Federal retirement expert, Chris Kowalik, dispels some misconceptions of how the Federal Employee Health Benefit (FEHB) program works in retirement.
Key takeaways:
- How a federal employee is eligible to keep FEHB coverage in retirement
- The costs of FEHB an employee can expect in retirement
- How income taxes affect out-of-pocket FEHB costs in retirement
- What changes a retiree can (and cannot) make in their FEHB coverage
- The cases a retiree can add family members to their FEHB plan
- What happens if a retiree drops FEHB coverage
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Scott: Welcome back everybody. This is another episode of FedImpact: Candid Insights on Your Federal Retirement. I’m Scott Thompson with MyFederalRetirement.com, and I’m here today with Chris Kowalik of ProFeds, which is home of the Federal Retirement Impact Workshop. In today’s episode we’re going to be talking about the Federal Employee Health Benefits Program and how it changes in your retirement years. Welcome, Chris.
Chris: Thanks again, Scott. We’ve had some great episodes that seem to really be striking a chord with our listeners based on all the feedback, so I’m grateful to be talking about such an important topic today, which is health benefits.
Scott: The topic of the Federal Employee Health Benefits Program and how it changes in retirement can be a pretty substantial topic to discuss and I know you have much to cover today, so where should we get started?
Scott: That sounds great. Let’s jump in.
Chris: All these little topics that we’re going to talk about today seem to get intertwined with one another so we’ll try to put this in a logical order for our listeners so it’s easy to take on. Let’s start with how an employee would be eligible to keep the FEHB Program once they retire. In order for a federal employee 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 one the day that they retire.
Now, most employees know about this five-year rule. That’s not typically a big surprise, but they’re not really 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, coverage type all within that five-year window.
Scott: That’s a good distinction and those rules seem to make sense. At MyFederalRetirement.com we do get a lot of questions about the five-year rule so I’m sure this will be a great help to our listeners today.
Chris: Yeah, so the next thing we’ll talk about today is the expected cost of health insurance under the FEHB plan in retirement. A very common misconception that employees have is that the government will no longer pay a portion of the premium once an employee retires. That in fact is not true. The government will continue to pay roughly 72% of the overall premium, which is exactly what they’re paying while that employee is still working, even when that person is already retired.
Scott: Chris, now you said that the government continues to pay roughly 72% of the overall premium, but does the actual premium change in retirement?
Chris: Great question, and the answer is no, the premiums that employees and retirees pay for FEHB coverage is exactly the same. Now there is one minor exception, and that is for postal workers. They 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 retirement simply because the postal service is no longer helping to offset their cost.
Transferring back to the regular employees, let me give you an example of the most popular FEHB Program out there, which is the Blue Cross Blue Shield plan. We have about 60% of the workforce that’s under BCBS, so very popular. If we were to have an employee under Blue Cross Blue Shield, their high-family option, here in 2017 they would be paying about $254 a pay period for that coverage while they’re working, and once they retire they will still pay $254 a pay period.
Now next year when premiums change, they will change for both employees and retirees equality, so for that same plan, next year it’s $270 a pay period, it will change for employees and retirees exactly the same. One minor note that I do want to make, just kind of a logistical issue 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 so they’re not on the biweekly pay period anymore.
Scott: We always hear, or seem to hear that retirees pay more for health insurance under FEHB, but that doesn’t seem to be the case based on what you’re sharing here. Is there a catch somewhere?
Chris: There is a catch unfortunately. It has to do with this thing called premium conversion. Now the idea of premium conversion is that while an employee is still working, they pay their FEHB premiums with pretax money, so this is a huge perk and it allows employees to save money now on their taxes because the amount they pay to the FEHB carrier is not reported as income. That’s why when an employee looks at, say, their Social Security statement on their earnings page and they think, “Dang, I thought I made more than that last year.” Well, technically they did. It just wasn’t all reported as income because none of that health premium is reported because of this premium conversion.
Once an employee retires, if they have chosen to keep their FEHB coverage in retirement, they will begin to pay the premium with after-tax money. Like I said, while they’re working they pay the FEHB premium with tax money, but in retirement they pay it with after-tax money. What does that really mean, I mean, financially speaking? How’s it all shake out? To answer that, let’s look at an example. Let’s assume that we have a married federal employee and they are under the self plus family option for FEHB with Blue Cross Blue Shield like we mentioned before. They’re paying $254 a pay period as an employee and as a retiree, so exact same premium. That ends up being about $6,600 a year.
Here’s where things really turn for a retiree and why it feels like it’s more expensive to have health insurance as a retiree. When it comes time to pay Blue Cross Blue Shield that $6,000 or whatever the number might be, the retiree can’t just take $6,000, and pay it, and call it a day because remember, they have to pay tax on that money first, so depending on the tax bracket that this person is in, they might have to start with more like $8,000 to pay the $6,000 bill.
This could be a little tricky for retirees because they’ve been told that the premiums are going to stay the same, and they are, but then the tax jumps up and kind of bites them in this scenario with premium conversion going away. We really want folks stepping into retirement to be aware that this is going to happen so they aren’t surprised and they’re not learning of this new taxable income at the time that they retire.
Scott: It seems that we’ve covered the cost aspect of FEHB and retirement. Let’s switch gears a little bit and talk about the changes that can be made to this program once someone has already retired.
