What it means
Many retirees pay their Medicare Part B premium (the monthly charge for outpatient medical cover) by having it deducted from their Social Security benefit. Each year, benefits are adjusted for the cost of living, and the premium can also rise.
Sometimes the premium rises by more than the benefit adjustment would cover. The hold harmless provision steps in when that happens.
It says the dollar amount a person receives after the premium is deducted cannot fall below what they received the year before, because of the premium increase. The premium is held down to whatever level keeps the net payment from dropping.
The protection is not universal. It generally does not cover people who are new to Medicare, those who pay their premium directly instead of through a deduction, or those who pay higher income-related premium amounts.
These groups can see their premium rise in full. The financial effect is that the protected group's net benefit stays the same in a year when the cost of living adjustment is small, while everyone else absorbs the full premium rise.
The cost of this protection falls on the overall system, because the shortfall is spread across the premiums paid by other beneficiaries. This is one reason why premium increases for unprotected people can be larger than expected.
For advisers and employers, the practical point is that retirement income planning should model net benefits after premiums, not gross benefits. The rules and figures are updated every year, so planners should check the current amounts before using any specific number.
A client who delays starting benefits, or who moves between payment methods, may lose the protection without noticing.
In practice
Real-world examples.
Example
A retired teacher receives $1,800 a month in Social Security and has her premium deducted. A small cost of living increase would be wiped out by a premium rise. The hold harmless provision limits the premium so her net payment does not fall.
Example
A man who turned 65 this year enrols in Medicare for the first time. He sees that his premium rises in full the next year, with no hold harmless protection, because he was not an existing deduction payer. His financial adviser had warned him to plan for the rise.
Example
A retiree with high income pays a higher, income-related premium. He assumes the hold harmless rule limits it, but it does not apply to the income-related portion. His accountant rebuilds his budget around the full premium.
Formula
Calculation
Maximum premium under the provision = New gross benefit - Previous year's net benefit
Suppose a retiree receives a gross benefit of $1,500 a month and pays a $170 premium by deduction, so the net payment is 1,500 - 170 = $1,330. A 2% cost of living adjustment raises the gross benefit to 1,500 x 1.02 = $1,530. If the standard premium were to rise to $215, the net payment would be 1,530 - 215 = $1,315, which is below $1,330. The provision caps the premium at 1,530 - 1,330 = $200, so the retiree keeps $1,330 a month. These figures are illustrative only.Case study
Seen in the real world.
Maple Ridge Advisers is an illustrative, fictional financial planning firm with a client, Mrs Alvarez, who lives mainly on a $1,400 monthly Social Security benefit. In a year when the cost of living adjustment was low, her adviser noticed the proposed premium rise was larger than her expected benefit increase.
Her benefit rose by $28, but the standard premium was set to rise by $35. Under the hold harmless rule, her premium rise was limited to $28, so her net payment stayed the same. Her neighbour, who had enrolled that year, paid the full $35 increase.
The adviser used the example to show other clients how enrolment date and payment method affect protection. The illustrative lesson is that the same headline premium increase can mean quite different outcomes for different people.
Watch out
Common mistakes.
- Assuming every Medicare beneficiary is protected, when new enrollees, direct payers and higher earners are generally excluded.
- Thinking the provision stops the premium from ever rising, when it only prevents a fall in the net benefit.
- Planning retirement income on gross benefits and forgetting that premiums reduce the money actually received.
Questions
People also ask.
Who pays for the protection?
The cost is spread across other premium payers, so the standard premium for unprotected beneficiaries can be set higher than it would otherwise be.
Does the provision apply to the premium for prescription drug cover?
No, it relates to the Part B premium deducted from Social Security, and other premiums are treated differently.
How can someone find out whether they are protected?
They can check their benefit notice each year and ask the Social Security Administration or Medicare, since the rules and amounts are updated annually.
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