Episode 86 – High income, higher Medicare premiums
Medicare is meant to make health care more affordable in retirement, but if your income is higher, you might pay more than expected. Some retirees are surprised to learn about Medicare surcharges that can add hundreds of dollars to their monthly premiums. In this episode, we talk with Tim, a Medicare expert, to break down these extra costs called IRMAAs (income-related monthly adjustment amounts). Then we walk through what they could mean for your retirement.
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Today we’re taking a deeper dive into Medicare. And in general, Medicare is supposed to make health care more affordable in retirement. And it does. But some retirees are surprised to learn that sometimes if they have a higher income, it can trigger some Medicare surcharges that add a couple hundred dollars to their premiums.
So, we’re talking about some of these extra costs that are generally referred to as IRMAAs. I-R-M-A-A, which stands for Income Related Monthly Adjustment Amounts. And to help us sort through the details, we’re joined again by Tim from the SHIBA program. The Statewide Health Insurance Benefits Advisors. And we’re happy to have you here. Tim, I know that you help retirees navigate Medicare every day.
Tim
I’m thrilled to be back again, Jenny. So, so much grateful for the invitation to DRS.
Seth
And the SHIBA program is part of the Office of the Insurance Commissioner.
Tim
It is. So, I am, like you, a state-employed person. We always have to start with the sad reality that lots of people don’t know there is an Office of Insurance Commissioner, but we are one of the nine separately elected officials in the state, and we are part of the Consumer Protection division of the Office of Insurance Commissioner.
Seth
And for those of you who didn’t listen to episode 19, the first time we had Tim on the podcast, could you just remind us what the SHIBA program is?
Tim
Of course. And I’m happy to say that we’re, celebrating 50 years this year. The program was initiated 50 years ago by a group of local volunteers in Stanwood, Washington. And it sounds kind of quaint to say this, but they thought, gosh, Medicare is pretty complicated. Wouldn’t it be nice if you could talk to somebody about it and not have to, you know, go to an agent or a broker necessarily. But the program has been part of the insurance commissioner’s office for more than 45 years.
And the idea is that it’s peer to peer counseling. So, someone who is a motivated volunteer who’s trained by our office can meet with you, in person or on the phone or virtually and help you navigate through the complexities of Medicare.
Jenny
Yeah, I think this is just super awesome program that they offer.
Tim
Thank you.
Seth
So, Tim, to prepare for this episode, I should first mention that this was a listener request. Actually, I think more than one listener has requested this over time. And the first time Jenny and I were like, well, we’re not qualified to talk about this, so we’re going to skip over. And then the second or third time we got the question, we’re like, okay, we need to phone a friend.
We’ll call Tim and see if he can help us understand a little bit of this. So I did a little bit of quick internet research, and I don’t usually trust ChatGPT and all the other tools, but, it did help me understand a little bit about I just was searching Medicare and high income and it provided a real long laundry list of these surcharges and as Jenny mentioned, frequently referred to as IRMAA.
Can you just help our listeners understand what the threshold for income is that we’re talking about as a retiree, somebody who’s on Medicare that may then qualify, qualify sounds like a wrong word. Like qualify is usually a good thing. But yeah, meet the threshold for this.
Tim
Sure. Of course. And maybe just a little bit of context. Likely the reason you’re getting the question is because people are sort of startled to find out there is such a thing. So, in general, we think of, one of the good qualities about the Medicare program is that it’s kind of universal. It’s the same for everyone. But this is a relatively new provision of the Medicare program that was designed to help kind of put the brakes a little bit on, the increasing cost of Medicare to the federal government.
And so, the idea is that a small number, a few percent of the highest income earners pay, as you said Seth, a surcharge. They pay more than kind of the market rate for Medicare. And again, that’s just to help take some of the pressure off the cost to the government of the Medicare program. It generally is going to be a thing that people encounter when they’re first starting in Medicare, right?
