Federal retirement expert, Chris Kowalik, provides insight on how federal employees married to one another likely have different choices on some key benefits decisions than employees married to a non-federal spouse.
- Choosing an FEHB plan while both spouses are still working
- FEHB premium conversion — and how it affects federal couples
- Important considerations for survivor benefits
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Scott: Welcome back, everyone. This is another episode of FedImpact: Candid Insights on Your Federal Retirement. I’m Scott Thompson with myfederalretirement.com. I’m joined by Chris Kowalik of ProFeds, home of the Federal Retirement Impact Workshop. Today we’re going to be talking about federal couples, and that is a federal employee married to another federal employee, and how they have some different choices when planning for retirement. Chris, it’s great to have you with us again today.
Chris: Yeah. Love being back on this podcast. Thanks so much. You know, Scott, since doing these podcasts, I’ve had so many folks in our live workshops tell us that they were first introduced to us on this podcast, and that prompted them to join us for one of our full-day workshops. I can’t tell you how awesome that feels to know that we’re reaching out to so many folks and covering quite a number of topics on these episodes today.
Scott: Well, that’s great. If we have listeners on today that want to attend one of your full-day workshops, where should they go to learn about the dates and locations?
Scott: Great. Well, today’s topic is aimed at a very specific audience, which is federal employees married to other federal employees. I was a little surprised to hear how common it is for federal employees to be married to one another, but both of us get so many questions specifically on this topic that I knew it would be a great one for us to cover.
Chris: Yeah. We do get do may questions about this particular audience, feds married to other feds. I think we’ll be able to drill down today and share with them how their decisions are different, and sometimes not different, than the average employee who may be married to somebody who’s not a federal employee as well. Just to make our lingo really simple today, we’ll refer to this group as a federal couple, again, a federal employee married to another federal employee.
Scott: Okay. That sounds good. Now, as we were preparing for today’s episode, you mentioned that there were four important decisions that are different when we have two feds married to each other. Can we start with that first one?
Chris: Yeah. First we’ll start with FEHB while both parties are still working. That’s one of the big decisions. Of course, all employees have a ton of choices in the FEHB program. They have different carriers, different plans, the high option, the low option, who’s covered, all of that. The same thing holds true for federal employees who happen to be married to each other. Now, if we have a couple with children who need coverage under FEHB, the family plan is the only way to accomplish that to make sure that everyone is covered. By the way, children can be covered up to age 26. What happens when we have a federal couple with no children? Well, we have some options that open up to them that might save this couple some money.
Let’s use an example of the most popular FEHB carrier out there, and that’s Blue Cross Blue Shield. For the sake of our example, let’s assume that this couple wishes to have the “high option” under the Blue Cross Blue Shield plan. Remember, they have no eligible children at this point. Maybe they’re all grown and gone out of the home. If this couple were to go to the self-plus-one option under Blue Cross Blue Shield, they would pay $240 a pay period. This covers them together. If they were to go with two self-only options, it would cost them about $106 a pay period each or about $212 a pay period. That’s a difference of about $29 per pay period or about $62 a month. That can be a pretty significant savings depending on, of course, the different plans that you’re in and the different premiums associated with that.
I do want to make one special note on the premium I used in this example. This is for a non-postal employee. If we have postal workers listening today, you know you pay a lower amount for your FEHB coverage than other federal employees. Same concept holds true, just a different premium for you.
Scott: Okay. Well, I’m sure our listeners who haven’t already implemented this strategy will be happy to have a little extra cash in their paychecks each month.
Chris: Of course.
Scott: What’s the next topic you’d like to cover?
Chris: The next topic still surrounds the FEHB plan, but it has to do with being eligible to take FEHB in retirement. Now, there’s a special rule that we’ve covered in our normal FEHB podcast called the five-year rule. That states that, in order to be eligible to keep FEHB in retirement, an employee must have been enrolled in FEHB for at least five years immediately preceding their retirement, and they must be enrolled in that plan on the day that they retire from federal service.
