Medicare's Higher-Income Premiums - dummies

Medicare’s Higher-Income Premiums

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For most of its history, Medicare had no means-testing; everybody paid the same premium for its services. Even today, nobody is denied Medicare coverage on the basis of being wealthy.

But since 2007, as a result of the 2003 Medicare Modernization Act, people with incomes over a certain level have been required to pay higher premiums for Part B. And under the 2010 Affordable Care Act, those same people must pay more for Part D, too.

Looked at another way, it means that people who pay these additional charges are receiving a smaller subsidy from the federal government for their health care. The feds provide a hefty chunk of money toward Part B and Part D services out of general revenues (that is, taxpayer dollars) — about 75 percent of the actual costs — while beneficiaries as a whole contribute about 25 percent through premiums.

So the rationale for the higher-income surcharge was based on fairness; surely wealthier people can and should pay more than 25 percent of the cost of their Medicare?

Most people, of course, don’t pay the higher premiums. Nonetheless, the income cut-offs aren’t so high that they affect only millionaires. So you need to know whether you’re likely to be asked to pay the surcharge — and what you can do about it if you are and think it’s unwarranted. The following sections examine those issues in detail.

If you’re liable for the surcharge, what you pay in higher premiums is calculated on a sliding scale according to your MAGI. Keep in mind that most people pay roughly 25 percent of Medicare costs through the standard premiums.

Those paying surcharges, depending on their MAGI, pay premiums at four different levels, which are equivalent to 35, 50, 65, or 80 percent of Part B and Part D costs. To see how this breakdown works, look at the table, which shows the different surcharge amounts required in 2013 for Part B and Part D premiums based on your 2011 MAGI as filed on your 2012 tax returns.

2013 Higher-Income Part B and Part D Premiums
Your 2011 MAGI (per 2012 Returns) Your Part B Monthly Premium in 2013 Your Part D Monthly Premium in 2013
Single person: $85,000 or less
Married couple: $170,000 or less
Standard 2013 premium = $104.90 Your regular Part D plan premium
Single person: $85,001 to $107,000
Married couple: $170,001 to $214,000
Standard premium + $42 = $146.90 Your Part D plan premium + $11.60
Single person: $107,001 to $160,000
Married couple: $214,001 to $320,000
Standard premium + $104.90 = $209.80 Your Part D plan premium + $29.90
Single person: $160,001 to $214,000
Married couple: $320,001 to $428,000
Standard premium + $167.80 = $272.70 Your Part D plan premium + $48.30
Single person: more than $214,000
Married couple: more than $428,000
Standard premium + $230.80 = $335.70 Your Part D plan premium + $66.60

Source: Social Security Administration

One other calculation isn’t shown in the table. It relates to married couples who live together for at least part of a tax year but file separate tax returns. In that case, each spouse pays a surcharge based on his or her individual MAGIs in one of two levels: from $85,001 to $129,000, and from $129,000 up.

The dollar amounts of the surcharges change slightly each year because they’re based on percentages of the total costs of Part B and Part D in the previous year, and these costs, of course, fluctuate from year to year.

But the thresholds — the MAGI amounts that take you to a higher level of premium — are fixed. Under the 2010 Affordable Care Act, the thresholds are frozen until 2020. This means that, although now the vast majority of people aren’t liable for the surcharges, over time an increasing number of people will be.