Because they may be having a relatively higher income when they’re working. And then across that transition to retirement, they’re going to experience a lower income. So, it commonly is a thing that’s happening when people are just getting started in Medicare. And their research may just not have extended all this way. It may not have occurred to them that there is such a thing as a higher premium, for higher income earners.
So specifically, every year, the IRS determines what this threshold amount is, and then it is the Social Security Administration that actually is responsible for deciding whether you Seth have a surcharge, or you Jenny do not.
Seth
Okay. And so, it’s based on my total income, I hadn’t thought about this situation where people go on Medicare starting at age 65. We know lots of people are still working beyond 65, but Medicare may be more expensive for them while they’re working. And then when they eventually retire, they will see their Medicare costs decrease because their income will then fall below the threshold. That’s what you’re saying?
Tim
That’s exactly right. And this is a very common challenge that we have. And something we’ll talk about today in our time together. So, the first thing to know is the assessment or the surcharge. I’ll just say my wife and I have just filed our income tax return. So, on your income tax return, there’s the line that we call modified adjusted gross income.
So essentially how much of your income is taxable by the IRS. And it’s that figure that we’re using to, say yes or no, compared to the threshold amount. So, the reality is that you know, the forms that I’m filing this year in March relate to the income I earned last year. So, although I’m filing the forms in 2026, it’s my income from 2025.
And so, this leads to one of the challenges with this IRMAA calculation is that if I was going to start Medicare, say, in October, the assessment applies to January of 2027. So effectively it’s my income that I earned in calendar 25 that I filed in calendar 26. That’s used to calculate my premium for January 2027. And so for some people, this feels like, well, wait a second, I earned that money a long time ago.
It feels as if it’s a penalty in a way, but that is just simply how, like administratively, how it rolls out.
Seth
That makes sense. There’s a little bit of a lag before this kicks in, just generally speaking.
Tim
Exactly.
Seth
I’m sure we’ll talk more about that. And you mentioned the modified income. I think in my research it showed that these surcharges start to kick in at somewhere around $109,000 for an individual and $218,000 if you’re filing jointly. And once again, these numbers are current, but they adjust over time. So be aware of that if you’re thinking about this possibly impacting you.
Tim
Yeah. So, two observations. And you know obviously compared to visiting with you in episode 19 we’re in a deeper end the pool now than we were then. So, the figures that you’re quoting, I would say those are sort of the low end of the threshold. There is actually several levels. So, there’s a beginning level where a person pays more than the standard Medicare Part B premium, but it goes up even higher than that.
There’s a couple of different levels. So, there is a “yes/no question”. And then, there is also a “how much question” based on income. Another sort of complexity here is that premiums for Medicare are individual. So, say my wife and I, if we were two Medicare eligible people, she has a Medicare Part B premium. I have a Medicare Part B premium.
But it’s of course really possible in real life, I’m six years older than my wife that I might be in Medicare and she might not be. But if we are married filing jointly, we are considering household income. Even though I’m the only one paying a Medicare premium.
Seth
Okay, yeah. So, it gets complicated quickly. As everything with Medicare does, which is why you’re here with us today. So, appreciate that.
Jenny
I think the other scenario that can come up sometimes is for folks that they possibly see an increase in their retirement income because of RMDs. So maybe someone, retired at 65 and now they are turning 73 and having to take, these required minimum distributions from their investment accounts, and then now they see their income level go up.
Tim
Yeah, that can certainly happen. Right? I mean, you all being in the business of DRS and deferred compensation, you know, you’re aware of these challenges that folks have. So I’m not a certified financial planner or a tax professional. And certainly people who have this concern should consult with someone. And this is a personal observation. I’m not representing the office of Insurance commissioner.
You can, charitable giving can help you with that required minimum distribution. Right? So you could use that to offset instead spending it on your own self or paying taxes on it or even having it, count against you for purposes of calculating this, IRMAA. But yes, that is a thing that people, Jenny, who you know, maybe retire at 65 and they’re, thinking, “gee, I’m going to wait to, collect my Social Security benefit until age 70”, right?
