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In considering the changes below, it is important to remember that the Affordable Care Act does not reduce benefits available under the traditional Medicare program, nor does the new law increase cost-sharing for Medicare-covered benefits.  In fact, the law reduces cost-sharing for preventive services, places limits on cost-sharing by Medicare Advantage (MA) plans, and reduces the cost of prescription drug coverage by closing the coverage gap, or Donut Hole. 

It is also important to note that the overwhelming majority of tax payers will not have to pay the new higher Medicare tax.  The tax is expected to apply only to people with the highest incomes, estimated at 2.6% of all households and 2.2% of elderly households.[2]

Income-Related Part B and Part D Premiums

Part B Income-Related Premiums: Since 2007, higher income beneficiaries have paid increased Part B premiums based on the income they previously reported to the Internal Revenue Service (IRS).[3] Premium adjustments are based on a beneficiary's modified adjusted gross income (MAGI), which is a combination of adjusted gross income and tax exempt interest income.[4] To determine premiums, the IRS sends Social Security information from a beneficiary's most recent tax return, generally two years before the year for which the premium is determined.[5]

In 2010, beneficiaries filing singly are subject to increased premiums if their MAGI is over $85,000; married beneficiaries filing joint returns are subject to increased premiums if their MAGI is over $170,000.[6]  In 2010, about 5 percent of Medicare beneficiaries pay the higher income-related premium.[7]

The original provision establishing the Part B income related premiums included an annual inflation adjustment for the threshold amount and the amounts used in the modified adjusted gross income ranges. The Affordable Care Act, however, freezes the income thresholds at the 2010 amount through December 31, 2019.[8]  Thus, the thresholds will remain at $85,000 and $170,000 for the next 10 years.

The freeze in the income thresholds has two consequences for beneficiaries. As the MAGI thresholds remain the same and retirement income increases over the next 10 years, a larger percentage of Medicare beneficiaries will be subject to the income-related premium.  Additionally, those who pay an income-related Part B premium are not protected by the "hold harmless" clause.  This means that they would have to pay Part B premium increases in years such as 2010 when there is no Social Security cost-of-living increase.[9]  In 2010, the Part B premium for people protected by the hold harmless clause is $96.40; the premium for people not protected is $110.50.  People who pay the income related Part B premium in 2010 pay premiums ranging from $154.70 to $353.60, depending how much their MAGI exceeds $85,000.

Part D Income-Related Premiums: As previously reported, beneficiaries with higher incomes who pay the Medicare Part B income-related premium will also be subject to a Medicare Part D income-related premium starting in 2011.[10] The increased premium amount will be based on a percentage of the base beneficiary premium for that year as determined by the Secretary of Health and Human Services (the Secretary). The base beneficiary premium (as defined by regulation)[11] is a function of both the amount Medicare pays toward the cost of prescription drug coverage in general and the national average bid amount.  The national average bid amount is calculated based on the approved bids submitted by Part D plan sponsors, weighted by a number of factors, including enrollment.[12]  The base beneficiary premium for 2010 is $31.94; the national average bid amount is $88.33[13]

The Secretary is required to inform the Commissioner of Social Security (the Commissioner) of the base beneficiary premium amount by September 15 of each year and inform the Commissioner of the income threshold by October 15. The Commissioner will make determinations to carry out the income-related premium and will collect the amount through withholding from Social Security or Railroad Retirement checks, or through withholding from checks issued through the Office of Personnel Management for federal government retirees.

As with the Part B income-related premium, the increase in the percentage of the Part D premium that a particular beneficiary will pay will be based on a monthly adjustment amount. Part D utilizes different monthly adjustment amounts depending on four different categories of modified adjusted gross income:  more than $85,000 but less than $107,000 for an individual beneficiary; more than $107,000 but less than $160,000; more than $160,000 but less than $214,000; and more than $214,000. In other words, a beneficiary whose modified adjusted gross income exceeds $214,000 will pay a greater percentage of the Part D premium than a beneficiary whose income is in the $85,000-$107,000 range.

Several questions remain about the effectuation of the Part D income-related premium. The actual premium a beneficiary pays could be lower than the base beneficiary premium if the beneficiary is in a Part D plan that submitted a bid that was lower than the national average or in a Part C plan that subsidizes its Part D benefit with the extra payments it receives to provide Part A and Part B services.[14]  Thus, if the increased amount for the income-related premium is based on the base beneficiary premium, a beneficiary who enrolls in a plan with a lower premium than the base premium may pay a greater percentage increase, albeit by a small amount, than someone enrolled in a plan with a premium that is higher than the base beneficiary premium.

