Some Social Security checks to decline in 2022 due to IRMAA

Many individuals who are subject to Medicare high-income surcharges are in for a nasty surprise next year: Their monthly Social Security benefits will decline from 2021 levels.

Although all Social Security beneficiaries will receive a whopping 5.9% cost-of-living adjustment in 2022, the biggest COLA in 40 years, Medicare premiums will offset much of the increase. And for higher-income retirees who are subject to income-related monthly adjustment amounts, or IRMAAs, the combination of higher Medicare premiums and higher IRMAA surcharges will more than wipe out the COLA, resulting in a net decline in Social Security benefits next year.

Most Social Security beneficiaries are protected by the Hold Harmless Act, which prevents a net decline in Social Security benefits from one year to the next. If the increase in the Medicare Part B premium is higher than the dollar amount of an individual’s Social Security COLA for that year, that person is only responsible for paying Medicare premiums up to the amount of the COLA. Unfortunately, anyone who is subject to IRMAA surcharges isn't protected by the Hold Harmless Act.

Medicare Part B premiums, which pay for doctors’ fees and outpatient services, are deducted directly from monthly Social Security benefits. The standard Part B premium will increase 14.5% in 2022, to $170.10 per month, up from $148.50 per month this year. Higher-income beneficiaries will pay even more.

Individuals with income above $91,000 and married couples with joint income above $182,000 will be subject to IRMAA surcharges ranging from an extra $68 per month to an extra $408.20 per month on top of the standard Part B premiums next year. Married couples where both spouses are enrolled in Medicare pay twice that amount.

Assume an individual receives $3,000 per month in gross Social Security benefits in 2021. With a 5.9% COLA, that monthly benefit would increase to $3,177 in 2022. But if that individual is subject to the first IRMAA surcharge bracket, the $177 COLA increase would be more than offset by the combined Medicare Part B premium and IRMAA surcharge, which would total $238.10 per month next year. Higher-income retirees, whose combined Medicare B premium and IRMAA surcharge could total as much as $578.30 per month next year, would see an even bigger decline in their gross Social Security benefits in 2022.

In late November, the Social Security Administration mailed IRMAA notification letters explaining how much an individual would pay in IRMAA surcharges in 2022 based on income reported on their 2020 federal tax returns. The minimum income that triggers those IRMAA surcharges also increased from this year’s $86,000 for individuals and $172,000 for married couples.

The IRMAA notification letter explains how to appeal a surcharge if your income has declined since 2020 as a result of a life-changing event such as marriage, divorce, widowhood, retirement or reduced work hours. “We cannot make a new decision if your income has changed for a reason other than those listed above, such a receiving one-time income from capital gains,” the notification letter says.

Medicare beneficiaries can choose to have their Part D prescription drug premiums, which are also subject to high-income IRMAA surcharges, deducted from their Social Security benefits. Part D premium surcharges range from an extra $12.40 per month to an extra $77.90 per month per person. The national average for Part D prescription drug plans is $41.69 per month in 2022.

“Medical costs are one of the greatest concerns of retirees, but few financial advisers discuss it with their clients,” said Craig Cheney, co-founder of IRMAA Solutions, a software tool that helps financial advisers calculate clients’ future health care costs based on their current age, income and financial assets.

“Up until now, the industry has been able to look the other way, but there is a train wreck coming for most American retirees under age 65,” Cheney said, noting that increasing Medicare premiums and surcharges will take an ever-bigger chunk out of retirees’ budgets in the future.

Cheney said the IRMAA Solutions tool can help advisers work with mid-career clients, who can take steps now to realign a portion of their assets into tax-free accounts by funding health savings accounts, converting traditional retirement accounts to Roth IRAs, and buying cash value life insurance to reduce future IRMAA liability. “It’s a great marketing opportunity to bring clients back to the table year after year,” he said.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin's ebook at InvestmentNews.com/MBFebook.)