Because you’re going to earn about 8% a year more if you defer until age 70. But that’s also the time when we start talking about, mandatory distributions from retirement accounts. And so it is possible that people could experience, kind of a surge of income beyond age 65. So, that would be the likely exception case to encountering this, when you were starting Medicare.
Jenny
Perfect. Thanks for that.
Tim
Yeah. Of course. And I’ll just say again, you know, consult with a certified financial planner or a tax professional because it’s a thing that you can you can plan ahead for, right? You can kind of see it on the horizon. And to Seth’s observation, your consultant will know, but the numbers do change annually.
Seth
When I was researching this, this surcharge, I always get confused about Medicare and we did a separate episode with Ellen was the person from the Health Care Authority.
Tim
That’s my friend Ellen Wolfhagan.
Seth
Who recently retired as well. She did. Yeah. So, Ellen came in and talked to us on episode 31, just a little bit about all the different parts of Medicare. And this is where I oftentimes get confused. There’s a part A, a B, a D, there’s gaps and advantages and all sorts of things that sometimes confuse me, because sometimes they’re talking about the same thing with different names and letters, but in researching this surcharge, it seemed to me that the surcharge applies to part B and to part D is that accurate? And could you just remind us what those parts are and what they do?
Tim
Yes, absolutely. It is accurate. And my friend Ellen did retire to live in New York City and she’s doing well. I check in with her periodically. So maybe we could just spend a minute here and kind of unpack that. So, in general, we think about Medicare as an entitlement program of the federal government, similar to Social Security.
In fact, when Medicare came online, 1965, it actually amends the Social Security Act. And so it borrows a lot of the same administratively, the same provisions, as with Social Security. So, Medicare Part A, you’ll hear referred to as the Medicare trust fund. So, while I’m working, I have a payroll deduction that goes it gets invested in the Medicare part A trust fund, so that when I retire, I do not have a premium for Medicare Part A.
Effectively, I’ve paid into the system similar to Social Security benefits. For Medicare Part B, that’s an optional benefit has always been an optional benefit. And so that is more like a pay as you go kind of situation. So, in current law, Medicare Part B premium, which is $203 in 2026, represents one quarter of the cost of the Medicare program.
For part B, three quarters is paid out of the, basically the general fund of the Treasury. So, every year, because it’s an entitlement program that does not have to be, an appropriation bill. But every year Congress is funding the three quarters. That’s the federal government responsibility. So, to my earlier point, this is where the government said, hey, you know, we could sort of save some money if we increase the part B charges for high income.
Seth
For some people. Yeah.
Tim
Yeah, exactly. So, it’s a political solution to that increasing cost every year to the government of Medicare Part B. Medicare Part D is the Medicare prescription drug benefit, which is the most recent change in the program. It’s essentially a benefit that is endorsed by the government. But private companies contract with the Medicare program to offer the prescription drug benefit.
And because it came after the Medicare Part B surcharge, the thinking was, well, you know, kind of sauce for the goose is sauce for the gander. And so we’ve already got this, sort of a paradigm in place for Medicare Part B high income earners. Let’s just apply that same logic to Medicare Part D, because, again, the government is subsidizing those, part D premium payments.
Seth
That’s perfect. That helps a lot. And you said in an earlier answer that this surcharge steps up the higher your high income is, the greater the surcharge. And you mentioned that if you’re not a high income earner, part B is costing you about $202.90. But then if you are a higher income earner, it can cost you starting at $284.
But all the way up to $689 based on my research in 2026. And these are assuming that I was looking up at 2026 numbers. But roughly, I mean, that’s a $400 increase from the low end of the threshold up all the way up to almost $700. So, does that all check with you? Does that sound right in my understanding that basically correctly that it steps up as a person is earning more?
I shouldn’t even say as a retiree because to your earlier point, as somebody who’s paying for Medicare, somebody who’s over 65.
Tim
Yeah, that’s exactly right. Again, I apologize. I don’t have the figures here, but there is a range and so yes, at the low end of the threshold $284 at the high end, $689 directionally. That’s correct.
