Executive Summary
Under Social Security and Medicare rules, the “Hold Harmless” provision is a special rule intended to protect most Social Security recipients from experiencing a decrease in their (net) benefit payments, by limiting the (dollar) amount of the annual Medicare Part B premium increase to the (dollar amount) of Social Security’s cost-of-living adjustment. And due to negative inflation from the recent fall in energy prices, the 2016 Social Security COLA is on tracked to be “floored’ at the minimum 0.0%, which in turn means that Medicare Part B premiums will be locked in for a 0.0% increase in 2016.
However, the "Hold Harmless" provisions only apply to approximately 70% of currently Medicare enrollees for the protection. Which means that the entire magnitude of Medicare's rising costs must be borne by just the other 30% of Medicare enrollees, as well as any who planned to enroll in 2016, resulting in a project 52% spike in Part B premiums next year!
Given the looming Medicare Part B premium increase, those who are not eligible for the Hold Harmless provision - for instance, those enrolled in Medicare but delaying Social Security benefits, or those who haven't yet enrolled in either but could - should carefully consider whether it is really still worth delaying Social Security benefits (and/or delaying enrollment in Medicare), given that those who begin the process by October of this year still have the potential to get started in time to be eligible for Hold Harmless and shelter themselves from the 2016 increase.
And in practice, it appears that slightly accelerating claiming may in fact be appealing, especially for those who otherwise anticipated starting Social Security and Medicare Part B in 2016. On the other hand, higher-income taxpayers who are subject to the Medicare Part B premium surcharge cannot protect themselves (or do anything else about it, since the calculation would be based on income from 2014 and that tax year is long since closed). And for those who still plan to delay Social Security benefits for many years to come, the reality is that delaying Social Security benefits is still so valuable, that even the projected Medicare Part B premium spike is still not nearly enough to deter the long-term value of generating Social Security’s Delayed Retirement Credits for those who anticipate living well past the breakeven period.
(Michael's Note: Some Social Security claiming strategies discussed in this article have been materially impacted by the Bipartisan Budget Act of 2015, which has eliminated most forms of the File-and-Suspend strategy. See "Congress Is Killing The File-And-Suspend And Restricted Application Social Security Strategies" for further details.)
How The “Hold Harmless” Rules Impact Medicare Part B Premiums
Every year, Social Security benefits receive a Cost-Of-Living Adjustment (COLA). At the same time, there is also an annual process to adjust Medicare Part B premiums higher every year, to account for the current (and rising) costs to administer the Medicare health insurance system.
However, a special provision dubbed the “Hold Harmless” rule stipulates that the dollar amount increase of Medicare Part B premiums can never be greater than the dollar amount increase of the Social Security COLA – effectively ensuring that retirees who receive Social Security benefits and have Medicare Part B premiums subtracted from their benefits will never see the size of their monthly checks decrease. At worst, payments will simply remain flat (although higher Medicare Part D premiums subtracted from Social Security benefits can still cause the final amount of the monthly check to decline slightly).
Notably, though, the Hold Harmless provision only applies to those who have actually enrolled in Medicare Part B, and who actually receive Social Security benefits (with Medicare Part B premiums subtracted) in the first place; those who have delayed Social Security, delayed enrolling in Medicare, or both, are not protected by the rule. In addition, the Hold Harmless rule also doesn’t apply to anyone who is subject to the “high-income surcharge” on Medicare premiums (formally known as the Monthly Income-Related Adjustment Amount to Medicare Part B premiums). In total, it’s estimated that these limitations mean the Hold Harmless provision only actually protects about 70% of Medicare enrollees.
Yet with the Social Security COLA projected to be flat at 0.0% for 2016 (due primarily to the crash in oil and other energies prices in late 2014 and early 2015), these rules mean that nearly 70% of Medicare enrollees cannot experience a Part B premium increase next year. Instead, the other roughly-30% of Medicare enrollees that are subject to the Medicare Part B premium increase must bear the burden for the entire premium increase due to Medicare's rising costs. Yet as noted recently in the WSJ, squeezing 100% of the premium increase into only 30% of the enrollees is projected to trigger as much as a 52% spike in Medicare Part B premiums (an increase of about $55/month, or over $650/year)!
Planning Around The Potential 52% Spike In Medicare Part B Premiums For 2016
The “good” news for planning purposes is that because the Hold Harmless provision is determined based on whether the retiree is getting Social Security benefits (and is a Medicare Part B enrollee) for the last two months of the year, it appears that there is still time for retirees to consider whether to take action on claiming Social Security or Medicare Part B now, before it is too late.
However, in practice whether it is effective to engage in such claiming strategies will depend heavily on the exact details of the retiree’s situation, as discussed through the various scenarios below.
