There are a lot of misconceptions about how the Federal Employee Health Benefits program (FEHB) works in retirement. Some people think that the health benefits completely go away while others think that now they’re responsible for their entire premium in retirement.
In this article, I’m going to dispel a lot of these myths under the FEHB program and give federal employees the real scoop on how this program works.
First, let’s start with how an employee would be eligible to keep the FEHB program once they retire.
In order for federal employees to be eligible to keep FEHB in retirement, they must have been covered under FEHB for at least five years immediately preceding their retirement, and they also must be enrolled in it on the day that they retire.
Most employees know about this five-year rule; however, they’re not clear on what that five-year rule really means. It does not mean that the employee had to be in the same FEHB plan for those five years. Employees are permitted to change carriers, plans, and coverage type all within that five-year window. Likewise, if two federal employees are married to one another, they can switch between plans within the five-year window without any effect to their eligibility to keep FEHB in retirement.
Myth #1: The Government Will No Longer Pay a Portion of Your FEHB Premium in Retirement
A very common misconception that employees have is that the government will no longer pay a portion of the FEHB premium once an employee retires. That, in fact, is not true. The government will continue to pay roughly 72% of the overall premium, which means that the retiree will pay the same percentage (roughly 28%) that they did while they were still working.
The premiums that employees and retirees pay for FEHB coverage is exactly the same, with one minor exception, and that is for postal workers. Postal workers actually pay less for their FEHB coverage while they’re working, but their premiums will mirror regular federal employees or retirees once that postal worker retires. So, their premium will increase upon initial retirement simply because the postal service is no longer helping to offset their cost.
Going back to the regular employees, the most popular FEHB programs out there are the Blue Cross Blue Shield plans, so I’ll use that as an example. If an employee is under Blue Cross Blue Shield, with the high-family option (plan 105), the employee would be paying about $300 a pay period for that coverage while working, and once retired, they will still pay $300 a pay period.
Next year when premiums change, they will change for both employees and retirees equally. One minor note that I do want to make is that retirees pay their premium on a monthly basis, so it all comes out to be the same amount, but it’s just paid one time per month instead of on the bi-weekly pay period schedule that employees have been so accustomed to.
The Catch: Premium Conversion
While the government still pays roughly 72% of your overall premium, there is a catch. It has to do with a program called premium conversion. While federal employees are still working, they pay their FEHB premiums with pre-tax money, which is a huge perk and allows employees to save money on their taxes because the amount they pay to the FEHB carrier is not reported as income.
Once employees retire, if they have chosen to keep their FEHB coverage in retirement, they will begin to pay the premium with after-tax money. While they’re working, they pay the FEHB premium with pre-tax money, but in retirement they pay it with after-tax money. But what does that really mean, financially speaking? To answer that, let’s look at an example.
Let’s assume that we have a married federal employee and he is under the self plus family option for FEHB with Blue Cross Blue Shield (the 105 plan we mentioned earlier). He’s paying $300 a pay period both as an employee and as a retiree – so the exact same premium – and that ends up being about $7800 a year.
Here’s where things really turn for a retiree and why it feels like it’s more expensive to have FEHB coverage as a retiree. When it comes time to pay Blue Cross Blue Shield, that $7800 or whatever the number might be, the retiree can’t just take $7800 and pay it, because he has to pay tax on that money first.
Depending on the tax bracket that this person is in, he may have to start with more like $10,300 to pay the $7,800 bill. The difference, is what he owes Uncle Sam in taxes based on the newly reported income of $7,800.
This could be a little tricky for retirees because they’ve been told that the premiums are the same for employees and retirees – and they are – but then the tax surprises them in this scenario when premium conversion goes away. We really want folks stepping into retirement to be aware that this is going to happen, so they aren’t caught off guard and they’re not learning of this new taxable income at the time that they retire.
