The ABCDs of Medicare

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On November 6, 2020, the Centers for Medicare and Medicaid Services announced that the 2021 monthly premium for Medicare Part B will increase by 2.7% from the premium for 2020. This increase is less than many expected — in April, the Medicare Trustees Report estimated a 2021 increase of 6% — due to recent legislation that limited the growth of the premium for next year.

However, this 2.7% increase exceeds the 2021 cost of living adjustment (COLA) of 1.3% for the Social Security retirement income program. Since most retirees have their Part B premium deducted from their Social Security payment automatically, this will result in a decline of real purchasing power for many seniors.

This loss of purchasing power can be challenging during periods of economic stress, especially for those retirees who have lost other sources of income, as Medicare premiums are more expensive for taxpayers with reported income over certain levels. In some cases, these seniors may submit a request to Social Security (which handles Medicare enrollments) to reduce their monthly premium.

What does Medicare provide?

Most Americans aged 65 or older rely upon Medicare for a large portion of their medical care. Coverage is composed of four parts:

1.            Part A: Hospital Insurance

2.            Part B: Medical Insurance

3.            Part C: Medicare Supplement (Medicare Advantage Plans)

4.            Part D: Prescription Drug Coverage

Medicare Part A

Medicare Part A covers the costs associated with a stay in a hospital or skilled nursing facility as well as care provided by home health care services. All those who qualify for Medicare are automatically enrolled for Part A coverage. While there is no premium for those who qualify, there is a deductible of $1,484 in 2021 for each benefit period.

Medicare Part B

Medicare Part B covers the costs incurred by a doctor’s services, various outpatient care and a litany of additional services (e.g., lab tests, flu shots, ambulance). Unlike Part A, eligible participants are not automatically enrolled in Part B. There is a monthly premium associated with this coverage, and most seniors have their Part B premiums deducted automatically from their monthly Social Security retirement income. Your premium amount is based on the last two years of your Adjusted Gross Income (AGI). You may wish to discuss ways to reduce your AGI with your Mesirow wealth advisor and tax professional. 

There is also a Part B deductible of $203 per year, and then you are typically responsible for 20% of incurred expenses once that deductible is met.

Medicare Part C

Medicare Parts A and B may not provide enough protection for the medical expenses you could incur in advanced age. As such, it is critical to obtain Medicare Part C, also known as Medicare Supplement. Unlike Parts A and B, Medicare Supplement is placed through a private carrier. The premium for your Medicare Supplement is based on your age and the qualities and features of the specific plan. The premiums are billed directly by the carrier; they cannot be deducted from your Social Security income.

The largest Medicare supplement program is called Medicare Advantage (MA).

Medicare Part D

Part D of Medicare is for prescription drug coverage. Like Part C, this coverage is offered through competing commercial carriers; the cost will vary based on the level of coverage and copay. However, unlike Part C, this part can be deducted from Social Security income or billed directly by the carriers.

How much does Medicare cost?

Most seniors have their Part B premiums deducted automatically from their monthly Social Security retirement income (Medicare premiums are billed directly to beneficiaries that do not receive Social Security retirement benefits). For most of Medicare enrollees, the 2021 monthly premium will be $148.50 (an increase of $3.90).

However, taxpayers with adjusted gross income of $88,000 (single filers) or $176,000 (married filing jointly) or greater will pay monthly premiums of $207.90 to $504.90.

Beneficiaries who file individual tax returns with income:

Beneficiaries who file joint tax returns with income:

Total monthly premium amount

Less than or equal to $88,000

Less than or equal to $176,000

$148.50

Greater than $88,000 and less than or equal to $111,000

Greater than $176,000 and less than or equal to $222,000

$207.90

Greater than $111,000 and less than or equal to $138,000

Greater than $222,000 and less than or equal to $276,000

$297.00

Greater than $138,000 and less than or equal to $165,000

Greater than $276,000 and less than or equal to $330,000

$386.10

Greater than $165,000 and less than $500,000

Greater than $330,000 and less than $750,000

$475.20

Greater than or equal to $500,000

Greater than or equal to $750,000

$504.90

In addition to earned income, up to 85% of Social Security retirement income, pension payments, and most investment income (including tax-exempt bond interest) is included in adjusted gross income. This also includes IRA withdrawals and Roth IRA conversions.

Medicare premiums are based upon the most recent tax return on file with the IRS — therefore, there is a one-year lag to determine the Part B premium category. For example, year 2021 premiums are based upon 2019’s tax returns (filed in 2020).

What can you do if your income has changed?

Due to the economic stress caused by the global pandemic, many taxpayers will see a reduction of the 2021 income. However, since 2021 Medicare premiums are based upon the 2019 tax return, it may be up to the retiree to identify and report these changes to Social Security.

Social Security lists five factors that could result in a new decision about the required Medicare Part B premium:

  • You married, divorced, or became widowed.

  • You or your spouse stopped working or reduced your work hours.

  • You or your spouse lost income-producing property because of a disaster or other event beyond your control.

  • You or your spouse experienced a scheduled cessation, termination, or reorganization of an employer’s pension plan.

  • You or your spouse received a settlement from an employer or former employer because of the employer’s closure, bankruptcy, or reorganization.

This process is initiated by requesting a “Medicare Income-Related Monthly Adjustment Amount: Life-Changing Event” form from Social Security. Documentation verifying the event and the reduction in income must accompany the form.

If you have any questions about Medicare, please don’t hesitate to contact your Mesirow wealth advisor.

Source: www.medicare.gov

 

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