The typical person on Medicare will pay at least $289 more in 2022, just for Part B coverage, and double that to $578 for a couple. IRMAA surcharges are also increasing 14.5%.

By David Enna, Tipswatch.com

Just a month after learning their Social Security payments will increase 5.9% in 2022, retirees got some harsh news Friday: Medicare Part B premiums will increase 14.5% next year, to $170.10 a month. Also, the annual deductible for all Medicare Part B participants will increase to $233, up 14.8% from this year’s level.

The Centers for Medicare and Medicaid Services announced the new rates Friday afternoon. CMS also announced new income tiers and costs for Income-Related Monthly Adjustment Amounts, IRMAA for short, that add Part B and Part D surcharges for higher-income participants.

Any day now, if you are on Medicare, you will get a letter from CMS informing you of these new premium and deductible costs for 2022. If you planned poorly, you may be meeting up with IRMAA, and you really don’t want to meet IRMAA. These surcharges can be lofty, so it’s smart to plan ahead to limit these costs.

Let’s dive into the key Medicare changes for 2022.

Part A: Hospital insurance

Most people who reach age 65 go on Medicare Part A, even if they are still working. Medicare Part A covers inpatient hospital, skilled nursing facility and some home health care services. About 99% of Medicare beneficiaries do not have a Part A premium since they have at least 40 quarters of Medicare-covered employment.

Although coverage is generally free, Part A has some sizable deductibles and coinsurance costs, and those will be rising in 2022:

Keep in mind that most people on Medicare have a Medigap or Medicare Advantage plan that will cover all or most of the Part A deductible and coinsurance amounts. For example, all standardized Medicare Supplement (Medigap) plans, A through N, provide coverage for Part A coinsurance, and most also cover all or most of the Part A deductible costs.

Part B: Medical insurance

Medicare Part B can be described as covering “outpatient services,” things like doctor visits, some lab tests, an annual wellness exam, flu shots, diabetes screenings, etc. Medicare Part B generally pays 80% of approved costs of covered services, and you pay the other 20%. Some services, like flu shots and a wellness visit, may cost you nothing.

Part B deductible. Before Medicare pays anything, you have to meet your Part B deductible each year. For 2022, that deductible is increasing to $233, up from $203 in 2021, an increase of 14.8%. Most Medigap plans do not cover this deductible and as of Jan. 1, 2020, Medigap plans sold to new people were not allowed to cover the Part B deductible. But once the deductible is met, Medicare and Medigap plans will cover some or all of your Part B costs.

Part B premium. The Part B monthly premium, paid by all people on Medicare, is rising to $170.10 in 2022, up from $148.50 in 2021, an increase of 14.5%. CMS noted this increase is unusually high, caused by several factors:

• For 2021, Congress put a cap on the Part B premium increase in one of its COVID-19 spending bills, holding the cost increase to just $3 a month. The 2022 increase will recoup some of that lost revenue.
• CMS noted “rising prices and utilization across the health care system.”
• CMS said is building “contingency reserves” due to the uncertainty regarding the potential use of the Alzheimer’s drug, Aduhelm, by people on Medicare. CMS is currently analyzing use of this drug, “which could, if covered, result in significantly higher expenditures for the Medicare program.”

So, for most people in 2022, Medicare Part B is going to cost $170.10 a month for the premium, plus the cost of the $233 deductible. That’s a total cost of $2,274 a year, up from $1,985 for 2021, an increase of 14.6%.

Beware: IRMAA is lurking

Since 2007, a beneficiary’s Part B monthly premium is based on reported income, known as MAGI, or modified adjusted gross income. According to the Social Security Administration handbook, for Medicare’s purposes MAGI is adjusted gross income (line 11 of the 2020 federal income tax form) plus tax-exempt interest.

Here are the 2022 Part B total premiums for high-income beneficiaries, which apply to income reported on your 2020 tax return:

These income-related monthly adjustment amounts affect about 7% of people with Medicare Part B. And it’s important to note that people on Medicare Advantage plans continue to pay the Part B premium, and are also subject to the IRMAA surcharges.

