Disenroll from Medicare Part B (due to Income Related Premiums)

[SteveO59]

I am a retired federal employee, and my wife is on my FEHB health benefits plan.  I was advised decades ago that for "most" federal retirees, Medicare Part B made sense, because it caused many of the copays and coinsurance premiums to be waived.  My wife turned 65 and we started her Part B coverage about 2 years ago.  At the same time, we have also been working on converting all of our IRAs to Roth IRAs, so ALL of the converted money is treated as income (even though not one dime of it has come to us, since we did 100% conversion and paid the taxes out of our savings).  The problem is that Medicare thinks we have all this money, and we are now paying at the highest levels for the Medicare Part B income related monthly adjustment.  We are converting just enough each year to stay in the 24% tax bracket, so we will have this "phantom income" for at least 3 more years - by which time I will turn 65 as well, and now our Part B premiums will double.  We'll be paying about $1000 per month for Part B at that time.  This won't go on forever - the IRAs will be converted in 3 years, but then each time I withdraw from my portfolio of investments, I will have some amount of long term capital gains, and that will most definitely also cause our premiums to increase.  Apparently, we are not "most" federal employees, so now we need to reconsider.

We are seriously considering cancelling our Part B and Medicare Advantage plan (offered through the health insurance company that has our FEHB coverage).  I know that cancelling Part B incurs a 10% penalty per year, and that it would impact me as well if I never sign up, but my FEHB plan covers everything I need (at present time) at about 1/3 the cost of $1000/month.  My main hesitation to cancel is that if Congress changes the FEHB program, changes Medicare program, or goes to some sort of healthcare for all system, I could be screwed by some future decisions that I cannot predict.  That said, $1000 per month is a hefty price to pay for a gamble on what Congress might do in the future.

I've seen other threads that talk about canceling Medicare Part B, but they all reference going back to work - and that is not in the cards for us.  I've also seen answers to the disenrollment question that suggest Part B is better than the FEHB program, but I disagree - my FEHB coverage covers me when I travel, not just in the USA (Medicare does nothing in Canada, Mexico, or other countries, from what I've heard).  So relying on Medicare vs. FEHB just doesn't pencil out for us.

I'm looking for any thoughts or advice on this scenario.  I'm also looking for thoughts on when I can do this - can I do it at any time of year, or do I have to wait until some open season, and how does this timing impact the Medicare Advantage plan that is tied to both Medicare and my FEHB insurance?

[DSumer]

Dear @SteveO59 Thank you for sharing your scenario. I’d like to present a petition that deals with some of these same issues. At your leisure, please tell me what you think 🤔 and please consider signing. Thank you ! https://www.change.org/p/national-council-on-aging-senior-housing?cs_tk=AqiYNZ-9stq-O8WthGEAAXicyyvN... thank you. -Dean

[GailL1]

@DSumer You really need to rethink the reasoning in that petition - as it stands now it makes little sense.    However, I will give you a solution that will work with some planning.

1st and foremost, a person has to pay taxes on the amount of the withdrawal or distribution from an IRA account. You know, the ole - "pay your fair share".

Retirement accounts especially of the tax deferred type (IRA) are for a purpose - RETIREMENT.  IRAs are tax deferred account.  The amount you take out is taxable as ordinary income because tax was not paid on it before.  The targeted purpose of the withdrawal doesn't matter (buying a home).  It adds to your MAGI in the year that it is withdrawn/distributed; it has to be so that the person pays ordinary income taxes on it in that year.

Perhaps the money should have been put in some other type account if they wanted to use it for something other than retirement.    Like buying a home.

HOWEVER - With just a bit of planning and know how, seniors (actually anybody) could avoid adding to to their MAGI for a targeted type withdrawal (like buying a home) and at the same time taxes paid as they should be to good ole Uncle Sam.

What you do is COVERT part or all of the IRA - pay taxes on it - and put it into a ROTH IRA.  Then you wait 5-years and the money is yours to spend anyway you want it and it is not reported in your MAGI again since it was done 5- years previous and taxes have already been paid.  You might even get a bit of a bonus too since earnings in this ROTH account grow tax free.

Down Payment for a home purchase or an outright buy/build are always AFTER tax money therefore you don't get to pull the money out from an Individual Retirement Account TAX FREE to buy a home no matter what age one might be or what other benefits they might be losing.

So either do a IRA to ROTH account CONVERSION OR while working put those funds directly in a ROTH rather than an IRA.  

You said in your petition . . . . (and I quote)

Those that wish to withdraw or draw down their retirement savings either in one lump sum to avoid a mortgage, or monthly mandatory minimum withdrawals, to qualify for a mortgage, this ordinary income can then disqualifies, negates, or reduces benefits to seniors from government programs such as Medicaid, social security, Medicare, food subsidies, and other aid programs earmarked for the elder, whereas otherwise, they would qualify.

1st there is NO income eligibility for Medicare or Social Security.  You maybe speaking about SSI (Supplemental Security Income).  I think if you look each of these helping hand benefits up one by one - even having an IRA counts as a resource or asset for those programs thus they would be denied these programs because of this countable resource. 

