For your high-net-worth and upper-middle-class clients, Medicare planning has become a critical component of a well-executed retirement income plan. New rules put into effect under the Affordable Care Act (ACA, or Obamacare in common parlance) can impact these clients' retirement income planning in ways they might not yet realize by increasing their Medicare premiums proportionally as income increases. The new rules will expand the pool of clients to which these monthly increases will apply. In today's environment, it is more important than ever to consider Medicare premiums when planning for retirement expenses.
Medicare Income-Based Premiums
Under Medicare's income-adjusted premium system, clients with income that exceeds certain threshold levels pay a higher monthly premium for Medicare Parts B and D. Individual taxpayers with income that exceeds $85,000 ($170,000 for joint filers) are subject to income-based premium adjustment.
Premiums increase incrementally based on a client's income level. For example, a married couple earning more than $170,000 will pay a Medicare Part B premium that is $42 higher than the standard premium level ($104.90 in 2013) and an additional $11.60 above the monthly Medicare Part D premium. Married couples earning more than $428,000, however, will pay $230.80 above the standard premium level in 2013 (and $66.60 above the Medicare Part D monthly premium). The difference can be substantial—a Medicare beneficiary in the highest income bracket will pay over $3,500 more in annual premiums than a beneficiary who does not exceed the income thresholds.
Before the ACA's rules became effective, the income thresholds were indexed annually for inflation to ensure that lower-income households did not become subject to Medicare's income-based premiums. The ACA froze the thresholds at the 2010 level so that more clients will become subject to higher premiums each year. It is projected that approximately 10% of all Medicare beneficiaries will become liable for income-adjusted premiums by 2019. The administration budget proposal for 2014 would continue the freeze until approximately 25% of all beneficiaries pay income-adjusted premiums.
Retirement Income Planning for Higher Medicare Premiums
The income threshold is based on the income reported on a client's most recent federal tax return, which may not reflect a client's current income (for example, 2013 premiums are based on the tax return your client filed in 2012, which is based on 2011 income). Clients who have recently retired and fallen into lower income tax brackets may be eligible for a premium reduction by contacting Social Security with documentation confirming their new income level.
