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How Medicare premiums are calculated

Written by: Elizabeth Walker
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Published on June 10, 2022.

If you're currently on Medicare, you probably know that your monthly premium is subject to change each year. But exactly how your premium changes isn’t based on the factors you might think, like your health, annual income, or chosen Medicare plan.

Instead, your Medicare Part B premiums will likely increase due to rising healthcare costs.

Understanding how your Medicare premiums are determined can help you better plan your healthcare finances, which is especially important for seniors on a fixed income.

Let’s take a closer look at what Medicare is, how monthly payments are calculated, and the current rates you can expect.

Check out guide to find out how an HRA can help you pay for your Medicare premiums

What is Medicare?

Medicare is a government health insurance program for people who are age 65 and older, have disabilities, or have end-stage renal disease (ESRD).

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 an income-based program for people with limited resources who require financial assistance. Medicare coverage determination, on the other hand, doesn’t use income during the application process.

The following table details the four main parts of Medicare:

Medicare Type

Definition

What it covers

Part A

Part A is the hospital insurance portion of Original Medicare.

Coverage includes costs associated with hospital stays and limited stays at nursing homes, hospices, and sometimes home healthcare and other covered services.

Part B

Part B is the medical insurance portion of Original Medicare.

Coverage is for regular healthcare expenses and basic costs, like doctor visits, outpatient care, certain medical equipment, and preventive care.

Part C

Part C is also known as the Medicare Advantage program. Beneficiaries can enroll in a private health plan, such as a health maintenance organization (HMO) or preferred provider organization (PPO).

Part C includes everything covered by Parts A and B. Coverage can also sometimes include Part D benefits.

Part D

Part D is optional supplemental coverage and pertains to prescription drug costs.

Part D plans are required to offer two medication options in all necessary categories to treat your health condition. Generic drugs are usually covered if a brand-specific drug isn’t.

How are Medicare premiums calculated?

Not all Medicare parts require a monthly premium payment. But for the ones that do, the plan premium amount will vary from year to year.

For example, the vast majority of Medicare Part B is funded by the U.S. income tax revenue. But the rest of your Part B expenses are paid by your plan premium, calculated according to your yearly income level.

Medicare premiums are determined based on the assumption that you have an “average” income. The average income amount is determined by the CMS and is updated and released annually.

For 2022, the average income threshold is $91,000 a year for individual filers and $182,000 for joint filers. If your income goes over that average a surcharge is applied, and your monthly premium may be higher.

The income-related monthly adjustment amount (IRMAA) is an added surcharge determined by the Social Security Administration that you might have to pay in addition to your Medicare base premium if your modified adjusted gross income (MAGI) is over the average threshold.

The adjustment is based on the adjusted gross income (AGI) amount you reported on your taxes two years prior.

Your MAGI is calculated by adding your AGI to any of your other income. This includes untaxed foreign income, non-taxable Social Security benefits, tax-exempt interest, and income from within the US territories not already included in your AGI. For most individuals, your MAGI will be the same as your AGI.

What are the Medicare premium rates for 2022?

Part A

Most people on Medicare aren’t charged a Part A monthly plan premium. According to the CMS, hospital coverage is premium-free if you have paid Medicare payroll taxes for at least ten years or 40 quarters.

If you haven’t met the ten-year or 40-quarter mark yet, you can purchase Medicare Part A, but the premiums will cost you $499 per month in 2022. Luckily, only about 1% of Medicare beneficiaries have to pay for Part A coverage.

Part B

As stated before, a Medicare beneficiary’s Part B monthly premium is based on their income. If your MAGI exceeds an income bracket, you are moved up to the next tier and will have to pay a higher plan premium.

The following table shows the 2022 Part B premium rates for Medicare beneficiaries:

Filed an individual federal tax return with MAGI

Filed a joint federal tax return with MAGI

Income-related monthly adjustment amount (IMAA)

Total monthly plan premium amount

Less than or equal to $91,000

Less than or equal to $182,000

$0.00

$170.10

Greater than $91,000 and less than or equal to $114,000

Greater than $182,000 and less than or equal to $228,000

$68.00

$238.10

Greater than $114,000 and less than or equal to $142,000

Greater than $228,000 and less than or equal to $284,000

$170.10

$340.20

Greater than $142,000 and less than or equal to $170,000

Greater than $284,000 and less than or equal to $340,000

$272.20

$442.30

Greater than $170,000 and less than $500,000

Greater than $340,000 and less than $750,000

$374.20

$544.30

Greater than or equal to $500,000

Greater than or equal to $750,000

$408.20

$578.30

For beneficiaries who are married but filed separate tax returns, the 2022 Part B monthly premium amounts are as follows:

