Federal employees will experience some changes to both their FEHB plans and how they pay for premiums and out-of-pocket health expenses once leaving federal service. We’ll walk you through what to expect and provide some guidance on how these changes impact your plan choices.
Goodbye Tax-Preferred Healthcare Programs
Upon retirement, one of the biggest changes annuitants will face is losing the ability to participate in tax-preferred healthcare programs like Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) once enrolled in Medicare. You’ll also lose “Premium Conversion”—paying for your health plan premium with pre-tax dollars.
Under IRS rules, annuitants cannot have an FSA, which is funded through payroll deductions before taxes. This is a smart way for active employees to save about 30%, depending on your tax bracket, on qualified medical expenses. However, since annuities are not considered salary, retirees lose the ability to continue participation in this program. Note – If you’re a re-employed annuitant that regains FEHB eligibility, you also earn back FSA eligibility.
High-Deductible Health Plans (HDHPs) are one of the best options available to federal employees. HDHPs generally have low premiums, excellent catastrophic coverage, and a plan-funded HSA. Due to these features, many HDHPs are often the least expensive plans available when we rank all FEHB plans in Checkbook’s Guide to Health Plans by estimated yearly cost—the combination of premium plus expected out-of-pocket costs based on the user’s characteristics.
HDHPs with an HSA are more than just health insurance; they’re a financial investment vehicle. You own your HSA and it stays with you if you switch plans. In addition to what the plan funds annually to your HSA, you can make voluntary contributions for a total HSA amount of up to $3,650 for individuals, or $7,300 for couples. If you’re 55 or older, you can add an additional $1,000 per year as a catch-up contribution. All contributions are triple tax-advantaged—they go into the account tax-free, grow tax-free, and exit tax-free if used for qualified medical expenses. Additionally, once you turn 65 you can make non-medical distributions from your HSA without additional penalty and only pay your normal tax obligations.
Annuitants that are not yet on Medicare will still receive a plan-funded HSA every year while enrolled in an HDHP. However, by law, HSAs are not available to individuals enrolled in Medicare or otherwise covered by another health insurance plan (such as a spousal plan). Instead, the HDHP will provide a Health Reimbursement Arrangement (HRA). You’ll still receive the same plan contribution into the HRA every year, but HRA rules are quite a bit different compared to an HSA:
- You cannot make voluntary contributions to an HRA, and your account funds are not invested.
- No portability. The health plan owns the HRA. If you have a balance in your HRA and you switch plans, you forfeit the unused funds.
- No non-medical distributions are allowed with an HRA.
One of the hidden financial benefits that almost all active federal employees receive is a program called Premium Conversion, or the ability to pay for your FEHB premium with tax-free dollars. For active federal employees, Premium Conversion allows FEHB premiums to be paid through a payroll deduction before federal income tax, Medicare tax, Social Security tax, and state and local taxes are taken, which reduces an employee’s taxable income.
This benefit’s value depends on many factors, including salary, state income tax rate, number of dependents, amount of deductions, etc. A good rule of thumb is about a 30% savings in your health insurance premium actually paid.
However, when you retire, you’ll start paying your FEHB premium from an annuity, and you’ll no longer be eligible to participate in Premium Conversion. Losing this benefit as an annuitant has a modest impact on the total cost ranking of FEHB plans available to you; lower-premium FEHB plans will see less of an increase in total costs compared to higher-premium FEHB plans.
How Medicare Impacts your FEHB Plan Benefits
As an annuitant, you can enroll in Medicare three months before you turn 65. Almost all federal annuitants will receive premium-free Medicare Part A (hospital) by virtue of paying taxes while an active employee. Medicare Part B (physician and related) requires paying an extra premium, which is $170.10 per month in 2022 and will be higher if your annual income exceeds $91,000 for an individual or $182,000 for a couple.