Here’s where a lot of employees get confused, though. When we have a federal couple, again, that’s a fed married to another fed, it does not matter whose coverage they are under for those five years as long as they’re covered under the FEHB umbrella for that period of time. They could switch from a family plan to two self-only plans and then to a self-plus-one during that five year period if they felt like it. The key is they had to have had continuous coverage under FEHB but not necessarily under the same carrier plan or coverage type. It is always unfortunate when I meet a couple that has thought that they had to stick in one plan for the whole five years for fear of losing their coverage if they made a change. Luckily, that isn’t the case.
Scott: Okay. Now, the next point that you wanted to cover today is one that I think probably gets overlooked, and it’s called the premium conversion. Would you give us some background on what that is, and then tell us how a federal couple might be affected?
Chris: Sure. The idea of premium conversion is that, while an employee is still working, they pay their FEHB premium with pre-tax money. Like we mentioned in our previous podcasts, this is a huge perk for employees. It allows them to save money now on their taxes because they’re not reporting the FEHB premium as income. This is a great thing. I mentioned this in the previous podcasts, but it’s something I think resonates with people. When they look at their Social Security statement, the page that has all of their earnings on it, and they look back and they think, “Gosh, I thought I made more than that in those years,” the reality is is they probably did make more than that. It’s just not all of the income was reported as taxable for that year.
Scott: Okay. Well, that’s interesting, but I suspect that things change once they step into retirement.
Chris: Yeah. You’re spot-on with that, Scott. 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. As a side note, FEHB premiums are the same for employees and for retirees, with the minor exception for postal workers who we mentioned just a few minutes ago, pay a lower premium while they’re working but jump up to the higher premium as a retiree. For non-postal employees, the premiums are exactly the same. While they’re employed or while they’re retired, premiums are exactly the same. I mentioned before that, while working, these employees, this couple, will pay the FEHB premium with pre-tax money, but in retirement, they end up paying it with after-tax money.
Let’s give a good example for the federal couple that we just talked about. Let’s assume that we have a married federal employee … In this case, in this example, let’s assume it doesn’t really matter whether they’re married to another fed or not, just in general. If they’re under the self-plus-one option for FEHB with the Blue Cross Blue Shield plan, they would be paying about $240 per pay period as an employee and as a retiree. That ends up being about $6,300 per year for the self-plus-one plan. Here’s where things will turn for them as a retiree. When it now comes time to pay that Blue Cross Blue Shield, the roughly 6,000, the retiree can’t just take $6,000 of their income from their retirement check and pay the FEHB carrier and call it day because, remember, as a retiree, there’s no more premium conversion. They have to pay tax on the premium first and then pay the FEHB carrier. Depending on a tax bracket that someone might be in, they might have to start with something more like $8,000 of income in order to be able to pay the $6,000 bill to Blue Cross. Again, this can be really tricky for retirees because they thought the premiums were going to be the same. Technically, they are, but then the tax jumps up and messes this whole thing up.
Scott: Okay. Now, is there a twist on premium conversion for federal couples?
Chris: Maybe. It really has to do with the amount of time between their two retirement dates. Actually, let’s just jump into an example. It might be easiest for everyone to see where the good little nugget is here for federal couples. Let’s say we have a federal couple who’s currently under two self-only plans in FEHB. They decided they’re going to save a little bit of money. They have no children so they’re under their own plans.
Let’s say, in this example, that the husband decides to work the longest. He’s going to work three years longer than his wife. From a tax standpoint, it might be wise for the wife to move under the husband’s plan under FEHB for those three years as he continues to work. The reason is is that when he pays the FEHB premium out of his employee paycheck, he doesn’t have to pay tax on it. If she pays her FEHB premium out of her retirement check, she will pay tax on it. This strategy only works when one of the parties is still working. Once both of them have retired, the tax gig’s up. There’s no more advantage there, at least not from a premium conversion standpoint.
Consider this. The longer that one of the parties continues to work, the further you can stretch this great tax advantage of premium conversion. That might not be the only reason for one party to keep working, but if that’s how the timing falls, we always want to make sure that federal couples know how to extend the tax advantage that’s afforded to them for as long as possible.