Myth #2: FEHB Open Seasons Only Occur While You’re Employed
Many federal employees think that the FEHB open seasons only happen while they’re employed, and that’s not the case. In fact, FEHB open seasons occur for federal retirees as well. They’re held at the exact same times; everybody can go in and make those changes.
There is one notable difference for open seasons for retirees though, and that is that a retiree cannot join FEHB once they have already retired. They had to have been covered under FEHB for five years immediately preceding their retirement and they had to be enrolled in it on the day that they retired, but they can make every other changes during open season that they could while they were still working. They can change carriers, change plans, change from the high option to the low option or vice versa, and then they can also change who’s covered under the plan.
Myth #3: You Cannot Add (or Drop) Family Members to Your FEHB Plan Once You’ve Retired
Retirees are allowed to add family members during open seasons (occurring in November and December of each year), or at other times during the year if they experience a qualifying life event like getting married, divorced, the death of a spouse, or the birth or adoption of a child.
An important note: Family members are only permitted to be added to FEHB while the retiree is still living. Occasionally, we will find that the spouse of a federal employee has a great employer-sponsored health plan that ends up being better than FEHB maybe for a period of time.
For example, some employer-sponsored plans are free while that spouse is still working for that employer. But oftentimes the premiums are expensive for that employer-sponsored plan once that person no longer works for that employer, or it’s even possible that the employer won’t allow the coverage to continue once that person no longer works for them.
While it might seem reasonable to be on two separate health plans – the federal employee under the FEHB program and the rest of the family on another plan – if the ultimate goal is for the spouse and any eligible children to be covered under FEHB long-term, we would want to make sure that they are added prior to the federal employee’s death. Again, family members cannot be added to the FEHB plan after that retiree dies.
Dropping or Cancelling FEHB Coverage
If a retiree chooses to drop or cancel the FEHB coverage, of course they’re allowed to do so. There’s no requirement that FEHB must be maintained. However, just because there’s no requirement doesn’t mean there’s no consequence. A very serious word of caution to any retiree thinking about cancelling their coverage—once retired, the decision to cancel FEHB is final. There’s no turning back. There’s no regaining coverage later.
There are two pseudo exceptions to this rule, and they don’t apply to most people, so these are very limited exceptions. If a retiree who wishes to obtain coverage under a Medicare-approved HMO plan, so that is Medicare Plan C, or if a military veteran who wishes (and is eligible) to be covered under the military health program called TRICARE, these two types of people can “suspend” their FEHB coverage to either go to the Medicare-approved HMO, or to TRICARE, and they can return at a later time to reinstate their FEHB coverage if they choose to do so.
These are the only two exceptions, and please note that they did not cancel their FEHB coverage. In both cases, they would suspend their coverage so they could return at a later time. To be crystal clear, this would not apply to someone who simply wishes to go out and try another plan and then maybe come back to FEHB later. This exception only applies to Medicare-approved HMOs (Plan C) or to the military’s TRICARE program.
FEHB and Medicare
I’m currently writing another article dedicated to this topic of Medicare and how it works with FEHB, which will go into great depth on Medicare and how it integrates with the FEHB program and all the different consequences of various decisions.
For now, let me give a little bit of background on Medicare. The part of Medicare that operates most like your FEHB plan is Medicare Part B. It covers things like doctors’ visits, preventative care, etc., and it runs about $149 per month per person for most people, depending on your income. The questions that we must figure out with respect to FEHB are: do you keep FEHB at this time that you’re eligible for Medicare, do you switch to Medicare Part B, or do you do both? Again, stay tuned. You’re going to get the full scoop on how Medicare works with FEHB in my next article where I’ll give more clarity on what the different options are.
Avoid Surprises in Retirement
The bottom line is that no one wants to be surprised in retirement, especially with financial surprises. Too often those surprises either leave us under protected, or the protection we do have costs us much more than we expected. FEHB is one of the golden gems of your federal benefits. I want you to know how valuable this program is so you’re sure to protect your eligibility to have it and to keep it in retirement.