Signing up for Medicare can be complicated, but if you're a high income earner it can be more costly, too. That's because Medicare charges those earning more a premium.
The cost adjustment premiums charged by Medicare range between $40 per month and $230 per month. While that may not sound like a lot, those payments can add up, especially, if you're newly retired. But fear not! For those high income earners who got most of their income from salary, there may be options.
First, a bit of background
Medicare isn't cheap. In 2013, spending on Medicare represented 14% of the federal budget, or $583 billion, and 20% of all health care spending in America. Only social security and defense cost American taxpayers more.
Medicare costs so much because so many people rely on it. The program helps pay for hospitals, doctor visits, and other healthcare for more than 54 million Americans 65 and older.
And those costs are climbing as baby boomers turn 65 at a pace of 10,000 per day. Medicare spending per member grew by an average annual rate of 7.7% between 1969-2012 and that has policy experts estimating that net Medicare outlays, after subtracting offsets like premium payments, will grow from $446 billion in 2010 to more than $850 billion in 2024.
Source: Kaiser Family Foundation
Gives and takes
With rising pressure threatening the Medicare system, a number of policies have been enacted to try and make sure the program remains solvent.
For example, Medicare is 38% financed by payroll taxes and Medicare part A, which pays for hospitalizations, gets 88% of its funding from payroll taxes.
Those taxes come from a 2.9% tax that is split equally between employers and employees. However, the prospect of growing demand tied to boomers led to the Affordable Care Act implementing a higher payroll tax for those earning more than $200,000 (or $250,000 for married couples). As a result, high income earners pay 2.35% of their income above those thresholds instead of 1.45%.
To pay for doctor visits, Medicare part B relies on the government's general revenue for 73% of its funding, so to keep that spending in check, beneficiaries with incomes above $85,000 ($170,000 for a couple) are required to kick-in more in the form of premium payments, too. Similarly, high income earners also have to pay higher premiums for Medicare part D drug coverage.
How much more does it cost?
The following table breaks out just how much more high income earners are paying for their monthly Medicare Part B and Part D plans in 2014.
As you can see, those who are married and file jointly are paying $42 more a month for Part B and $12.10 per month more for part D if they earn between $170,000.01 and $214,000. Those who are married filing jointly that earn more than $428,000 will need to pay $230.80 more for Part B and $69.30 for Part D.
Source: Social Security Administration
But those income thresholds aren't based solely on the adjusted gross income you reported on your taxes last year. They're modified to include tax-exempt income, too. That means that if you get a lot of money in the form of tax-exempt bond dividend payments, those payments could push you above those income levels, triggering higher premiums.
All isn't lost
There's nothing that can be done to lower high income earners' higher payroll tax while they're working, but the premium cost increases were designed to target the wealthiest, not necessarily workers with high paying jobs. That means that if the majority of your income comes from your, or your spouse's, salary, not tax-exempt investments, there may be a chance to get Medicare to charge you to the normal rate -- but only if you're going through a life-changing event that decreases your income.
According to Medicare, there are eight life changing events that could result in them reconsidering your monthly premium payment: marriage, divorce/annulment, the death of a spouse, work stoppage, work reduction, loss of income producing property due to catastrophe, loss of pension income, or an employer settlement payment. If those events cause your income to slip below the income hurdles, then you can contact Social Security to apply for a rate reduction.
