Are you planning to retire in 2022? How your FEHB plan changes when you retire
If you plan to retire in 2022, you’ll see changes both to your FEHB plan and to how you pay premiums and out-of-pocket health expenses once you leave. We’ll explain what to expect and provide guidance on how these changes will impact your diet choices.
Farewell to tax-efficient healthcare programs
In retirement, one of the biggest changes annuitants will face is the loss of the ability to participate in tax-advantaged health care programs such as Flexible Spending Accounts (FSAs) and Health Savings Accounts. (HSA) once enrolled in Medicare. You will also lose “premium conversion” – paying your health plan premium with pre-tax dollars.
Under IRS rules, annuitants cannot have an FSA, which is funded by pretax payroll deductions. It’s a smart way for active employees to save about 30%, depending on your tax bracket, on eligible medical expenses. However, since annuities are not considered a salary, retirees lose the possibility of continuing to participate in this program. To note – If you are a re-employed annuitant who regains FEHB eligibility, you also regain FSA eligibility.
High-deductible health plans (HDHPs) are one of the best options available to federal employees. HDHPs typically have low premiums, excellent catastrophic coverage, and a plan-funded HSA. Because of these characteristics, many HDHPs are often the lowest priced plans available when we rank all FEHB plans in Checkbook’s Guide to Health Plans by estimated annual cost – the combination of premium and projected outlays in depending on the characteristics of the user.
HDHPs with an HSA are more than just health insurance; they are a financial investment vehicle. You own your HSA and it stays with you if you change plans. In addition to what the plan pays 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 are 55 or older, you can add an additional $1,000 per year as a catch-up contribution. All contributions receive a triple tax benefit: they enter the account tax-free, grow tax-free, and exit tax-free if used for eligible medical expenses. Plus, once you turn 65, you can make non-medical distributions from your HSA without additional penalty and only pay your normal tax obligations.
Annuitants who do not yet have Medicare will still receive a plan-funded HSA each year when enrolled in an HDHP. However, by law, HSAs are not available to people enrolled in Medicare or otherwise covered by another health insurance plan (such as a spousal plan). Instead, HDHP will provide a Health Reimbursement Agreement (HRA). You will still receive the same plan contribution in the HRA each year, but the rules of the HRA are quite different from those of an HSA:
- You cannot make voluntary contributions to an HRA and funds in your account are not invested.
- No portability. The health plan owns the HRA. If you have a balance in your HRA and you switch plans, you lose unused funds.
- No non-medical distribution is permitted with an HRA.
One of the hidden financial benefits that nearly all active federal employees receive is a program called Premium Conversion, or the ability to pay your FEHB premium with tax-free dollars. For active federal employees, premium conversion allows FEHB premiums to be paid through payroll deduction before federal income tax, Medicare tax, Social Security tax, and state and local taxes , which reduces an employee’s taxable income.
The value of this benefit depends on many factors, including salary, state income tax rate, number of dependents, amount of deductions, and more.
However, when you retire, you will begin to pay your FEHB premium from an annuity and you will no longer be able to participate in premium conversion. Losing this benefit as an annuitant has a modest impact on the total cost ranking of the FEHB plans available to you; Lower premium FEHB plans will see less increase in total costs compared to higher premium FEHB plans.
How Medicare Affects Your FEHB Plan Benefits
As an annuitant, you can enroll in Medicare three months before you turn 65. Almost all federal annuitants will receive Medicare Part A (hospital) premium-free by paying taxes as an active employee. Medicare Part B (doctor and related) requires paying an additional 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 important and should be made when you turn 65. Here’s why: If you don’t register for Part B when you first qualify, 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 your future registration for Part B, 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.
Whether you only have Part A or Parts A and B, it’s important to know how your FEHB coverage is affected by Medicare. The worst case scenario is that your FEHB plan benefits will remain the same, but, in most cases, they will improve when you join Medicare. Know that the benefits offered by your FEHB plan will never be worse because of your Medicare membership.
The FEHB plan brochure is an invaluable resource for better understanding how your FEHB plan and Medicare fit together. You will find information in section 9 at the back of any FEHB brochure.
Part A only
If you decide to have only Medicare Part A and not pay the additional Part B premium, Medicare will be the primary payer 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 the remaining hospitalization costs.
Parts A and 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 outlays. 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 “blanket coverage,” and you’ll have nearly 100% coverage of your medical expenses. in addition to prescription drugs.
You can also use Part B coverage for better access to providers. For FEHB plans that traditionally don’t offer out-of-network coverage (like 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 only the 20% allowable fee once you have met the Part B annual deductible of $233.
There are also a few FEHB plans that have partial reimbursement of Part B premiums. Blue Cross Basic and GEHA High are two national plans that offer partial reimbursement, and if you are enrolled in an HDHP you can also use the contribution from the HRA plan to help pay your Part B premiums.
Benefit of Medicare
The Medicare Advantage (MA), or Part C, program has grown rapidly and now attracts more than 40% of Medicare enrollees. For over a decade, annuitants have been able to suspend FEHB enrollment, join an MA plan and only pay the Part B premium. However, a relatively new arrangement is now available where annuitants who have the parties A and B remain enrolled in their FEHB plan and become eligible to enroll in the MA plan options offered by certain 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 options include Kaiser, United, and Humana. United MA plan offers are local but taken as a group are available in most areas of the United States. These MA plans require enrollment in Part B and the corresponding FEHB plan and payment of both premiums. However, some of these MA plan offerings will refund most and in some cases all of the Part B premium. Some of these MA plans will waive all health care costs, in addition to prescription drugs, for care approved medical treatment from providers who accept Medicare.
If you decide to go with Part B, you should definitely consider joining one of these MA plans as they have some of the lowest estimated annual costs available to you, far lower than any other FEHB plan option in most regions of the country.
The last word
Once you retire and become an annuitant, you will lose the ability to have an FSA and pay FEHB premiums before tax. As a result, you’ll pay more for health care in retirement, and if you enroll in Medicare Part B, you may pay significantly more simply because of the cost of the additional premium. Remember: if you are currently enrolled in an HDHP and have an HSA, you will be able to keep your existing HSA. But once you join Medicare, you will receive an HRA and lose the ability to make voluntary contributions.
If you decide to join Medicare Part B, make sure you understand the different ways FEHB plans coordinate with Medicare. You’ll find that many FEHB plans offer comprehensive coverage outside of prescription drugs, which will enhance the value you receive by paying two premiums. Be sure to carefully consider the MA plan options available to you. They are among the least expensive plan options for annuitants who have Part B.
As part of our Plan to retire in 2022 series with FedSmith, stay tuned for future articles that include an in-depth look at deciding to enroll in Medicare Part B, everything you need to know about Medicare Advantage plans, how high-income federal retirees can avoid paying higher Part B premiums each year, and our article on How to keep FEHB coverage in retirement.
Kevin Moss is an editor at Consumers’ Checkbook. Checkbook’s Guide to Health Plans for Federal Employees is available free to many federal employees; Check here to see if your agency provides access. The guide is also available for purchase and FedSmith readers can save 20% by entering promo code FedSmith at checkout.
© 2022 Kevin Moss. All rights reserved. This article may not be reproduced without the express written consent of Kevin Moss.