Wait, What? No 2016 Cost of Living Increase for Social Security Means My Medicare Part B Premium Could Increase by Over $650 Next Year?

Michael Kitces has recently blessed us with two fine blog posts (August 19 and August 26) describing how interaction of Medicare’s “Hold-Harmless” provision and a projected 0% cost of living increase for Social Security benefits for 2016 could increase 2016 Medicare Part B premiums by over $650 for some individuals.  I encourage readers of this website who do not fall into one of the three categories described below to read Michael’s posts for a very thorough discussion of how this situation developed, its implications and potential strategies.  I will attempt to provide below a very brief summary of the implications.  

Assuming there is no cost-of-living increase for Social Security, the current law remains unchanged and the Health and Human Secretary does not set a lower Part B premium for affected individuals, for everyone who is subject to the Hold Harmless provision, the 2016 Part B monthly premium will be the same as the 2015 Part B monthly premium ($104.90).  For individuals not subject to the Hold Harmless provision, their monthly 2016 Part B premium is estimated to increase by approximately $55 per month to pay for freezing the 2016 Part B premium for individuals subject to the Hold Harmless provision.  This extra premium is in addition to the extra premiums that may be required for individuals with relatively higher incomes under the Income-Related Monthly Adjustment Amount provisions of the law (IRMAA).

There are generally three types of individuals who are not subject to the Hold Harmless provisions of the law for 2016 (and therefore potentially subject to this additional $55 per month premium):

1. Individuals subject to extra premiums because of higher income (IRMAA):  You can fall into this category if your modified adjusted gross income for 2014 as reported on your tax return exceeded $85,000 for an individual filer or $170,000 for a married filer.  For this purpose, adjusted gross income is “modified” by adding any tax exempt interest.  Note that you can fall into this category for 2016 even though your income is not normally this high as a result of unusual realized capital gains, conversion of an IRA to a Roth IRA, etc. 
2. Individuals who are eligible for and participate in Medicare but do not receive a Social Security benefit.  For example, an individual who has decided to defer commencement of her Social Security benefits but has commenced participation in Medicare.  Note that this category would apply even if you could have commenced your Social Security benefit in an earlier year and you would otherwise have been eligible for the Hold Harmless provision for 2016. 
3. Individuals who commence participation in Medicare in 2016 with or without a Social Security benefit.

Of the three categories of individuals potentially being socked to pay for the costs not paid by the individuals benefiting from the Hold Harmless provision, perhaps the most surprising (to me) is category 2.  These are the good folk who listened to all the financial experts who told them that it was a “no-brainer” financially to defer commencement of their Social Security benefit to age 70.  If you fall into this category, you should read Michael Kitces’ analysis concluding that if you are planning to commence your Social Security benefit at the beginning of 2016 (and you otherwise meet the Hold Harmless requirements), you might want to consider accelerating commencement of your Social Security benefits so they start this November.  Note that relatively quick action would be required to commence Social Security benefits in November of this year in order to avoid this extra $650-ish premium for 2016.