Scott: Yeah. That’s a really valid point, Chris. If the tax advantage is there, they might as well get it for as long as they can.
Scott: Yeah. Well, we’ve covered three points so far. I know you mentioned you had four on your list. What’s the last thing that is really different for feds married to other feds?
Chris: Yeah. We’re on our final point for today’s episode, but I would argue it might be the most important of everything I’m sharing today. It has to do with survivor benefits. Now, for those who are not familiar with this topic, I encourage you to listen to our podcast on the Survivor Benefit Plan. It’s coming soon, so know that you’ll be able to listen to that once you’re done with this episode. Now, there’s a lot of detail that we can cover in that podcast that is relevant to consider on this point, but let me give everyone a quick primer on survivor benefits so that we have some working knowledge of how this program really functions.
When someone is retiring under SERS or FERS, they have an option to protect roughly half of their pension for their surviving spouse in the event that the retiree dies before the spouse does. Overall, the Survivor Benefit Plan is one of the most inflexible programs that the government offers to its retirees. Again, definitely it’s important to go listen to that podcast to be able to get more insights on those inflexibilities, but it is definitely a very rigid program that’s very structured and does not allow for a lot of flexibility. One of the weird things that really happens with respect to the survivor benefit decision is that, in order for a surviving spouse to continue to have FEHB coverage after the federal retiree dies, they must be named as what we call a survivor annuitant, meaning that some form of the survivor benefit was selected, and now they’re going to receive a check every month after the retiree dies. In a way, because of this connection to the survivor benefit … or the survivor benefit, the connection it has to the FEHB program, it might force retirees to take the survivor benefit for their spouse even though they might not love the program itself and all of its inflexibilities. Again, the only reason that they might do it is to protect health insurance for their spouse under FEHB.
Now, when it comes to federal couples, we likely have a very different scenario. As long as both of them have been covered by some version of FEHB for five years immediately prior to their own retirement and they are enrolled in this program on the day that they retire, they are permitted to keep their FEHB coverage forever, regardless if their spouse names them as a survivor annuitant. What does this really mean for federal couples? Well, it means that they get to make their decision on the survivor benefits based on the merits of that plan and not because of its odd connection over to the FEHB program. Ultimately, if a federal couple had other plans in place that would protect an income stream for each other, maybe a life insurance policy, whatever that might look like should one of them die, they could both decline the survivor benefit plan without any consequence to each other’s eligibility to keep FEHB, because in fact they’ve earned their own right to FEHB as an employee, not because they’re a spouse. Okay?
Chris: Now, on the flip side, if we have a federal employee married to a non-federal employee, most of them are really forced to take the survivor benefit plan whether they like it or not, simply because they know that their spouse needs the FEHB coverage.
Scott: Well, that’s a huge different that might be made for a federal couple, at least to know that they have options that others don’t. I appreciate you so much that you brought this up today, Chris. Do you have any final words for our listeners today on this topic?
Chris: Yeah. Most of what I teach, whether it’s a podcast or a live workshop, is to empower employees with the right information so they can feel like they have all the facts to start making decisions that suit their family. I’m not here to tell employees to make certain decisions. I’m not going to tell every federal couple out there to drop the Survivor Benefit Plan or anything like that. I do want to arm people with the right information so they don’t have any surprises in retirement.
Scott: Right. Okay. Well, before we wrap it up for today, would you mind reminding our listeners how they can attend one of your live workshops?
Chris: Most definitely. For everyone listening today, if you’d like to come to one of our live full-day workshops, you can visit fedimpact.com/learnmore to find your city. We’ll put a link to that right below the play button on the site so everyone can click on it, find a city that works for you. If you don’t see your city listed, be sure to let us know so that we can notify you when one is scheduled in your area. We open up workshops in new cities all the time, so you’ll be the first to be notified. Again, thanks everyone for listening today.
Scott: Well thanks, Chris. It’s always great to be with you. We ask that you stay tuned to the FedImpact podcast to get straight answers and candid insights on your federal retirement.