How Medicare premiums are calculated

If you're currently on Medicare, you probably know your monthly health insurance premium changes annually. But how the federal government determines your premium doesn’t always depend on factors like health status, income, or your chosen plan. In many cases, your Medicare Part B premiums change based solely on projected program spending. This can be impacted by rising healthcare costs.

Understanding Medicare premium calculations can help you better plan your healthcare finances, which is vital for seniors on a fixed income. Let’s take a closer look at how the Medicare program works and the health plan premium rates for 2025.

In this blog post, you’ll learn:

• How the federal government calculates Medicare premiums based on factors like income limits and tax filing status.
• What Medicare covers and its associated costs for 2025.
• How to coordinate Medicare with a health reimbursement arrangement (HRA).

What is Medicare?

Medicare is a federal health insurance program for people aged 65 and older. You may also qualify if you have end-stage renal disease (ESRD), ALS, or other specific disabilities. Medicare typically has four parts, listed by letter. The term Original Medicare relates to Parts A and B only.

Some individuals get Medicare automatically, while others have to sign up. Whether you’re automatically enrolled or have to enroll manually depends on whether you start receiving retirement or disability benefits from Social Security before turning 65.

A common mistake people make is confusing Medicare with the Medicaid program. While both are health insurance programs run by the Centers for Medicare and Medicaid Services (CMS), Medicaid is for people with limited incomes and resources.

In contrast, income doesn't affect Medicare eligibility. But it can affect the cost of your coverage.

The following table details the four main parts of Medicare:

How are Medicare premiums calculated?

Medicare plan premiums vary from year to year. But the factors the government uses to calculate your monthly premium depend on which part you have.

For instance, U.S. income tax revenue funds most of Medicare Part B and D for enrollees. If you enroll in either plan, you’ll pay the remaining cost through your plan’s premium, which the government calculates using your yearly income level. The CMS updates and releases the income limits annually.¹

Below are the annual income thresholds for Medicare Part B and D in 2025:

Those who earn up to these amounts will pay the same premium rate for Part B. But if your income exceeds these thresholds and you have Part D, you must pay a surcharge fee known as the income-related monthly adjustment amount (IRMAA).

The Social Security Administration will charge you an IRMAA fee in addition to your base premium if your modified adjusted gross income (MAGI) exceeds the thresholds listed above.

The IRMAA calculation uses your adjusted gross income (AGI) on your tax return from two years prior. For example, the federal government will use the AGI listed on your 2023 federal income tax return for 2025 calculations.

Then, they’ll calculate your MAGI by adding your AGI to your additional income.

Additional income includes:

• Untaxed foreign income
• Non-taxable Social Security benefits
• Qualified education expenses
• Passive income or losses
• Rental losses or losses from a publicly traded partnership
• Retirement plan contributions
• Tax-exempt interest

For most individuals, your MAGI will be the same as your AGI. However, your premium can also vary based on your chosen plan, age, location, and tobacco use.

What are the Medicare premium rates for 2025?

Now, let’s review the Medicare premium rates you can expect to pay in 2025.

Part A

Most people with Medicare Part A don’t pay a monthly premium. Hospital coverage is premium-free if you’ve paid Medicare payroll taxes for at least ten years or 40 quarters. You may also get premium-free Medicare Part A if you qualify for (or already receive) Social Security or Railroad Retirement Board benefits.²

Suppose you haven’t met the ten-year or 40-quarter mark yet. In that case, you can purchase Medicare Part A.³ Luckily, only about 1% of Medicare beneficiaries pay for Part A coverage.

Here are the 2025 Medicare Part A premium rates:

Part B

As previously stated, your income level will determine your Medicare Part B monthly premium amount. If your MAGI exceeds an income bracket, you move up to the next tier and pay a premium increase.

Additionally, the annual deductible for all Medicare Part B beneficiaries is $257 in 2025.⁴

In many cases, the government automatically deducts Medicare Part B premiums from your Social Security, Railroad Retirement Board, or Civil Service Retirement checks.

Here are the 2025 Medicare Part B income tiers and premium rates:

Here are the 2025 Part B premium amounts for married couples who file separate tax returns:

Part C (Medicare Advantage Plans)

Medicare Part A and Part B cover 80% of patients' health services costs. Part C, also known as Medicare Advantage plans, covers everything Parts A and B do. But it charges small copay and coinsurance rates for prescription drug coverage and other medical services.

Most Medicare Advantage plans are very affordable. Many have an out-of-pocket maximum limit and a $0 monthly payment rate. But, costs vary depending on the plan’s coverage.

Plan costs vary depending on the extra benefits included, such as:

• Medicare Part D
• Prescription drugs
• Dental and vision care
• Hearing care
• Wellness programs

Part D

Medicare Part D is optional, and monthly premium payments vary from plan to plan. Most people only pay their base premium. But those with higher incomes pay an extra fee in addition to their premium. Like Medicare Part B, the government will use your federal income tax return from two years prior to calculate the additional cost.

Most people opt to have the extra amount taken from their Social Security or Railroad Retirement Board checks. If not, you’ll get a bill directly from your plan to pay the surcharge.

If you have a Medicare Advantage plan with Part D coverage, you must still pay the extra charge if you’re over the income limit. You can lose your Part D coverage if you don't pay it.

Here are the 2025 Medicare Part D income tiers and premium rates:

How you can coordinate Medicare with a health reimbursement arrangement (HRA)

If you’re an employee approaching age 65 with a health reimbursement arrangement (HRA) through your employer, you may wonder how to coordinate this health benefit with Medicare coverage.

An HRA is a formal health benefit employers use to reimburse employees for health insurance premiums and qualified out-of-pocket medical expenses. Medicare is an HRA-eligible insurance plan, so the two benefits can work together. However, it depends on the type of HRA your employer offers and which Medicare Parts you’re enrolled in.

To keep it simple, the qualified small employer HRA (QSEHRA) and individual coverage HRA (ICHRA) can coordinate with Medicare under certain circumstances. They can reimburse Medicare premiums depending on the HRA’s design and the employee’s enrollment status. Unfortunately, integrated HRAs don’t work with Medicare because they only supplement employer-sponsored group health insurance plans. An integrated HRA also doesn’t allow for premium reimbursements of any kind.

Check out our blog for full details about how HRAs work with Medicare.

Conclusion

Understanding Medicare premiums is crucial for accurate financial planning for those 65 and older. Many people overlook premium rates during the annual renewal process. If you’re unprepared, you could experience costly health insurance bills that may not be within your budget.

If determining your Medicare premiums alone seems daunting, work with your tax advisor for further financial help. Plus, if your employer offers an HRA through PeopleKeep, our award-winning customer support team can help you answer your Medicare coordination questions.

This article was originally published on October 17, 2021. It was last updated on December 13, 2024.

1. Medicare Premiums for 2025

2. Who's Eligible for Medicare?

3. CMS - Medicare Part A Premiums

4. 2025 Medicare Part B Deductibles