CMS just announced these 2022 IRMAA levels, but they are triggered by income you reported on your 2020 federal tax return. These charges are universally misunderstood. They are called 2022 IRMAA levels, but apply to the 2020 tax return. In other words, when you filed your 2020 return earlier this year, you could not know the income levels that would trigger the surcharges. And a tiny mistake can be very expensive.

When you file your 2021 return next year, realize that you won’t know the relevant IRMAA levels until November 2022, many months after you have filed. It’s a crazy system.

Part D: Drug coverage

IRMAA surcharges also apply to Medicare’s Part D premiums for drug coverage. There is no “standard” Part D premium — the cost you pay depends on the Part D insurer and plan you choose. The IRMAA cost, if any, is added on top of your base premium. People in Medicare Advantage plans don’t pay a separate Part D premium, since those plans include Medicare Advantage Prescription Drug (MAPD) coverage. But Part D is built into Medicare Advantage, and the IRMAA surcharge still applies.

Here are the Part D IRMAA levels for 2022, based on reported income for 2020:

IRMAA can pack a wallop

The IRMAA penalty isn’t a “progressive tax” that ramps up as you go over an income level. Instead, going $1 over the limit is the same as going thousands of dollars over the limit, and incurs the same surcharge. And while the IRMAA surcharges are increasing 14.5% across the board, the IRMAA income tiers only increased around 3%, less than the rate of inflation.

Here is a look at the annual costs of Parts B and D, plus IRMAA, for 2022, based on income reported for 2020:

My advice: Recognize IRMAA and plan for it

It’s worth noting that the first IRMAA tier for both singles and couples is not too daunting. It adds just $965 to the annual costs for a single filer, and $1,930 to the annual costs for a couple. But the next tier up starts to get pricey, increasing annual costs by $2,426 for a single filer and $4,853 for joint filers.

So I think people looking to take capital gains, buy a boat, make Roth conversions, etc., could feel comfortable in hitting that first IRMAA tier. In fact, anyone planning on doing major Roth conversions over a period of time should probably shoot for that level, but not higher, if possible.

Anyone reaching age 63 this year, and everyone already on Medicare, should be paying careful attention to income levels each year. That means tracking capital gains distributions, dividends, pension payments, annuity income, Roth conversions, IRA withdrawals, Social Security income, etc. It’s a lot of work, but can avoid financial pain.

Another key consideration is that Required Minimum Distributions are required from traditional tax-deferred accounts beginning at age 72. If you have sizable holdings in these accounts, you could be facing years of higher Medicare premiums triggered by RMDs. And if one spouse dies, and the surviving spouse inherits tax-deferred holdings, the problem magnifies. The surviving spouse now will file a single tax return, pushing IRMAA costs much higher.

So making some Roth conversions, within reason, before reaching age 72 makes good financial sense. Plus, it’s wise to use tax-deferred accounts for charitable giving, beginning at age 70, when qualified charitable distributions are allowed.

You can appeal an IRMAA ruling

The Social Security Administration has very specific rules that will allow you to get a waiver of the IRMAA surcharge, if you meet certain criteria for a “life-changing event” in 2020, which include:

• Work stoppage
• Work reduction
• Employer settlement payment
• Death of spouse
• Divorce
• Loss of pension income

You’ll need to fill out IRS Form SSA-44 to request the waiver.

Closing thoughts

The surge in Part B costs was anticipated because of last year’s congressionally-mandated limit, but an increase of 14.5% surprised me. As recently as August, Medicare trustees had projected a smaller increase of $10 from the current $148.50.

The result: A typical person on Medicare will be paying at least $289 a year more, just for Part B coverage. That’s $24 a month, and $48 a month for a couple. In addition, they most likely they will also face higher costs for Part D and Medigap coverage.

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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.