Deferred Compensation and Medicare IRMAA: How NQDC Payouts Affect Your Premiums

Nonqualified deferred compensation (NQDC) distributions are ordinary income — every dollar counts toward the MAGI that sets your Medicare Part B and Part D surcharges. A lump-sum payout at retirement can push a single filer from no IRMAA into Tier 5 ($6,936/yr extra per person) for two years. Installment elections, Section 409A re-election timing, and pre-retirement Roth conversions can each make a material difference. The window to choose is usually years before Medicare enrollment.

How NQDC distributions count toward IRMAA MAGI

NQDC plans allow executives and highly compensated employees to defer salary or bonuses to a future year under IRC §409A. The deferred amounts are not taxed when earned — they're taxed when distributed. When the plan pays out, the distribution is reported as ordinary income on Form W-2 (box 11) or Form 1099-MISC, flowing directly into AGI as if you had earned that compensation in the year of distribution.²

IRMAA MAGI = AGI (Form 1040 Line 11) plus tax-exempt interest (Line 2a). Because NQDC distributions are ordinary income included in AGI, they count toward IRMAA at 100% — there is no exclusion, no basis recovery, and no preferential treatment. The full distribution, including any investment returns credited by the plan, is ordinary income in the year received.

Unlike a 401(k) or IRA, there is no rollover option for NQDC. You cannot move the balance to a Roth IRA to escape future taxation, because NQDC never actually sat in a qualified account — it was an unsecured promise by the employer, now being fulfilled as ordinary income. Every dollar that comes out is ordinary income. That's a fundamental structural difference from equity compensation (where ISOs can get capital-gains treatment) and from qualified plans (where Roth conversions are available).

The two-year look-back timing problem

Medicare surcharges for the current year are based on MAGI from two years prior. This creates a specific trap for executives who retire at or near age 63:¹

• Age 63: your last full year of employment. Salary is high. If your NQDC plan pays out at separation, the distribution stacks on top of salary — a double-income year.
• Age 65: you enroll in Medicare. SSA looks back to your age-63 MAGI (2 years prior) to set your Part B and Part D premiums. If that year included both final-year salary and an NQDC distribution, your Medicare premiums reflect that combined figure.
• Age 66: the second year of elevated premiums from the age-63 look-back. By now you may have much lower income — but you still pay the surcharge.

The gap between when the income was received and when the Medicare bill arrives means most retirees are blindsided. You felt the NQDC income in 2024. You feel the Medicare surcharge in 2026 and 2027.

Lump sum vs. installments: the election that determines everything

Most NQDC plans offer a choice of distribution form at the time of initial deferral election: lump sum, annual installments over 3, 5, or 10 years, or a fixed-date in-service distribution. The default — and the election most executives choose because it seems simpler — is lump sum at separation. That's usually the wrong choice for Medicare planning.

Worked example: Sarah, SVP, retires at 63

The lump sum creates $13,872 in cumulative IRMAA over two years, then zero. The 5-year plan creates $23,095 over five years. The 10-year plan creates $11,480 over ten years. The right answer depends on your complete income picture over those years — including when RMDs begin, when Social Security starts, and what else stacks. But the lump sum is rarely the winner once you model Medicare alongside it.

Other MAGI in this example ($45,500): Social Security $30,000 (85% taxable = $25,500) + dividends/interest $20,000. Sarah is a single filer. 2026 IRMAA surcharges per person per year.

2026 IRMAA surcharge tiers

2026 surcharges are based on 2024 MAGI (two-year look-back). Per person — married couples each pay their own surcharge:³

IRMAA impact calculator: NQDC payout + other income

Section 409A re-election: can you still change your payout schedule?

The most common question from executives approaching retirement: "I elected lump sum ten years ago — can I change it now?" Sometimes yes, but the rules are strict.²

Under IRC §409A, changing an existing distribution schedule requires:

1. 12-month advance notice. The election to change the timing must be filed at least 12 months before the original payment was scheduled to begin.
2. 5-year delay minimum. The new payment start date must be at least 5 years after the original scheduled date.
3. Plan must allow it. Not all NQDC plans permit re-elections. Check your plan document first — some only allowed a one-time election at enrollment.

Example: If your NQDC was scheduled to pay as a lump sum on January 1, 2026 (when you turn 65), you had until December 31, 2024 to file a change. The new payout could not start before January 1, 2031. Missing the deadline means you're locked into the original election.

If you're still actively employed with 2+ years before planned retirement, this window is likely still open. If retirement is imminent, confirm the deadline with your plan administrator immediately — a missed election is irrevocable.

Five strategies for reducing IRMAA during NQDC payout years

1. Elect the longest installment period your plan allows — before you separate

The time to optimize is when you make the original deferral election, typically years before retirement. If your plan offers 3, 5, or 10-year installment options, model which spreads annual NQDC income most effectively relative to your expected retirement income. For most executives, 10-year installments create the lowest annual MAGI spike — especially if RMDs, Social Security, and pension income will also be present in retirement.

