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.
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
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.
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.
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
In 2010, about 5 percent of Medicare beneficiaries pay the higher
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.
Thus, the thresholds will remain at $85,000 and $170,000 for the
next 10 years.
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.
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.
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)
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.
The base beneficiary premium for 2010 is $31.94; the national
average bid amount is $88.33
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.
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
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
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
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.
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.
Increased Medicare Taxes for Higher-Income Taxpayers
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.
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.
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
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.
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.
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
 The Affordable
Care Act is the name the Obama Administration is using
collectively to apply to the two health care reform bills
passed in March of this year. The separate acts are the
Patient Protection and Affordable Care Act (PPACA), Pub. L.
111-148 (March 23, 2010) and the Health Care Reconciliation
Act of 2010 (HCRA), Pub. L. 111-152 (March 30, 2010
Part B premiums were added to Medicare by the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(MMA), § 811 Pub.L. 108-173 (Dec. 8, 2003).
 Kaiser Family
Foundation, The Social Security COLA and Medicare Part B
Questions, Answers, and Issues (Oct. 2009); http://www.kff.org/medicare/upload/7912-02.pdf.
 PPACA § 3402,
amending 42 U.S.C. § 1395r(i).
 Part B
Premium: Who Pays What, and Why? Supra.
 42 C.F.R. §
 42 C.F.R. §
 42 C.F.R. §
423.286(d). Note also that a beneficiary’s premium may be
higher if the beneficiary pays an extra premium for
supplemental drug coverage and/or pays a late enrollment
 For additional
explanations and examples, see, Joint Committee on Taxation,
Technical Explanation of the Revenue Provisions of the
“Reconciliation Act of 2010,” As Amended, In Combination
with the “Patient Protection and Affordable Care Act of”
(JCX-18-10, March 21, 2010),
and C. Marr, Changes
in Medicare Tax on High-Income People Represent Sound
Additions to Health Reform ( Center on Budget and Policy
Priorities, March 4, 2010)
 PPACA § 9015;
HCRA § 1402(b).
 HCRA § 1402.
A trust may be exempt from the new Medicare tax if it meets
certain requirements regarding charitable trusts.