Married and lived with their spouse at any time during the year, but filed separate tax returns with MAGI

Income-related monthly adjustment amount (IMAA)

Total monthly plan premium amount

Less than or equal to $91,000

$0.00

$170.10

Greater than $91,000 and less than $409,000

$374.20

$544.30

Greater than or equal to $409,000

$408.20

$578.30

Part C

Medicare Part A and Part B cover 80% of the costs of health services a patient receives. Medicare Advantage plans cover everything Parts A and B do, but they charge a small copay and coinsurance for drugs and other medical services.

Most Medicare Advantage plans are usually very affordable. Most have a maximum annual out-of-pocket cost amount, and many plans have a $0 monthly payment. Plan costs for people can vary depending on what other benefits are included, like Medicare Part D, dental, vision, hearing, and even gym memberships.

Part D

Medicare Part D is optional and monthly premiums vary from plan to plan. Most people only pay their base premium, but those with higher incomes have to pay an extra charge based on their IRS income taxes. Like those with Medicare Part B with an IMAA, the amount is based on their income tax report from two years prior.

In most cases, the additional premium amount is withheld from your Social Security check. If you have a Medicare Advantage plan that includes Part D coverage, you will still have to pay the extra amount if you’re over the income threshold. If you don’t pay the extra fee, you can lose your Part D coverage.

The below table shows Medicare Part D monthly premium amount for 2022:

Filed an individual tax return

Filed a joint tax return

Married filing separately tax return

Total monthly plan premium amount

$91,000 or less

$182,000 or less

$91,000 or less

Your plan premium

Greater than $91,000 and less than or equal to $114,000

Greater than $182,000 and less than or equal to $228,000

N/A

$12.40 + your plan premium

Greater than $114,000 and less than or equal to $142,000

Greater than $228,000 and less than or equal to $284,000

N/A

$32.10 + your plan premium

Greater than $142,000 and less than or equal to $170,000

Greater than $284,000 and less than or equal to $340,000

N/A

$51.70 + your plan premium

Greater than $170,000 and less than $500,000

Greater than $340,000 and less than $750,000

Greater than $91,000 and less than $409,000

$71.30 + your plan premium

$500,000 or above

$750,000 or above

$409,000 and above

$77.90 + your plan premium

How Medicare can be coordinated with a health reimbursement arrangement or a health stipend

If you’re an employee approaching age 65 and you have a health reimbursement arrangement (HRA) through your employer, you’re in luck. To participate in a stand-alone HRA, employees must have an HRA-eligible health insurance plan. Medicare is an eligible insurance plan, in addition to most major medical plans.

Integration between Medicare and HRAs can be tricky, but it's very doable depending on what type of HRA you have. Out of the HRAs that are available, the qualified small employer HRA (QSEHRA) and individual coverage HRA (ICHRA) can coordinate with Medicare.

HRA funds can help you pay your Medicare premiums and other qualified medical expenses not covered by your insurance. Integrated HRAs unfortunately can’t be integrated with Medicare because they can only be used in conjunction with group health insurance plans.

If your employer offers you an employee stipend, you have even more flexibility. Health stipends provide employees with a fixed amount of money to use on healthcare. Since they are much less regulated than other health benefit options, stipends can be used to pay for Medicare premiums, health services, and out-of-pocket expenses, if your employer allows it.

With WorkPerks through PeopleKeep, employees can easily submit their premium and medical expenses to be reimbursed up to a set monthly allowance amount. The user-friendly dashboard makes it simple for employees of all ages to get their expenses reimbursed quickly and easily.

Conclusion

Understanding Medicare premiums is crucial for accurate financial planning for those age 65 and older. Plan premium costs can sometimes be overlooked and, if you’re not prepared, you could be hit with expensive medical charges.

If determining your Medicare premiums alone seems daunting, you should work with your tax advisor for further financial assistance. And if your employer is offering an HRA or health stipend through PeopleKeep, our award-winning customer support team can help you with your Medicare coordination questions and concerns.

This article was originally published on January 27, 2015. It was last updated on June 10, 2022.

Originally published on June 10, 2022. Last updated June 10, 2022.
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