Chris: This is a great section. Many folks think that the FEHB open seasons only happen while they’re employed, and that’s just not the case. In fact, FEHB open seasons occur for federal retirees as well. They’re the exact same times, everybody is able to go in and make those changes. Now there is one notable difference for open seasons for retirees though, and that is that a retiree cannot join into FEHB once they have already retired because remember, 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 do absolutely everything else other than join. They can change carriers, change the plan they’re under, change from the high option to the low option or vice versa, and then they can also change who’s covered under the plan.
Scott: I think many federal employees listening today have been under the impression that they cannot add family members to their FEHB plan once they’ve retired, but it sounds as though that actually is an option. Is that correct?
Chris: That is correct, so retirees are allowed to add family members during open seasons, so that’s November and December of each year, or if they experience a qualifying life event like getting married, divorced, the death of a spouse, or the birth or adoption of a child, although I typically try to dissuade federal retirees from having children in retirement because they tend to mess up retirement plans pretty considerably.
Scott: Right, and if a retiree were to die before adding their family members to their FEHB plan, will the family members have a final opportunity to join FEHB at some point?
Chris: That is a really great question, Scott. Unfortunately the answer is no. 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. Let me give an example. Some employer-sponsored plans are even free while that spouse is still working for that employer, and it’s hard to beat free, right? 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, so the federal employee be under the FEHB Program and the rest of the family be on another plan, if the ultimate goal is for this 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. I cannot stress enough that family members cannot be added to the FEHB plan after that retiree dies.
Scott: That’s a really important point that you’ve made here, Chris. It is definitely important to have everyone covered under this plan in time so that they are able to keep it if that’s what’s best for their long-term needs, but what happens if a retiree decides they want to drop FEHB?
Chris: 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. Just because there’s no requirement doesn’t mean there’s no consequence, okay? I’ll offer 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, and that’s a big deal. Now, there are two pseudo exceptions to this rule and they don’t apply to most people, so very limited exceptions.
Here’s the two exceptions, if we have a retiree who wishes to obtain coverage under a Medicare-approved HMO plan, so that is Medicare Option C, or Plan C, or if we have 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 we did not say that they have cancelled their FEHB coverage. In both of these 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 or to the military’s TRICARE Program.
Scott: That’s a great word of caution for our listeners today. We would certainly hate to see someone cancel their coverage only to find out that they could not regain it later. Now I’m curious. Do some people decide to drop FEHB to go on Medicare?
Chris: That is a very, another common question that we get. We actually have an entire podcast dedicated to this topic of Medicare and how it works with FEHB, so all of our listeners stay tuned for that future podcast. We would encourage you to listen to that podcast. It’s going to go into great depth on Medicare and how it integrates with the FEHB Program and all the different consequences of various decisions. Real quick, just for everybody listening today, let me give our listeners a little bit of background on Medicare.
The part of Medicare that we’re referring to is Medicare Part B. This is the part of Medicare that operates most like your FEHB plan. It covers things like doctors’ visits, preventative care, that type of thing, and it runs about $134 per month per person for most folks, depending on your income. The question that we have to figure out with respect to FEHB is 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, I highly encourage our listeners to go listen to that podcast. Stay tuned. You’re going to get the full scoop on how Medicare works with FEHB. I think it’ll make things a little bit clearer on what the different options are.
Scott: That sounds great. Now earlier you mentioned that postal workers have some different rules regarding FEHB. Are there any other groups of employees that may have some special roles?
Chris: Yes. We have federal employees, when they’re married to one another, so a federal employee married to another federal employee, they have quite a bit of flexibility with FEHB in particular. Of all the benefits that they have out there, FEHB is one that they have a great deal of flexibility on. It’s a lot to get into on this particular podcast, but just like Medicare, we have an entire podcast coming on the federal couple topic and so all those special circumstances that federal couples are in and those choices that they have to make are going to be covered in that podcast. Again, listeners, stay tuned. We’ve got a lot of great episodes for you and this is definitely one of them.
Now namely, the decision for federal couples is whose coverage to be under while working versus once somebody is retired, and the other part is how to stretch out the tax benefit, remember, that premium conversion we talked about before, how do you stretch that out for as long as possible. Again, for any of our listeners who are also married to another federal employee, be sure to take time to listen to that podcast once it’s released and you’re going to be sure to have all those right facts about your situation.
Scott: That’s great. Yeah, sometimes these topics really do get a little tangled up, don’t they?
Chris: They do.
Scott: You’ve given us so much to think about today. Are there any final words for our listeners that you have on this topic?
Chris: Yeah. One common topic that I teach, or a theme that I teach on whether it’s in a podcast or in a live workshop is that I don’t want anyone to be surprised in retirement. Normally at that stage in life we don’t like financial surprises, namely because those surprises often either leave us under protected, or the protection we do have costs us much more than we expected. With FEHB, this is one of the golden gems of federal benefits and we want our audience to know how great this program is so they’re sure to protect their eligibility to have it and to keep it in retirement.
Scott: It’s been great to have Chris Kowalik again with us today from ProFeds. We’d like to invite you to stay tuned to the next episode of FedImpact to get straight answers and candid insights on your federal retirement.
