His Last Paycheck Held 14 Weeks of Unused Vacation and a Retirement Bonus. His Final Year of Work Was the Highest-Earning Year of His Life. It Is the Year Medicare Prices for 2028
A generous retirement bonus and years of stockpiled vacation days make his final paycheck the largest of his career, and Medicare is already watching. Find out why that farewell check could quietly reshape his healthcare costs two years after he…
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He retires in late 2026 after decades with one employer. His final paycheck includes 14 weeks of unused vacation plus a retirement bonus. He saw his first retirement year looking lean on paper. Instead, that farewell check makes 2026 the highest-income year of his career. In 2028, Medicare will use that year to set his premiums.
The income surcharge behind this, the Income-Related Monthly Adjustment Amount, or IRMAA, reaches about 8% of people with Medicare Part B. Under 2026 thresholds, someone filing alone with MAGI of $109,000 or less pays no IRMAA. A long-tenured worker with a large final payout fits the opposite profile: he crosses the line for one year and pays for it two years later.
Years of Vacation Days, Taxed in a Single Year
Take a simple example. His regular 2026 salary before retirement is $150,000. The unused vacation pays out $40,000, and the retirement bonus adds $35,000. His final-year wages total $225,000.
He built up those vacation days over many years, and the bonus marks the end of a career. The IRS still taxes compensation in the year he receives it or it becomes available to him. Bonuses show up on Form W-2 and flow into adjusted gross income (AGI).
Medicare then reads that tax return. Social Security bases IRMAA on modified adjusted gross income (MAGI), which equals total adjusted gross income plus tax-exempt interest income. Interest from municipal bonds counts too. The two-year lookback means his 2026 return sets his 2028 Part B and Part D premiums.
One Payout Jumps Him Two IRMAA Tiers
The table below uses 2026 plan-year figures from the CMS premium fact sheet to show the scale. The 2028 thresholds will be different.
| Scenario (single filer) | MAGI | 2026 Part B Total Monthly Premium, Per Person |
|---|---|---|
| Retirement-level income | $109,000 or less | $202.90 |
| Salary alone | Above $137,000 to $171,000 | $405.80 |
| Salary plus final payout | Above $205,000 to below $500,000 | $649.20 |
His salary by itself already lands him in a surcharge tier. The payout pushes him two tiers higher. At that level, Part D IRMAA adds another $83.30 a month on top of whatever his drug plan charges. Under 2026 numbers, the Part B and Part D surcharges together come to $6,355.20 a year, and that covers the surcharges alone.
Social Security and Medicare Read the Same Paycheck Differently
Under Social Security’s retirement earnings test, a bonus or accumulated vacation pay received after retirement can qualify as a special payment if it was earned before he stopped working. When it qualifies, SSA excludes it from the annual earnings limit
IRMAA asks a different question: what did that return report? If the vacation payout and bonus count as taxable compensation inside AGI, they stay inside MAGI. Old work can still produce current-year income in Medicare’s eyes.
Retirement Unlocks the SSA-44 Fix
Retirement counts as a work stoppage, one of Social Security’s recognized life-changing events. On Form SSA-44, he can ask the agency to use a more recent year’s income when retirement has cut his MAGI.
Suppose his 2026 MAGI is $225,000 and his first full retirement year, 2027, totals $85,000. For 2028, he can ask Social Security to use the $85,000 figure in place of the 2026 return. Under 2026 thresholds, that income falls below the single-filer line and pays the standard premium.
The eligibility gate is strict. SSA-44 works here because his work stoppage causes a meaningful drop in MAGI. A Roth conversion, home sale, or substantial IRA withdrawal is not itself a qualifying life-changing event. If one of those pushes his 2027 MAGI back above an IRMAA threshold, the lower-income year may no longer eliminate the surcharge.
Three Moves Before Payroll Locks the Final Check
- Get the payment dates in writing. Ask HR when the vacation payout and the bonus become payable. If any of it shifts into January 2027, the spike spreads across two years, but it also raises the 2027 income he would cite on SSA-44. Run the numbers for both years before he agrees to a schedule.
- Ask whether the 401(k) plan takes contributions from the final payout. Some plans do. A pre-tax contribution lowers W-2 wages and AGI, which can drop him a full IRMAA tier.
- Build the full-year MAGI and keep the evidence. Add pension income, IRA withdrawals, capital gains, and interest from tax-free bonds to the wages. Save the retirement letter and final pay stub. When the 2028 IRMAA notice comes, file SSA-44 with those documents attached.
His last paycheck holds money earned across many years, and all of it lands on one return. Medicare’s two-year lookback turns that farewell check into a 2028 premium bill unless he shows Social Security what his income looks like after the job ends.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