Seth
Okay. So it is a pretty big difference. If somebody was initially paying $208, they weren’t a high income earner. And then if they are or become a high income earner it can go up all the way up almost to $700 a almost a $500 difference. But to your earlier point, it could also go in reverse. Correct? They start off on Medicare as a worker, as an employee, they’re getting a higher income and then their income drops and then their Medicare B, their Medicare B costs can go down by almost $500. If they were at the very high end of the threshold.
Tim
That’s exactly right. Obviously, my wife and I are not going to be people who are going to meet this income threshold. Not because we were not responsible adults just because we have, you know, relatively modest incomes. But to illustrate your point, yes Seth, if I was going to qualify for Medicare, in 2026, we would be looking at the income I had when I was still working as well as my wife’s income.
And so it may be that I had relatively higher income based on the wages we had when we were both working. And then subsequently it may go down again when I stop working or even down again, more when she stops working. But then to Jenny’s point, it might kind of move up again when I, have to start taking money out of my deferred comp account at age 70, or if I start, cashing my Social Security check at age 70.
So, yeah, it definitely could kind of float up and down, either in or out of the range of the threshold or within the higher income brackets.
Seth
That all make sense. Jenny, does this raise any more questions for you?
Jenny
No, not really.
Tim
A couple of things I could add here. This is not on our, sort of top ten list of questions that we get generally for the volunteers, but when it does come up, besides being startled, of course people are startled. They didn’t know that this was a provision of, the Medicare program. But then the two most common questions are, can I appeal this decision?
And the answer is yes. You can ask for a redetermination. And there’s a formal process of doing that. Again, we’re talking about through the Social Security Administration. So SSA.gov they have a form you can download the form, fill it out and send it back. So, you’re essentially saying the income that you used to assess my income is not correct.
Use this amount instead. Right. And then the other is to your earlier point Seth, it changes. So just because you have an assessment, at a certain level this year, does not mean that it’s going to continue. So those notices, if you’re a person who is going to have an assessment, would come to you in December for the year ahead, starting January. The most common cases people have the Part B premium deducted from their Social Security check.
But for some of these folks who are these very high-income earners, their income from sources outside Social Security is going to be higher than their Social Security benefit. So, the likelihood is that they’re actually paying Medicare every quarter for their part B premium, either through, you know, electronic funds transfer or they’re writing a check. So, it would sort of swamp their Social Security benefits or deduction doesn’t make sense.
So then we’re helping people navigate how to just make sure that the assessment kind of comes and goes appropriately so that, especially in the case of like an electronic funds transfer, you don’t want last year’s amount to come out of next year’s check if it ought not to.
Jenny
Tim, I think you kind of touched on this a little bit. But then, does Medicare send out a notice to folks saying that, you know: Now we see that your income has increased, you’re going to be charged this surcharge.
Tim
Correct. That’s exactly right. Yeah, that’s a great question. And it’s not a mid-year change. It’s always going to be based on, the income tax return that you filed. So, obviously lots of times people do things like, you know, estimated returns or adjusted returns and so, you know, that can create some kind of administrative, challenges for people, but yes, generally that the changes are going to show up in January based on the, income tax return for the previous year’s income.
Seth
I feel like health insurance is always complicated, but it gets more complicated as a retiree and I feel very similarly about taxes. It’s ironic. Yeah, taxes get more complicated as you become a retiree. I feel like this is what I hear from retirees that, yeah, I never knew about quarterly taxes until you start talking to retirees and yeah, yeah, there’s a lot more things to keep in mind.
Tim
There is. And one of the things I wanted to bring to our conversation today, just for awareness, speaking of, you know, things that are different after you retire, all of the counties in Washington state through the Department of Revenue have a program where you can get a reduced or an exemption from your property tax. And, so for people who are not aware of that, that’s absolutely something you should check in with your county administration.
But there is that provision. So, the point is, if you are a person who is having this surcharge because you’re a higher income earner relative to your Medicare Part B premium, the costs that you’re paying for Medicare are deductible. So, if you’re a person for whom property taxes get to be burdensome after you retire and health insurance premiums, including Medicare, are contributing to kind of your uneasiness, then those are an allowable deduction for folks who are seeking a property tax exemption.