LOL - please rethink your (change.org) petition. You are spreading misinformation.

[somarco]

@SteveO59 had you converted the IRA in one year you MIGHT have had IRMAA relief via an appeal.

https://www.ssa.gov/forms/ssa-44-ext.pdf

You may still want to give it a shot. All they can say is "no".

Cancelling Part B probably isn't the best option because you will be disenrolled from any Medicare Advantage plan. You must have A & B to participate in an Advantage plan.

Generally, plans under the FEHB Program help pay for the same kind of expenses as Medicare. FEHB plans also provide coverage for emergency care outside of the United States which Medicare doesn't provide.

https://www.opm.gov/healthcare-insurance/healthcare/medicare/medicare-vs-fehb-enrollment/

When traveling outside of the US you should consider an international travel medical plan.

You may also change your enrollment during the annual Open Season

Other answers to your questions are on the page linked above.

[GailL1]

What about this?

Watch video especially at the 5:25 marker.  Especially in the OP's case where the wife is the Medicare beneficiary and she still has the husband's (primary) FEHB at least until he retires.  Is this still the case?  If so, it has a Med. Part B penalty EXCEPTION.

[SteveO59]

That's a really good video - thanks.  My situation is a little different though - I am no longer working, so don't have the option to defer my wife's Part B decision.  The one takeaway for me, however, is I need to reconsider what FEHB plan I have - we have an HMO now, but I should be looking at FFS plans as well.  Of course, that's still complicated since the health insurance math would be different for my wife than for me because only one of us has Plan B.  Luckily, we are both healthy, so maybe I can take some risk and lower my FEHB costs by changing to a lower level FFS plan.

Thanks!

[GailL1 · Accepted solution]

You and your wife have a very complicated matter that involves money, taxes and premiums AND your health care coverage for the long term.  You need a CPA or Financial Advisor, one that understands Medicare! 

But I will offer some NON-professional suggestions for you and your wife to think about -  Before making any decision to drop your wife's Part B let's see if those IRMMA premiums can be modified based on your actual real income and not what you call "phantom income" from the IRA> ROTH conversion.  

The ownership of the IRA and the Medicare account (your wife), especially since she is currently age 65 (Medicare age) and you are not, is very important.  

There is NO "WE" in the actual ownership of a Medicare account and NO "WE" in the ownership of an IRA or ROTH account.  Each of you have different accounts.

Are you with me here on the above points? 

Break out the figures of the IRA>ROTH conversion on the tax year(s) forms involved as to who it actually belongs to - you (less than 65) or your wife (over 65).  This is probably TY 2019.  That is the one SSA is looking at for 2021 Medicare Part B  premiums.

1st is a simple solution and probably the easiest.  Has your wife tried this?

SSA.gov - Form SSA-44 - Medicare Income Related Monthly Adjustment Amount - Life Changing Event

Work Reduction reason = Retirement for your wife

If you (or she) fills out the form include her IRS Form 8606 showing the amount of her ROTH conversion and the tax return showing her IRA distribution.  The figures should match.  If they don't because you both filed as MFJ, and you also did a conversion, you may need to show a complete breakdown especially since she is the only one that is currently 65 years old and currently paying the IRMMA.

If calling as the form states doesn't work because they are still working remotely (pandemic) try calling your Congress person's office and see if they can help with a better direct contact.  

Now if this works, I will assume you will be fine because SSA should modify the Part B premiums without the inclusion of the IRA>ROTH conversion(s) as a Life-Event (Work Reduction reason = Retirement for your wife)

If it does NOT work - depending upon the defined $$$ numbers and ownership - there maybe another solution - that is, refiling the subject tax return [probably 2019] from which the IRMMA is based from MFJ to MFS and each one of you file a separate return.  I believe you can go back (3) years.  More tax maybe assessed on one of you but that amount just needs to be brought into the evaluation of which way is best way to proceed on this whole matter of IRMMA.

This is only some possible solutions to the AMOUNT of the IRMMA - by SSA modifying it on a Life Event basis or by refiling the tax return that has created this IRMMA premiums.

If neither of these work - let's us know and maybe we can help to figure out if cancelling Part B might be a good option although having both FEHB (retirement) and Medicare is superior coverage.  

[SteveO59]

Thank you - that's a very good answer.  I probably can't get much relief for 2019 because we were still converting my wife's IRA>Roth in 2019, but started on my IRA>Roth in 2020, so what you said should translate to next year's IRMMA, where the IRA conversion income is all mine (her IRA conversions were all finished in 2019, so we're working on mine now - including transfer out of TSP into a Traditional IRA so I can do the Roth conversion).  Yes, we did file MFJ.  I did some quick calculations to see if it made sense to file separately, but it penciled out cheaper jointly (mainly since the 2019 IRA conversion was on my wife's side for 2019).

I did not think about the SSA-44 life changing event (didn't think it would apply to our situation), but I can see that this might be something to try - especially since she gets no pension, and with her Roth conversions gone in 2020, her income should only include half of any interest or long term capital gains we have in non-IRA accounts.  MFS might be a good option there too.

It looks like I have more math to do next year to see what pencils out...

Thanks for this reply!