Medicare's hold harmless act: It's not for everyoneArticle added by Dan McGrath on May 7, 2014
Dan McGrath

Dan McGrath

Windham, NH

Joined: April 03, 2013

​The hold harmless act was written into Medicare by laws through the Medicare Catastrophic Coverage Act of 1988 and was then revamped in 2009 by the Medicare Premium Fairness Act that has been designed to protect seniors’ Social Security cost of living adjustments (COLAs) from being consumed by Medicare premium increases year by year.

The goal of this act was to ensure that those collecting Social Security would not see their benefit being consumed by Medicare Part B premiums as they aged.

A simple example of how this act helps to protect Medicare beneficiaries:

Person A earns $1,050 a month from Social Security in 2013 while also having their Part B premiums of $104.90 deducted from their benefit.

Then in 2014, the Social Security COLA just happens to be 1 percent, or $10.50 a month, giving Person A a total of $1,060.50 a month in income, while Medicare happens to inflate by 15 percent or $15.75 a month.

Since the COLA only increased $10.50, this would mean that no matter how high Medicare Part B inflates, according to the rule, the most this person can be charged is the $10.50 more than the original amount of Part B in 2013, or the total of $115.40 a month, not the $102.79 the Part B premium became .

Thus the hold harmless act protects Person A’s Social Security income from decreasing due to increases in Medicare Part B premiums on an annual basis, but it doesn't protect them from realizing the fact that their entire COLA was consumed by Medicare inflation. But unfortunately, there are still some issues with this Act:

1. This act only protects seniors from increases in Medicare Part B premiums and not from Part D premiums.

So even though Person A's Part B premium could only increase that $10.50 no matter where Medicare Part B is set, Part D premiums (which are set by private health insurers) can inflate unchecked.

2. Too much income. Seniors who have not planned accordingly in retirement and are receiving “too much income” will not be protected by the hold harmless act no matter how high Part B premiums increase or how low Social Security COLAs become.

If Medicare Part B happens to inflate by $100 a month while Social Security announces that there will be no COLA adjustment, then those who fall into the category of earning too much income will not be "held harmless."
In fact, they will be harmed in a way that will see their Social Security benefit decreased for the entire year. The key is, obviously, income which Medicare deems to be, “Your adjusted gross income PLUS any tax exempt income or everything on lines 38 and 8b of the IRS form 1040”.

Some examples of income are: wages, Social Security, income from pensions, rental income, capital gains, dividends (including those from muni bonds), withdrawals from any traditional IRA, 401(k), 403(b), 457, SEP, Keough, and certain annuities.

What is not considered income? Certain types of life insurance, specific investments and select annuities, along with HSAs, reverse mortgages and 401(h) plans.

The hold harmless act was created to help seniors maintain their Social Security benefits throughout retirement, which is dearly needed, as Social Security has reported that roughly 53 percent of married couples and 74 percent of unmarried persons receive 50 percent or more of their income from Social Security.

The issue, even with the hold harmless act in place, is the fact that any increases seniors do receive from Social Security through COLAs could be eaten away by Medicare premiums. And seniors who happen to be earning too much income may see their Social Security benefit decrease or even possibly vanish over time.

The overall problem: Retirees have a very good chance of seeing a large portion of their income consumed by their health care costs, which is factored by the very same income that they will need.

One of the simplest solutions to this problem is generating Medicare-free income, which can be done by implementing certain types of life insurance and specific annuities into the overall financial plan. These solutions are easier for those that have more time to generate cash value, so the sooner a person decides to plan for retirement, the better.
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