How Medicare premiums are calculated

If you're currently on Medicare, you may know your monthly premium is subject to change yearly. But exactly how your health insurance premium is determined may not be based on factors like a health condition, annual income, or chosen Medicare plan. Instead, in many cases your Medicare Part B premiums will change based on rising healthcare costs alone.

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 health plan rates you can expect.

What is Medicare?

Medicare is a federal government health insurance program for people aged 65 and older or those with certain disabilities. You may also qualify if you have end-stage renal disease (ESRD) or ALS.

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, on the other hand, isn’t granted based on income.

The following table details the four main parts of Medicare:

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 instance, U.S. income tax revenue funds most of Medicare Part B, but the rest of your expenses are paid by your plan premium, which is calculated according to your yearly income level.

Medicare premiums are determined based on income limits, or thresholds, that are determined by CMS and are updated and released annually.

For 2023, the average income threshold for Medicare Part B and D is $97,000 per year for individual filers and $194,000 for joint filers. Those who earn up to that amount will pay the same premium rate, but for those whose incomes exceed that amount, a surcharge will be applied.

The income-related monthly adjustment amount (IRMAA) is an added surcharge determined by the Social Security Administration that you will 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. This means that your 2023 premiums are based on your 2021 federal income tax return.

Your MAGI is calculated by adding your AGI to your additional income. This includes untaxed foreign income, non-taxable Social Security benefits, tax-exempt interest, and income from within the U.S. 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 2023?

Part A

Most people on Medicare aren’t charged a Part A monthly plan premium. For most people, hospital coverage is premium-free if you have 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 benefits¹.

If you haven’t met the ten-year or 40-quarter mark yet, you can purchase Medicare Part A. Depending on how much you and your spouse have paid in Medicare taxes over the years, your monthly premium² in 2023 for Part A will either be $278 or $506. Luckily, only about 1% of Medicare beneficiaries pay for Part A coverage.

Part B

As previously stated, 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.

Additionally, the annual deductible for all Medicare Part B beneficiaries is $226 in 2023.

Medicare Part B premiums are often automatically deducted from your Social Security, Railroad Retirement Board, or Civil Service Retirement checks.

The following table shows the 2023 Part B income tiers and premium rates for Medicare beneficiaries:

For beneficiaries who are married but filed separate tax returns, the 2023 Part B monthly premium amounts are as follows:

Part C (Medicare Advantage Plans)

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 amount for prescription drug coverage and other medical services.

Most Medicare Advantage plans are usually very affordable. Most have a maximum annual out-of-pocket amount, and many plans have a $0 monthly payment. Plan costs 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 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 with Part D coverage, you will still have to pay the extra amount if you’re over the income threshold. You can lose your Part D coverage if you don’t pay the additional fee.

The below table shows Medicare Part D monthly premium amount for 2023:

How you can coordinate Medicare with a health reimbursement arrangement or a health stipend

If you’re an employee approaching age 65 with a health reimbursement arrangement (HRA) through your employer, you may wonder how you can coordinate this health benefit with Medicare coverage. Because Medicare is considered an eligible insurance plan, you should be able to use your HRA funds to cover your Medicare premiums.

Integration between Medicare and HRAs can be tricky, but it's very doable, depending on your HRA type. 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 eligible people pay their Medicare premiums and other qualified medical expenses not covered by their insurance. Unfortunately, integrated HRAs don’t work 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.

However, these stipends are considered taxable income, so use of these may increase your tax liability.

Conclusion

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

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

This article was originally published on October 17, 2021. It was last updated on May 30, 2023.

1. https://www.hhs.gov/answers/medicare-and-medicaid/who-is-eligible-for-medicare/index.html

2. https://www.medicare.gov/basics/get-started-with-medicare/medicare-basics/what-does-medicare-cost