No escaping IRMAAs by switching to Medicare Advantage

Financial advisers are painfully aware that many of their higher-income clients pay more for Medicare each month than most retirees. Medicare premiums for both Part B, which covers outpatient services and doctors’ fees, and Part D, which covers prescription drugs, are tied to income.

In 2020, most retirees pay the standard Medicare Part B premium of $144.60 per month, which is usually deducted from Social Security benefits or paid directly to Medicare on a quarterly basis for those who are not yet receiving Social Security.

But high-income retirees, defined as individuals with an annual modified adjusted gross income of more than $87,000 and married couples with a joint MAGI over $174,000, pay an additional surcharge, officially known as an income-related monthly adjustment amount, or IRMAA. This year’s IRMAA surcharges are based on 2018 federal tax returns.

Medicare premiums and surcharges are reset each year. Later this month, the federal government is expected to announce 2021 IRMAA surcharges, which will be based on the 2019 tax returns that taxpayers filed earlier this year.

Americans age 65 and older, as well as eligible disabled individuals of any age, have two options for how they receive Medicare services. They can select original Medicare, which includes premium-free Part A hospital insurance and Part B medical coverage, which has a monthly premium. In addition, most enrollees in original Medicare also carry supplemental Medigap insurance and optional Part D prescription drug coverage.

Alternatively, Medicare enrollees can choose an all-inclusive Medicare Advantage plan, which usually includes additional benefits such as dental, vision and hearing aids not covered by original Medicare, often at no additional monthly premium.

In 2020, high-income IRMAA surcharges range from $57.80 per month to $347 per month per person on top of the standard Part B premium. That means clients in the top income tier — above $500,000 for individuals and above $750,000 per year for married couples — pay nearly $6,000 per year for Medicare Part B premiums alone, plus-income related surcharges for Part D prescription drug plans ,plus monthly premiums for supplemental Medicare insurance policy known as Medigap. High-income couples where both spouses are 65 or older pay twice as much.

So it’s only natural that many clients who fall into the IRMAA surcharge category are looking for ways to cut their healthcare costs, particularly during Medicare open enrollment season, which runs from Oct. 15 through Dec. 7 each year. Changes made during fall open enrollment take effect Jan. 1 of the following year.

One reader asked recently if he could switch from traditional Medicare to a Medicare Advantage plan as a way to avoid monthly IRMAA surcharges.

“I've listened to the barrage of TV ads touting the added benefits of Advantage Plans, often with a zero premium,” the reader wrote in an email. “My wife and I, ages 74 and 70, are subject to IRMAA and each pay more than $500 per month plus we carry Medicare supplemental plans. Obviously, it would be attractive to us to enroll in a Medicare Advantage plan if our IRMAA premiums could totally disappear.”

If only it were that easy. Unfortunately, even if you enroll in a Medicare Advantage plan, you are still subject to the Medicare Part B premium plus any IRMAA surcharges.

You might find an Advantage program in your area that does not charge an additional premium (known as zero-premium plans) above your Part B premium/IRMAA surcharge, I told the reader. But Advantage plans require you to use their network of health care providers, often require pre-approval for specialists and are usually restricted to care in a specific geographic region. While Medicare Advantage programs are becoming increasingly popular as a low-cost way to receive health care in retirement, they do involve trade-offs that may not be appropriate for people who are wedded to their doctors or who travel extensively.

Although this year’s Medicare open enrollment season may not hold the desired answer to this reader’s health care question, it is still a good idea for financial advisers to remind older clients of the potential value of re-shopping their Medicare drug plans and Medicare Advantage plans each year.

Part D plans may change their costs and list of covered drugs, known as formularies, from year to year, so it's important that clients review their current plan and Annual Notice of Change to learn if their premium, deductible or cost-sharing will change and whether their specific drugs will still be covered next year.

The nonprofit Medicare Rights Center, which provides information for consumers and training for financial professionals, offers step-by-step guidance on how to compare stand-alone Part D or Medicare Advantage plans by using the Plan Finder tool at www.medicare.gov.