The decision to enroll in Part B is an important one and must be done when you turn 65. Here’s why: If you don’t enroll in Part B when you’re first eligible, you’ll pay a 10% premium penalty if you decide to do so later. The 10% penalty stacks: If there is a five-year gap between the date of your first eligibility and future Part-B enrollment, the penalty would be 50%. In a future FedSmith article, we’ll take an in-depth look at the pros and cons of enrolling in Medicare Part B.
Regardless of whether you have just Part A or Parts A & B, it’s important to know how your FEHB coverage is impacted by Medicare. The worst-case scenario is your FEHB plan benefits will stay the same, but, in most cases, they’ll improve when you join Medicare. Know that the benefits offered by your FEHB plan will never be worse because of joining Medicare.
The FEHB plan brochure is an invaluable resource to better understand how your FEHB plan and Medicare coordinate. You’ll find information in Section 9 at the back of any FEHB brochure.
Part A Only
If you decide to just have Medicare Part A and not pay the extra Part B premium, Medicare will be the primary payor and your FEHB plan will be secondary for hospital and skilled nursing care covered by Part A. For example, if you were to have a hospitalization, Medicare would pay first and in almost all FEHB plans your FEHB plan would pay any remaining hospital charges.
Parts A & B
If you decide to join Part B and pay the extra premium, you’ll want to try to find a FEHB plan that waives most of their out-of-pocket costs. Many national plans waive their hospital and medical deductibles and other out-of-pocket expenses when you have Medicare Parts A & B. This is often called “wraparound coverage,” and you will have close to 100% coverage of your medical expenses besides prescription drugs.
You can also use Part B coverage to receive greater access to providers. For FEHB plans that traditionally don’t offer out-of-network coverage (such as Blue Cross Basic and most HMOs), your Part B benefit allows you to go out-of-network to any provider that accepts Medicare and pay just the 20% allowed charge after you’ve satisfied the $233 annual Part B deductible.
There are also a few FEHB plans that have partial Part B premium reimbursement. Blue Cross Basic and GEHA High are two national plans that offer partial reimbursement, and if you’re enrolled in an HDHP you can use the HRA plan contribution to help pay for your Part B premiums as well.
The Medicare Advantage (MA) program, or Part C, has grown rapidly and now attracts over 40% of Medicare enrollees. For more than a decade annuitants have been able to suspend FEHB enrollment, join a MA plan, and pay just the Part B premium. However, a relatively new arrangement is now available where annuitants that have Parts A and B stay enrolled in their FEHB plan and gain eligibility to enroll in MA plan options offered by some FEHB plans.
National plans offering this approach include Aetna Advantage, APWU High, and MHBP Standard which have open enrollment, and Rural Carrier and Compass Rose which have enrollment restrictions. Local area options include Kaiser, United, and Humana. The United MA plan offerings are local but taken as a group are available in most parts of the U.S. These MA plans require enrollment in Part B and the corresponding FEHB plan and paying both premiums. However, some of these MA plan offerings will refund most and in some cases all the Part B premium. Some of these MA plans will waive all out-of-pocket health care expenses, besides prescription drugs, for approved medical care from providers that accept Medicare.
If you decide to take Part B you absolutely need to consider joining one of these MA plans as they have some of the lowest estimated yearly costs available to you, much lower than any other FEHB plan option in most parts of the country.
The Final Word
Once you retire and become an annuitant, you’ll lose the ability to have an FSA and pay for FEHB premiums before tax. As a result, you’ll be paying more for healthcare in retirement, and if you join Medicare Part B possibly a lot more simply because of the extra premium cost. Remember: If you are currently enrolled in an HDHP and have an HSA, you’ll be able to keep your existing HSA. But once you join Medicare, you’ll receive an HRA and lose the ability to make voluntary contributions.
If you decide to join Medicare Part B, make sure you understand the several different ways that FEHB plans coordinate with Medicare. You’ll find many FEHB plans provide wraparound coverage outside of prescription drugs, which will improve the value you receive by paying two premiums. Make sure to carefully consider MA plan options available to you. They are some of the lowest cost plan options for annuitants that have Part B.