2014 it would appear that the 4th option for Medicare to remain solvent is the only viable one.
As they say, every action has a reaction and with changes to the government it may appear that those with “too high” of income may just be picking a much larger share of the cost to fund the Medicare system for everybody else.
What doesn’t count as income towards IRMAA?
Unfortunately, not very much, but Health Savings Accounts, Roth investments and Life Insurance are fantastic solutions when it comes to IRMAA as distributions are not recognized by Medicare.
The only issue: the financial industry does not seem to want to tell anyone any of this.
Your health is your greatest asset, the time to plan for it is today.