It’s Medicare Season….Part 1

By Jeffrey P. Deiss, CFP®, AEP®

Health care costs continue to be an important retirement planning consideration. Last year, we covered some relevant “frequently asked questions” about Medicare Open Enrollment, which runs from October 15 to December 7. If you have questions on what you can and cannot do during Open Enrollment and the differences between traditional Medicare and Medicare Advantage plans, then please contact your ACM Wealth Advisor.

Over the next couple of weeks, we will focus on the potential Part B (physicians and outpatient care) premium increases for 2017 and beyond, where and why Medicare Supplement Plan G should be considered instead of Plan F and quick refresher on shopping your Part D coverage (which you should do every year during Open Enrollment).

2017 Part B Premiums

Many of you may already know that the Social Security cost-of-living allowance (“COLA”) for 2017 will be 0.3%. While this represents an increase from 0% for 2016, it also means that increases in Medicare Part B premiums are in store for all and for some, the increases are projected to be as high as 22%. Last year, a minority of beneficiaries who are burdened the majority of the premium increases faced a similar situation, but Congress came to a budget agreement at year-end that lowered the increases. With Congress out of session until after the election, time will be short to repeat last year’s fix, assuming that there is even the political will to do so.

Beyond 2017, higher-income taxpayers should continue to see an increase in premium costs as part of the “doc-fix” legislation passed by Congress last year. The law increases payments to doctors and is partially paid for with Part B premium increases. Starting in 2018, the percentage of premiums paid by high-income taxpayers will increase from 50-65% to 65-80% depending on income level (a provision which is expected to impact 2% of beneficiaries). Additionally starting in 2020, Medicare Supplement (Medigap) policies will no longer cover the annual Part B deductible.

The majority of Social Security beneficiaries with yearly income of $85,000 or less (filing individually) / $170,000 or less (filing jointly) AND who have their Medicare Part B premiums deducted from their Social Security benefits continue to be protected by the “hold harmless rule”. The hold harmless rule ensures that Social Security checks will not decline from one year to the next because of increase in Part B premiums. So for the majority (70% of beneficiaries), Part B premiums cannot increase by more than the Social Security cost-of-living allowance.   For 2017, the Part B monthly premium for those held harmless will be just a few dollars more than the $104.90 they paid for 2016. Also for 2017, the yearly income to be considered is from 2015.

Given that Part B premiums are set to cover 25% of total Medicare costs (with the remaining 75% contributed by the government), this leaves the remaining 30% of folks “not held harmless” on the hook, like last year, for any increases in Medicare costs that exceed Social Security’s annual COLA.

One group included among the 30% not held harmless are those who are not subject to the income-related monthly adjustment (Medicare surcharge), but who either pay for their Medicare premiums out of pocket or who aren’t receiving social security (if they are delaying SS benefits, for example). This group is expected to pay around $149/month for their Part B premium in 2017, a 22% increase from $121.80 in 2016 (according to the 2016 annual report issued by Medicare trustees in June). Other groups impacted are those who are new to Medicare in 2017 or who do not participate in Social Security due to state or federal pensions.

For higher-income beneficiaries who are subject to the income-related monthly adjustment, the estimates are for monthly premiums to increase from$166.30 to $202.40 for the lowest affected tax bracket and from $380.20 to $467.20 for those in the highest in 2017 (according to the National Committee to Preserve Social Security and Medicare).

We’ll send out an update if Congress announces any changes to the pending 2017 Part B premium increases. Lastly, please note that for all beneficiaries, the 2017 annual Part B deductible is projected to increase from $166 to $204.

————————————————————————-

Health care costs can represent a significant portion of overall retirement spending. As health care costs, including insurance premiums, continue to rise it is increasingly important to proactively manage these costs.

Long term cash flow planning may be particularly impacted by rising health care costs. To lessen the impact, you could consider setting aside a portion of your investment accounts, that won’t impact your overall spending, to be tapped in the event of higher than expected health care costs occur.

Any funds sitting in a Health Savings Account (HSA) could serve this purpose and, if you are younger than 65, then an HSA may be a good vehicle to invest dollars for future health care expenses.

On an ongoing basis, it’s also important to consider the impact of year to year cash flow on your taxable income. Delaying income or managing taxable income to lessen the impact of Medicare income surcharges may help. By proactively considering the effects of health care costs to your retirement spending, the impact of rising health care costs may be reduced.

Please reach out to your ACM wealth advisor with questions on your plan and consider engaging us in a conversation about your long term cash flow if you haven’t already.

Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.