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Understanding FEHB in Retirement

June 13th, 2019

Federal employees are often unsure about what happens to their health insurance when they retire.  There is confusion regarding premium payments, integration with Medicare, and whether or not retirees can even keep FEHB. It is important for federal employees thinking about retirement and federal retirees to understand how the program works in retirement.

First and foremost is that yes, federal employees can continue to keep their FEHB insurance when they retire. There is an eligibility hurdle that they must overcome, though. They must have been covered by FEHB for the 5 years preceding their retirement, and they must be enrolled the day they retire. During that 5 year period, employees can change plans, carriers, etc. without affecting their eligibility.

FEHB premiums are subsidized by the government, which pays 72% of the cost. A common misconception is that the government no longer provides that subsidy upon retirement. That is not the case. In fact, retirees will pay the same percentage of the premiums (about 28%) as they did when they were working; the government continues to pick up the remaining 72%. For example, the Blue Cross Blue Shield standard self plus one plan (plan 106) has a per pay period (biweekly) premium of $748.81.  The government will cover $492.27 of that amount regardless of whether the benefit is for a current employee or a retiree, leaving the employee or retiree with a premium of about $269 per biweekly period. It should be noted that retirees will make their payments on a monthly basis, while employees pay biweekly, but the overall amounts per month are the same.

The one minor exception is for postal service retirees. Postal employees receive an additional subsidy that does not carry through to retirement. Once a postal service employee retires, their subsidy will revert to the same 72% that federal employees receive, so in their case, premiums will increase slightly.  For the example above (plan 106) the rate per biweekly period would increase from about $250 per period to about $269 per period.

While premium amounts don’t change when a federal employee retires, tax treatment may. Most federal employees are enrolled in the FEHB premium conversion program. This program allows the employee portion of the premium payment to be made in pre-tax dollars. Unfortunately, this option is not available to retirees. Paying premiums with after-tax dollars does effectively increase the cost of FEHB for retirees, though how much will depend on the tax bracket of the individual. Continuing to use our example above, $269 per period comes out to $6994 per year. For a couple filing jointly in the 22% tax bracket (up to $165,000), a retiree would need almost $9000 in pre-tax income per year to cover federal taxes and the $6994 annual premium. For a high income tax state like California, the amount needed would be more like $10,000.

FEHB open season is another commonly misunderstood point for retirees. Despite what some think, federal retirees have the same open season, and can make the same changes, as federal employees.  This includes changing carriers, changing plan types and changing who is covered under the plan.  This addresses yet another misconception – that family member cannot be added to a plan. During open season, it is perfectly fine to add or drop family members as needed with one exception – family members cannot be added after the death of the retiree. This situation can arise, for instance, with a spouse who is getting full coverage under the spouse’s own employer sponsored plan. Should the spouse quit or be laid off, he or she would not be able to switch to FEHB if the federal retiree has passed away. While anyone already on the FEHB plan when the federal retiree dies would be able to maintain coverage, no one else could be added.

Finally, a note of caution about canceling FEHB coverage. There is, of course, no requirement that a retiree maintain FEHB coverage.  Some federal retirees move to Medicare, which can be considerably less expensive, though coverage may be reduced as well. The thing to keep in mind is that once FEHB coverage is dropped in retirement, it cannot be re-instated. There are a couple of exceptions to this.  Veterans can suspend FEHB and move to Tricare, and any federal retiree can suspend FEHB and move to a Medicare HMO (Plan C). In these cases, coverage with FEHB can be re-established, but under most circumstances, once a retiree gives up FEHB, there is no going back. To be clear, though, if a federal retiree moves to a spouses FEHB enrollment, that retiree can move back to their own FEHB enrollment in the future. In this situation, FEHB enrollment is not considered terminated.

Federal retirees should take the time to learn the details of how FEHB works. Even for those switching to Medicare, it is possible to have both Medicare plan B and an FEHB plan. While doing this is a bit more expensive, coverage can be more complete than either of the two programs on their own. As a federal retiree, FEHB is a great benefit for you and it is important to understand how to maintain eligibility for the program for yourself and your family.