Medicare “Hold Harmless” Rules

Potential Part B Premium Spike in 2016

By Norm Miller, Senior Wealth Counselor

The Social Security system contains two provisions to aid beneficiaries from a cash flow perspective. If inflation is negative, the COLA (cost of living adjustment) cannot be negative, meaning, no reduction of benefit. Secondly, Social Security net benefits cannot decrease due to increasing Medicare Part B premiums. At worst, the Part B premium is capped to the increased Social Security benefit. This second provision is commonly called the “Hold Harmless” rule. The “harmed” group population is around 30 percent of all Medicare beneficiaries and it is this group that bears all of the potential increased Medicare Part B premiums in 2016.

The final decisions on COLA and Part B premiums will be announced this month (October). It is anticipated that COLA will be 0 percent for 2016 (just as we had in 2010 and 2011). Current estimates are that Part B premiums may increase by over 50 percent.

Projected Part B Premium Increases

income threshold

Source: No Social Security COLA Causes Medicare Flap by Alicia Munnell and Anqi Chen, Aug. 2015

 

As the graphic depicts, there are two distinct taxpayer classes – standard premium and the means-tested higher premium taxpayers. The standard premium taxpayers also fall into two groups – held harmless and not held harmless. The characteristics and planning implications of the various groups are:

Standard Premium, Held Harmless
This constitutes the majority of the Medicare beneficiaries. The Social Security benefit and Medicare Part B premium will be the same in 2016 as it is in 2015.

Standard Premium, Not Held Harmless
If you pay for your Medicare Part B premium out-of-pocket instead of direct deduction from your Social Security benefit, you are considered not held harmless and you will incur the substantial premium increase. Social Security and Medicare benefit ages synced at age 65 when Medicare became law in 1965. Today, Baby Boomers reach Social Security full retirement age at 66 and Gen X and Y at age 67. This age disconnect means that some taxpayers will start Medicare at age 65 and Social Security at age 66 (or even delay to age 70 to get a higher benefit) and therefore, will be impacted in 2016. The financial planning question is if one should take Social Security benefits earlier than planned to avoid the Medicare Part B spike. According to analysis by Michael Kitces, there is a negligible impact on the Medicare Part B spike relative to the benefit of delaying Social Security for increased benefits. Please contact your advisor to review choices if you fall into this category.

Means-Tested Premium
This class has no choice but to incur the higher Part B premiums in 2016. There is, however, an important nuance that should be reviewed. Medicare uses the tax return from two years earlier to determine income threshold and premium amount. So, if you are a recently retired taxpayer and your current income is less than the income used by Medicare to set your premium, you can go to the Social Security office and file form SSA-44 that allows for a reduction in your Medicare premiums, due to a lower income from work stoppage. This is a very important consideration to mitigate Medicare premium costs when one transitions into retirement. The Social Security Administration considers this a life-changing event. Other examples are marriage and loss of a pension.

Versant Capital management, Inc. recommends that you contact your advisor to review your personal situation to assess your optimal Social Security and Medicare strategy due to the impending 2016 Part B premium hike. It is also noteworthy that Sylvia Burwell, Health and Human Services Secretary, is exploring policy options that could lessen the impact. We will not know the final decision as to the Medicare part B spike until some time in October.

 

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