This decision is often made at age 45 or 50 with minimal thought given to Medicare. The difference in IRMAA exposure between payout structures is frequently $20,000–$50,000 over a retirement lifetime.

2. Front-load Roth conversions before NQDC payouts begin

If you retire at 62 but NQDC installments don't start until 63 or 65, the gap is a valuable conversion window. In those low-income years, you may be able to convert traditional IRA or 401(k) funds to Roth at Tier 0 MAGI — permanently reducing the pre-tax balance that will generate taxable RMDs at 73 or 75.

Sequencing example: retire at 62 with NQDC starting at 63. SS delayed until 70. Use age 62 (one year before NQDC begins) for large Roth conversions. Result: lower traditional IRA/401(k) balance when RMDs start, less stacking of NQDC + RMD in later years. See our Roth conversion and IRMAA guide for bracket math on timing conversions.

3. Use QCDs to offset NQDC income once you reach age 70½

If you hold any IRA — including a rollover IRA from a prior employer's 401(k) — you can direct up to $111,000 per person in 2026 directly to qualified charities as a Qualified Charitable Distribution.⁴ The QCD satisfies all or part of your RMD and never enters AGI — eliminating that dollar from IRMAA MAGI entirely.

For an executive receiving $80,000/year in NQDC with $55,000 in other income (MAGI = $135,000, just below the Tier 2 threshold of $137,000), a $30,000 RMD would push MAGI to $165,000 — firmly in Tier 2. Redirecting that $30,000 as a QCD keeps MAGI at $135,000 — still Tier 1. Annual savings: $1,736/person/year for as long as NQDC continues and the RMD can be redirected.

4. Avoid stacking NQDC payouts with other one-time income events

NQDC payout years are the wrong years for:

• Large Roth conversions (which also count toward IRMAA MAGI)
• Realizing substantial long-term capital gains from taxable accounts (0%-rate gains still count)
• Selling investment real estate (§1250 depreciation recapture is ordinary income)
• Taking large discretionary IRA withdrawals for home purchases or gifts

NQDC income is largely fixed once the payout schedule is set. These other income sources are controllable. Defer or accelerate them to years outside the NQDC window. See our capital gains and IRMAA guide and RMD and IRMAA guide for more on managing each source.

5. SSA-44 appeal for the retirement-year MAGI spike

If your final year of employment combined high salary with an early or in-service NQDC distribution, or with severance pay, the look-back year MAGI may be substantially higher than your ongoing retirement income. An SSA-44 appeal lets you ask SSA to use current-year estimated income instead of the look-back year — if a qualifying life-changing event reduced your income.

Retirement from employment is a qualifying event. Filing promptly after retirement often recovers $1,148–$6,354/year per person in surcharges during the first two look-back years. The key question: is your current income actually lower? If ongoing NQDC installments mean your retirement income is still at or above the threshold, the SSA-44 provides limited relief — but for the retirement year itself, when salary dropped to zero and NQDC hadn't started at full pace, it frequently applies.

Decision framework by situation

Sources

1. SSA POMS HI 01101.020: IRMAA Sliding Scale Tables (updated December 2025) — 2026 IRMAA income brackets and surcharge amounts for Part B and Part D, single and married filing jointly. Based on 2024 MAGI via two-year look-back. Standard Part B premium $202.90/month; surcharges $81.20–$487.00/month.
2. IRS Publication 5528: Nonqualified Deferred Compensation Audit Technique Guide — IRC §409A compliance requirements including election timing (before compensation is earned), permissible distribution events, and re-election rules (12-month advance + 5-year delay). NQDC distributions are ordinary income reportable on Form W-2 box 11 in the year of distribution.
3. CMS: 2026 Medicare Parts A & B Premiums and Deductibles (November 2025) — Standard Part B monthly premium $202.90; annual deductible $283. IRMAA surcharge tiers confirmed for 2026 benefit year. Single-filer threshold $109,000; married/joint threshold $218,000.
4. IRS Notice 2025-67: 2026 Retirement Plan Contribution and QCD Limits — Qualified Charitable Distribution limit for 2026: $111,000 per person (inflation-indexed under SECURE 2.0 §307). QCDs from IRAs count toward RMDs and are excluded from AGI and IRMAA MAGI. Eligible at age 70½+.
5. 26 U.S.C. §409A: Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans (Cornell LII) — Statutory authority for NQDC plan requirements, distribution timing, re-election rules, and penalty for non-compliant plans (immediate income inclusion plus 20% additional tax plus interest).

Values verified as of May 2026. IRMAA brackets set annually by CMS; NQDC tax treatment per IRC §409A and IRS Publication 5528. Consult a licensed advisor for guidance specific to your situation.