Some beneficiaries pay their Part D premiums directly to their drug plan rather than having the premiums deducted from their Social Security, Railroad Retirement, or federal government retirement checks.  Such individuals who are subject to the new income-related Part D premium will unfortunately have to make two separate premium payments.  They will pay the regular plan premium directly to their drug plan through the mechanism they establish with the plan, and they will have the applicable income-related premium amount deducted through their government issued retirement check.

The Centers for Medicare & Medicaid Services (CMS) currently makes premium information for Part D plans available in the Medicare & You Handbook, which is distributed to all Medicare beneficiaries each year in advance of the annual enrollment period.  Premium information is also made available through the Plan Finder tool on www.medicare.gov.  It remains to be seen whether these sources will also include information concerning the income-related premium amounts for Part D plans.

Finally, since the inception of Part D, beneficiaries have experienced difficulties with having the appropriate Part D premiums withheld from their Social Security checks.  Adding an income-related Part D premium for some beneficiaries may only exacerbate the problem.[15]

Increased Medicare Taxes for Higher-Income Taxpayers[16]

Increased Medicare Tax on Wages above Certain Levels:  Starting in 2013, individuals and couples with higher incomes will pay more toward the Hospital Insurance portion of the Federal Insurance Contributions Act (FICA) tax.  This Medicare tax funds the Medicare Part A trust fund.

Currently, employees and employers each pay a Medicare tax equal to 1.45% of an employee's wages. The Affordable Care Act adds an additional 0.9% tax on wages in excess of $200,000 for an individual filing a separate tax return, wages in excess of $250,000 for individuals filing a joint tax return, and wages in excess of $125,000 for an individual who is married but filing separately.[17]  The additional 0.9% Medicare tax is not assessed on a worker's entire income.  It applies only to wages above the specified levels, meaning that an individual taxpayer who makes, for example, $235,000, would pay 1.45% tax on the first $200,000 in wages and 2.35% tax on the additional $35,000.

Employers are required to withhold the additional tax from a worker's wages if a worker's wages exceed $200,000.  Some workers with multiple jobs may have wages below the cut-off from each job individually, but when the wages are combined they exceed $200,000.  Because the wages from each employer are below the cut-off, the employers are not responsible for withholding the additional tax.  Workers in that situation will be responsible for paying the additional taxes themselves. Similarly, a married couple whose individual wages are below $200,000 but whose combined wages exceed $250,000 will not have the additional tax taken from their wages but will have to pay the additional tax separately.  Individuals who are self-employed and who will be subject to the additional taxes will also be responsible for paying the tax in the same manner they currently pay Medicare taxes.

Medicare Tax on Unearned Income:  For the first time, starting in 2013, individuals, estates, and trusts will have to pay Medicare tax on certain unearned income.[18]

Individuals will have to pay a Medicare tax equal to 3.8% of the lesser of net investment income for the taxable year, or the excess of modified adjusted gross income over a threshold amount.  The threshold amounts are the same as for imposition of the additional Medicare tax on wages: $200,000 for an individual; $250,000 for a married couple filing jointly; and $125,000 for a married individual filing separately.

A trust or an estate is responsible for a Medicare tax of 3.8% of the lesser of (1) undistributed net investment income for the taxable year, or (2) adjusted gross income over the dollar amount at which the highest tax bracket for a trust or an estate begins.

Net investment income means the excess, if any, of the sum of (1) gross income from interest, dividends, annuities, royalties, and rents (subject to certain exceptions for such income earned through trade or business), and (2) net gain attributable to the distribution of property; over deductions that may be allocated to the gross income or net profits.  Net investment income does not include distributions from certain pension plans or items taken into account when considering self-employment tax.  It also does not include some active interests in partnerships or S corporations.  Other exemptions may apply.

Conclusion

In 2011, the majority of Medicare beneficiaries will once again not be affected by the new rules for income-relating premiums.  Similarly, starting in 2013, most taxpayers will not be required to pay higher Medicare taxes.  However, advocates need to be aware of these provisions if they are to understand the complexities of the Affordable Care Act and be prepared to assist the broad range of Medicare beneficiaries.