If retiring from federal service is on your agenda, make sure you’re qualified to receive FEHB health coverage once you leave because it far outweighs any other available options. We’ll discuss the five-year rule that federal employees must satisfy for FEHB coverage in retirement, provide advice for federal employees who are covered by non-FEHB health insurance from a spouse, and explain why a Medicare-only approach in lieu of FEHB coverage doesn’t make sense.
First, when federal employees retire, they have to satisfy federal retirement requirements.
There are two major civilian retirement systems (FERS and CSRS) and many rule complexities involved. For more information on retirement eligibility and related issues, check with your agency HR/Benefits staff and guidance from OPM.
In addition, check to see if your agency is offering retirement planning sessions. There are a few private firms, such as the National Institute of Transition Planning, that are often used by federal agencies to counsel employees who are planning to retire.
The Five-Year Rule
To continue health benefits in retirement, you must be continuously enrolled in an FEHB plan for the five years prior to your retirement date and the start of your annuity. You don’t have to be enrolled in the same FEHB plan, but you must be continuously enrolled in some FEHB plan or, in the case of former military, TRICARE. But everyone, even former military, must be enrolled in an FEHB plan on the day they retire, which in practice means you enrolled in an FEHB plan during the previous Open Season.
OPM does have the authority to waive the five-year rule. However, waiver approvals are only granted when an employee provides evidence of exceptional circumstances that prevented them from meeting this requirement. In practice, it’s usually available only in cases of agency reductions in force.
If an employee doesn’t meet the five-year rule, and it was within their control to satisfy the eligibility requirement, OPM will not generally grant a waiver. For example, if an employee claims to be unaware of the five-year rule or an employee voluntarily retires and could have chosen to remain in federal service to fulfill eligibility requirements, those waiver requests would be denied.
Federal Employees Covered by Non-FEHB Health Insurance
We hear from many federal employees that are not currently enrolled in an FEHB plan because they joined their spouse’s health insurance provided by a private employer. If you fall into that category, the five-year rule is especially important.
In most cases, the health insurance your spouse currently has will go away once your spouse retires, and the only way you’ll be able to keep FEHB coverage in retirement is by satisfying the five-year rule. Also, should you die while not enrolled in an FEHB plan in the self-plus-one or family option, your spouse will lose FEHB eligibility forever. To protect you both, particularly as you near retirement age, the safest choice is to be in a self-plus-one FEHB plan.
There is a low- to no-cost strategy available: You can stay enrolled in your spouse’s private health insurance and enroll in a consumer-driven (CDHP) or high-deductible plan (HDHP) in the FEHB program. Both types of plans will provide you with a health reimbursement account (HRA) that will be funded by the plan (HDHPs normally provide a health savings account (HSA) but you won’t qualify since you have other insurance). The combination of the plan-funded savings account and the value of paying for the premium pre-tax are about the same as what you must pay in premium. You’ll have double coverage which means your spouse’s plan will probably pay any unreimbursed expenses you incur, and you’ll likely never have to pay anything additional out-of-pocket under the high-deductible FEHB plan.
If this sounds too complicated, there is always the option of enrolling in a non-HDHP low-premium plan while you have double coverage. The key point is to be covered by an FEHB plan if you are covered by your spouse’s non-federal plan.
We also hear from federal employees who wonder if they should drop FEHB coverage and instead rely on just Medicare in retirement. We generally advise against that decision. To even get close to the comprehensive coverage provided by any FEHB plan, federal retirees would need to join three parts of Medicare—A (hospital), B (physician and related), and D (prescription drugs)—and while Part A is premium-free for most, Parts B and D can be quite a bit more expensive.
All federal retirees should qualify for premium-free Medicare Part A, but they’ll pay a $1,556 deductible for a hospitalization if that is their only insurance. They will also pay the Medicare Part B premium, which for 2022 is $170.10 per month, and the Part B deductible, which is $233. Medicare Part D also requires a premium that differs by plan, but generally ranges from $20 to $40 per month, depending on plan generosity.
You’ll be paying more than $2,000 per person in Medicare premiums each year, and even more if you’re a high-income retiree.
If your income is $91,000 or more for individuals, or $182,000 or more for couples, you’ll be subject to an Income Related Monthly Adjustment Amount (IRMAA) and will pay an extra charge on top of the base Part B premium (IRMAA charges also apply to Part D premiums). IRMAA is a premium surcharge on top of regular Medicare premiums. Its purpose is to charge high-income retirees (not just federal annuitants) a larger share of the Part B premium to help offset Part B costs. It varies with your adjusted gross income but can raise your total Part B premium to more than three times the regular Part B premium, about $400 a month.
Traditional Medicare has so many limitations that most enrollees buy even more insurance to fill coverage gaps. Medigap plans supplement traditional Medicare, but you’ll pay extra for this coverage, roughly double the amount of the Medicare Part B and Part D premiums.
You’ll find many FEHB plans with premiums well below Medicare premiums and with lower out-of-pocket costs compared to Medicare. FEHB plans also have other important benefits that you won’t want to lose in retirement.
All FEHB plans provide emergency overseas coverage, a provision not available in Medicare except in certain parts of Canada and Mexico. Importantly, all FEHB plans include catastrophic coverage—which ranges from $3,000 to $7,500 for self-only enrollment and $6,000 to $15,000 for self-plus-one and family enrollments depending on the plan—which protects you against high healthcare expenses that can be many tens of thousands of dollars. Traditional Medicare does not have this vital protection.
A much better option for most annuitants is to be enrolled in both programs, FEHB and Medicare. For those with both Part A and an FEHB plan, almost all FEHB plans either eliminate the hospital deductible or limit it to just a few hundred dollars. Most, but not all, FEHB plans will also eliminate both the Part B deductible and the plan deductible if you are enrolled in both. By joining Part B with your FEHB plan you’ll also qualify to join special Medicare Advantage plans that reduce premium and out-of-pocket costs further.
When considering both cost and coverage, FEHB plans by themselves or paired with Medicare are a superior choice compared to Medicare only. (There is one exception. Ex-spouses who pay full FEHB premiums will save significantly by suspending FEHB enrollment and enrolling in Medicare and a Medicare Advantage plan.)
The Final Word
Full retiree health insurance benefits that are guaranteed for life are rare in the private sector. By carefully following the five-year rule, federal employees can continue receiving FEHB health coverage in retirement. If you’ve not met the five-year rule and you otherwise qualify for retirement, you’ll benefit in the long run by working longer to satisfy that requirement to receive FEHB coverage in retirement.