Currently On Medicare Part B And Receiving Social Security Benefits, Not Subject To IRMAA
For anyone who is currently on Medicare Part B, is receiving Social Security benefits, and will not be subject to the income-related monthly adjustment amount (IRMAA) for their Medicare Part B (and Part D) premiums in 2016 because their income was low enough on their 2014 tax return, there’s nothing to be done. The Hold Harmless provision will apply, and Medicare Part B premiums will remain “locked in” at the current $104.90/month rate.
Notably, the determination here is whether IRMAA will apply to the retiree next year in 2016 (based on the 2014 tax return), even if the retiree is not currently subject to IRMAA for his/her Medicare premiums this year (which was based on the 2013 tax return). Thus, even though the tax year is already closed, if 2014 income was up over the IRMAA threshold, the Hold Harmless provision will not apply to the looming Medicare Part B premium increase next year too (i.e., Medicare premiums will go up next year).
Currently On Medicare Part B And Receiving Social Security Benefits, And Subject To IRMAA
For those who do anticipate being subject to IRMAA for 2016 because their 2014 income was in fact too high (regardless of whether they’ve been subject to it already for 2015), unfortunately the coming Medicare Part B premium increase will apply. And in practice, there’s really very little that can be done; since IRMAA is calculated based on the 2014 tax return – a tax year that has already closed – even end-of-year tax planning for the current 2015 tax year won’t help. At best, it may help to avoid IRMAA and leave someone eligible for the Hold Harmless provision in 2017, but that will merely lock in the new already-increased 2016 rates!
On the other hand, there are some “life-changing events” that do qualify for an exception to IRMAA in 2016, even if modified AGI would have otherwise triggered it based on the 2014 tax return. For those who may be eligible for an IRMAA exception, it’s necessary to complete Form SSA-44 to request relief.
In the context of an IRMAA exception, though, it's important to recognize that ‘mere’ volatility of income from year to year, even including a one-time significant capital gain, is generally not an exception to the IRMAA rules; it means IRMAA may only apply for that one year and not subsequent years. Alas, if that one year was the 2014 tax year, there’s again little that can be done at this point.
Currently Below Age 65 And Not Eligible For Medicare
For those who are below age 65 and not eligible for Medicare, there’s nothing to be done about the looming Medicare premium increase. The Hold Harmless provision cannot apply if not already enrolled in Medicare (and if under age 65, there's no way to enroll at this point, unless disabled!). Of course, for those who are not yet age 65, the Hold Harmless provision may be a moot point anyway; if they won't be starting Medicare Part B in the near term, the looming Medicare Part B premium increase won't apply anytime soon, either. And by the time the retiree is eligible for Medicare, the Part B premium increase under the Hold Harmless provision may have normalized by then.
Notably, those who are younger than age 65 but are disabled and are on Medicare will generally not be eligible for Hold Harmless either, because they are not also receiving Social Security retirement benefits with Part B premiums subtracted from their monthly checks. However, this will generally be a moot point anyway, as younger disabled beneficiaries who are dual-eligible for Medicare and Medicaid will already have their premiums paid by the state (so the state may be impacted by the premium increase, but they won't be directly).
Unfortunately, though, for those who will turn age 65 soon and become eligible for Medicare in 2016, alas the new higher Medicare Part B premiums will already be in force by that time, and must be paid by a new enrollee.
Currently Over Age 65, Eligible For But Not Claiming Medicare Yet
For those who are over age 65 but not claiming Medicare yet (most commonly because they are still working and eligible for an employer retirement plan, or eligible for a working spouse’s employer health plan), the Hold Harmless provision will not apply because there is no ongoing Part B premium “base year” on which to limit a premium increase in the first place.
For those who do not anticipate beginning Medicare until many years in the future anyway, this may be a moot point, as again eventually the Medicare premium increase should normalize in several years once Social Security benefits begin to increase again and the Medicare premium increase can be re-distributed across the entire base of Medicare enrollees (as occurred in 2012). And starting Medicare "early" when already covered by an employer may be especially unappealing, simply because the benefits aren’t otherwise needed but will involve paying $104.90/month in current Medicare Part B premiums, just to avoid a $55/month increase (and paying $104.90/month to dodge a $55/month increase is an outright losing proposition!).
For those who do anticipate beginning Medicare in the next year or two, though, the situation is more acute, as such individuals will end out paying for Medicare Part B soon enough anyway, but starting now means more payments at a materially lower dollar amount. Fortunately, those covered under a group health plan based on current employment are eligible for a Special Enrollment Period to sign up anytime in Medicare as well (once already age 65), which means they can add themselves to Medicare now in time for the Hold Harmless measuring period that begins in November. Again, though, paying many years of $104.90/month premiums just to avoid a $55/month increase won’t necessarily pay off; this strategy will likely be most beneficial for those who were going to start Medicare within the next year or two anyway.
