Medicare: This "Gotcha" Can Cost You Thousands

Medicare covers tens of millions of Americans, most of whom are 65 or older. Because 65 is the earliest age at which most people can claim Medicare benefits, a lot of people believe they don't really have to think about Medicare until they're within a month or two of reaching that key age. Indeed, with early Social Security recipients getting automatically enrolled in Medicare, it's tempting to think you can just leave everything about the program on autopilot.

Unfortunately, a number of older Americans have found out the hard way that early planning for Medicare is essential. In particular, by being aware of one rule that emphasizes what people do before they're eligible for Medicare, you can potentially reduce some key costs of the program.

Why IRMAA can take money out of your pocket

Medicare has different parts that cover various types of services. Part A covers hospital and other inpatient costs, and most Americans get it without paying an additional premium because of the Medicare payroll taxes they paid throughout their careers. Part B outpatient care coverage requires monthly premium payments, as do many Part D prescription drug plans.

Image source: Getty Images.

What many people don't realize, however, is that higher-income retirees have to pay additional premiums to get their Part B and Part D coverage. This is because of the feature known as the income-related monthly adjustment amount, or IRMAA for short. Under the laws that created the IRMAA, those who had modified adjusted gross income above certain limits have to pay extra amounts for their monthly Medicare premiums.

The added payments can be extremely high. For instance, here's the IRMAA table for 2022:

Data source: Centers for Medicare & Medicaid Services.

Here's the same table for 2023:

Data source: Centers for Medicare & Medicaid Services.

You can see that the numbers are actually lower for 2023 than for 2022. That's unusual, but it reflects a rare reduction in base Medicare costs. Nevertheless, despite this change offering some relief, you can still see that some individuals have to pay more than triple the base Medicare Part B premium because of their income.

There are also potential IRMAA-related surcharges for prescription-drug coverage. For 2022, those in the surcharge brackets above have to add $12.40, $32.10, $51.70, $71.30, or $77.90, respectively, to their regular Part D monthly premium. In 2023, those amounts fall slightly to $12.20, $31.50, $50.70, $70, or $76.40, respectively.

Why 63-year-olds should pay attention

The thing that's particularly tricky about IRMAA surcharges is that the number that's used to determine income isn't your current income. Rather, it's the income from your tax return from two years before the year in question. So for those who turned 65 in 2022 and will have to pay surcharges, it's the income figure from 2020 -- when they were 63 -- that determines any surcharge amount.

If you think that's unfair, you're not alone, and there are ways to appeal the IRMAA determination. Specifically, if you've had what the Social Security Administration calls a "life-changing event" -- such as marriage or divorce, death of a spouse, work stoppage or reduction, or a loss of other income sources -- then you can file Form SSA-44 to request a reduced surcharge.

However, if you don't ask for the discount, you won't get it. Indeed, many people don't even realize they're paying the surcharge, because Medicare premiums get deducted automatically from Social Security checks, in most cases.

Alternatively, you can start planning at age 63 to avoid the IRMAA when you turn 65. If you can keep your income below certain threshold levels, it could save you hundreds or even thousands of dollars in surcharges.

If you want to be smart about retirement planning, knowing obscure rules in advance, like the IRMAA surcharge, is essential. Medicare is a useful service, but you don't want to pay more than you have to for the healthcare coverage it offers.

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