What can advisors do for higher income clients to position them better to get the same Medicare coverage without unnecessarily high premiums?
With Medicare premiums set to take a bigger bite out of more higher-income retirees' Social Security benefits in the next couple of years, Medicare expert Dr. Katy Votava outlined some strategies she sees as useful during a recent webinar.
"Higher incomes pay more for the Medicare B premiums, as well as pay an additional amount for the privilege of participating in Medicare D that's above and beyond the actual premium for the insurance coverage," Votava said.
Medicare Part B premiums are based on a person's income – or Medicare-adjusted gross income, which is calculated using the adjusted gross income (Line 37 on the Form 1040 tax return) plus tax-exempt interest (Line 8b on Form 1040).
Part B premiums are expected to go up in 2016 for higher-income Americans thanks to lower inflation and no 2016 cost-of-living adjustment (COLA) for Social Security recipients.
In 2018, some higher-income Medicare beneficiaries may have to pay more in Part B and Part D premiums. This is due to a provision in the Medicare Access and CHIP Reauthorization Act of 2015.
This is important now because Social Security looks at the tax return two years in arrears to determine its MAGI and in effect its premiums. So, 2018 premiums will be based on 2016 tax returns.
For example, Part B premiums are expected to rise from $238 per month per person to $310 per month per person in 2018 for Medicare beneficiaries with incomes from $133,501 to $160,000 (or $267,001 to $320,000 per couple), according to a Kaiser Family Foundation analysis. And, for beneficiaries with incomes between $160,001 to $214,000 (or $320,001 to $428,000 for a couple), monthly Part B premiums are expected to rise from $310 to $381 per person in 2018.
"More people will be paying the highest premium starting on the tax return based in next year," Votava said. "What can we do for our higher income individuals and ourselves to position ourselves better to still get the same coverage but not pay unnecessarily high premiums?"
Votava and Tom Dickson, leader of RMF Financial Advisor Channel, discussed three strategies to help minimize the cost of Medicare plans and reduce high-income consumer exposure to unforeseen Medicare premiums:
1. Enroll in Medicare at the right time to avoid costly, lifelong penalties.
One way to avoid unnecessary costs is by enrolling into Medicare on a timely basis to avoid penalties.
"Medicare enrollment periods are critical because you have a window of opportunity for various reasons to get into Medicare as well as to get a new plan," Votava said.
The initial enrollment period is seven months around the 65th birthday, but there is also a special enrollment period that is eight months after a trigger event.
There are also annual general enrollment (1/1 – 3/31) and open enrollment (10/15 – 12/7) periods.
"If a person doesn't get into Medicare in their initial enrollment period and they do not have the criteria for what's called a special enrollment period down the road, that's when they're going to be having penalties and problems," Votava said. "The annual premiums and penalties they will pay the rest of their life."
Someone who signs up late for Medicare Part B would have to pay a late penalty premium every month for the rest of his or her life, along with the Part B premium.
The monthly Part B premium would go up 10% for each full 12-month period that the customer could have had Medicare Part B but did not take it.