In addition, it’s crucial to recognize that starting Medicare Part B earlier to try to lock in premiums under Hold Harmless still will not matter unless the retiree also enrolls in Social Security in time for payments to begin in November as well. And it's also important to recognize that this remains a moot point if income will be high enough to be subject to IRMAA anyway. And further complicating the matter is that for those who are between age 65 and age 66 (old enough for Medicare, but not yet full retirement age), beginning Social Security benefits early will likely subject them to the Earnings Test, reducing Social Security benefits until they actually do reach full retirement age anyway. On the other hand, for those over the full retirement age of 66, the Earnings Test no longer applies, and it is simply a matter of signing up for Social Security benefits by October (so that payments can begin in November) and also getting enrolled into Medicare Part B by then as well.
Notably, though, the decision of whether to accelerate the onset of Social Security benefits just to avoid the Medicare Part B premium increase still requires a further evaluation of whether it’s really worthwhile to give up on the otherwise-significant longevity-hedging benefits of delaying Social Security in the first place, for “just” a $650/year Medicare Part B premium savings for a couple of years!
Accelerating Social Security Benefits To Apply Hold Harmless Vs The Benefit Of Delaying
Given that most retirees who start Medicare at age 65 but delay Social Security are doing so specifically to generate Delayed Retirement Credits (given their long-term value), the trade-off of continuing to delay versus accelerating benefits to lock in Medicare Part B premiums must be carefully considered. The issue applies for those who are eligible for a Special Enrollment Period (e.g., have ongoing employer coverage but are already age 65) and could start Medicare Part B and their Social Security benefits in time to get November payments. It also applies for those who already are on Medicare (i.e., over age 65, enrolled, and didn’t delay or opt out) but who have been delaying Social Security benefits already and may now be reconsidering.
For people in this situation, the decision effectively amounts to a trade-off between the benefits of starting Social Security earlier to lock in current Medicare Part B premiums.and the benefits of delaying Social Security to generate higher (inflation-adjusting) payments in the future at a "cost" of absorbing higher Medicare Part B premium in the meantime.
While the ultimate outcome and benefit of this situation will vary depending on how many years there may be higher Part B premiums before Social Security COLAs increase benefits enough to redistribute the increased-Part-B-premium to all enrollees, we can estimate the impact.
For instance, consider a 66-year-old retiree who was planning to continue to delay Social Security benefits for the next 4 years, and assume a “worst case” scenario that Medicare Part B premiums remain elevated by $55/month (or $650/year) for the next 4 years, effectively increasing the “cost” of delay by $2,600 cumulatively (plus the time value of money).
As the chart shows below, assuming the retiree’s baseline benefit is $2,000/month (such that delaying 4 years increases it by 4 x 8% = 32% to $2,640 at age 70, plus ongoing COLAs), the reality is that the projected long-term economic value of delaying Social Security experiences only a negligible impact when dragged down by the Medicare Part B premium spike (the Medicare Part B increase may cost thousands of dollars, but a good decision on delaying Social Security benefits for 4 years can amount to hundreds of thousands of dollars!). In other words, if delaying benefits was already appealing, even a multi-year impact from “losing out” on the Medicare Part B Hold Harmless provision doesn’t appear to be a deal-killer at all. The relative impact is barely visible in the early years (i.e., the value of delaying Social Security is virtually the same as the lines overlap), and while it does cause a slight decrease in long-term value to absorb a Medicare Part B surcharge, if the retiree anticipated living long enough to reach their 90s and beyond, the economic value of delaying Social Security is still hugely positive (rising as high as +$500,000 of economic value!), Part B premium spike or not.
Ultimately, this suggests that retirees who might have been considering whether to apply for Social Security benefits very soon anyway may wish to start benefits a few months earlier (and must be done by October) to ensure eligibility of the Hold Harmless provision for their Medicare Part B premiums (assuming they’re also eligible for and enrolled in Medicare Part B by then, too!). But those who otherwise had a plan for a multi-year delay in benefits and found delaying Social Security benefits to be economically appealing in the first place will likely want to continue to delay (it's not worth giving up hundreds of thousands of dollars of delayed Social Security benefits, just to avoid a few years of paying an extra $650 for Medicare Part B). Similarly, those who are engaging in file-and-suspend strategies (which don’t help for Hold Harmless because there are no actual payments being made to which the rule can be applied) will likely want to continue to keep their file-and-suspend in place (unless it within a month or few of winding down anyways).
In the end, though, it's still crucial to recognize that all of this may prove to be a moot point. Health and Human Services Secretary Sylvia Burwell can choose to set a lower premium to mitigate the 52% increase, and has already indicated that she is exploring other policy options. Either way, the “final” Medicare Part B rates for 2016 will be set in October... but those who aren't actually eligible for Hold Harmless, and are concerned about its potential Medicare Part B premium impact, may want to start planning now, just in case!
So what do you think? Are you engaging in any adjustments to your planning strategies for retired clients to contend with the potential Medicare Part B premium spike? Are you clients mostly already eligible for Hold Harmless? Or are they just planning to ride it out?
