His Deferred Pay Will Deliver $150,000 a Year for Five Years After Retirement, and Medicare Will Still Tax It Into His Premiums

Quick Read

• Nonqualified deferred compensation cannot be rolled into an IRA, so each $150,000 annual payment counts toward taxable MAGI and can trigger Medicare IRMAA surcharges.

• A single filer with $230,000 of MAGI would pay more than $31,776 in added Medicare surcharges over five payment years using 2026 rates.

• Form SSA-44 only helps if the income decline moves the retiree into a lower IRMAA bracket, not when deferred compensation keeps him in the same tier.

Imagine a 66-year-old executive who leaves work at the end of 2026. His regular pay stops, but beginning in 2027, a deferred compensation agreement sends him $150,000 a year for five years. Although he is no longer employed, Social Security still treats each payment as income when calculating his Medicare premiums.

That situation is uncommon for most retirees. The Centers for Medicare & Medicaid Services says income-related surcharges affect about 8% of Medicare Part B enrollees. A single filer with MAGI of $109,000 or less, or a couple with MAGI of $218,000 or less, pays the standard $202.90 monthly Part B premium. People with deferred compensation often end up above those limits.

A retirement payout can still count as income

A nonqualified deferred compensation plan allows an executive to receive part of his pay years after the work was done. Unlike a traditional 401(k), those payments generally cannot be rolled into an IRA to delay taxation. That distinction matters when the money is distributed. A 401(k) withdrawal can be rolled into an IRA to continue deferring tax, but a nonqualified payout cannot. Each payment is taxable in the year it is received, and the plan withholds income tax on the taxable portion.

Social Security determines the income-related monthly adjustment amount, or IRMAA, using modified adjusted gross income, which is adjusted gross income plus tax-exempt interest. Income from municipal bonds also counts, even though it is not taxed.

Five payment years can mean five surcharge years

Suppose he has another $80,000 of MAGI on top of the deferred payout, bringing his annual total to $230,000, and files as single. Under 2026 rules, that places him in the bracket from $205,000 to $500,000. He would owe a $649.20 monthly Part B premium and an $83.30 monthly Part D surcharge in addition to his drug plan premium.

Those surcharges add up to $6,355.20 per year. Across five payout years, the total reaches $31,776 per person. This figure uses 2026 brackets as a proxy, since the thresholds are reset each year.

There is also a two-year lag before the bill shows up. Social Security generally uses income reported two years earlier, so premiums are based on prior tax years. In this example, the 2027 payout would affect the 2029 premium, and the final 2031 payout would affect the 2033 premium. The 2027 and 2028 premiums would reflect the last years he was still drawing salary.

Filing jointly can reduce the damage. A married couple with $230,000 of income would fall into the first IRMAA tier, where each spouse pays $284.10 for Part B and a $14.50 Part D surcharge. That comes to $1,148.40 per person each year in surcharges. If his wife dies during the payout period, he would switch to single filing on the same income and move up to the $649.20 level.

Why retirement relief has limits

Retirement can qualify as a life-changing event. SSA lists work stoppage among the events that allow a beneficiary to file Form SSA-44 and ask for a more recent, lower income year to be used.

The problem is how SSA defines a qualifying drop. The lower income must be enough to reduce or eliminate the income-related monthly adjustment amount. If his income in his final salary years was already between $205,000 and $500,000, then a retirement estimate of $230,000 falls in the same bracket, and the form changes nothing. It would only help if his salary-year income had exceeded $500,000, where the total Part B premium reaches $689.90.

The form may become useful after the deferred compensation ends. Social Security can take an earlier retirement into account even if the income drop happens years later. If his MAGI falls to $80,000 after the final payment, he can ask SSA to use that lower income instead of waiting for the usual two-year lookback.

What to review before selecting a payout schedule

Before choosing when to take deferred compensation, retirees should compare the payout schedule with expected MAGI, filing status, and the Medicare IRMAA brackets that could apply in future years. Because the premiums are based on earlier tax returns, the timing of the distributions can matter almost as much as the amount.

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