Seth
That’s great. And maybe a future episode to find someone from the Department of Revenue to talk about this for retirees, that feels like a good public service to remind people that. Yeah.
Tim
And you know, you and I and Jenny, we’re all talking here in the first part of March. Hopefully this session will finish on time Thursday. Right? Touchwood. But there is a bill, that’s under consideration that would, rather than having people itemize for purposes of qualifying for a property tax exemption, they’ll just set a minimum threshold that everyone gets to write off.
I’m going to get the number wrong, but 25 grand and, you know, allowable deduction. So yeah, I think it’ll be worthwhile for you to consider having somebody from DOR come in.
Seth
Yeah, that’s a great idea.
Tim
The other thing I would just raise obviously today’s episode is focused on, you know, the most fortunate people, the higher income earners. But there is also on the other side of that for low-income earners, the state can pay the Medicare Part B premium. So, we talk about the standard Medicare Part B premium $202.90, for our low-income earners.
Similarly, there’s a threshold. If your income is below a certain amount, then the state will pay the premium and essentially put the money back in your Social Security check. So, the observation is just that we talk about a standard part B premium. But some folks pay more and some folks can pay less or nothing. The other observation that somewhat relates sometimes people who are higher income earners, when they’re working are going to choose from their employer, or what we call high-deductible health plans that attach to a health savings account.
And for those of us who work in state government, we have that option. Those are the folks who, again, need a consultation with their, certified financial planner or tax professional because they need to not enroll in Medicare Part B, at age 65, because that will effectively create a penalty situation for contributions to their HSA account. So, this is a little bit next door to the specific conversation about the IRMAA.
But for high income earners who are, while they’re working, contributing to an HSA, then check in with, SHIBA program or check in with your tax professional about, whether it’s okay to enroll in Medicare Part A while you’re still working.
Seth
That’s great clarification. With all this stuff, it is in the details where people really want to dive on their own personal situations. And that’s why it’s great that SHIBA program exists. Yeah. Allows people to come in and ask those sorts of questions.
Tim
Yeah. And of course, our bread and butter is just, you know, one third getting started in Medicare, one third Medicare open enrollment is coming: “What should I do?” And then one third, just the friction of using your benefits, you know, on the regular. So, we always want to hear from people who are having, you know, a challenge using their benefits and eligibility, enrollment claims, potential fraud, but really holding ourselves out as a, as a full service, you know, support through the insurance commissioner’s office.
Tim
So, meaning to say that we appreciate the conversations with high income earners as much as we do with low income earners.
Jenny
So, I think just as kind of a general summary. So, these IRMAA surcharges can apply to folks who are in Medicare. And if you’re over a certain income threshold, about $100,000 for individuals and about $200,000 for those who are filing jointly, and that’s annual income. And that it sounds like it can affect both Medicare Part B, as in boy, and then Medicare Part D, as in drug.
Tim
Yeah, that’s exactly right. Yeah. And as we said, when we talk about that income threshold, it’s your adjusted gross income. Right. So, it’s after, you know, that, preliminary deductions. But yes, that’s correct.
Jenny
And then, of course, if folks do have more questions, the SHIBA program is a great group of volunteers that can answer your questions. And Tim, just remind us what that website address is.
Tim
Sure. So, for people who are on the computer, we’re going to have you navigate over to insurance.wa.gov. And you can look for the SHIBA program. We’re always obviously recruiting people who want to be volunteers and help in the community. If you’re a person who wants to call, that’s 1-800-562-6900 and we live answer the telephone five days a week, excepting, you know, holidays, so you can connect with a real person in real time.
Tim
And we’ll get you connected to a SHIBA volunteer as soon as possible.
Seth
Thanks for joining us, Tim.
Tim
Thank you so much for having me. It’s lovely to see you both again.
Jenny
Thank you.
[music outro]
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