For federal retirees, two of the most valuable benefits are the Federal Employees Health Benefits (FEHB) and Medicare. It’s crucial to understand how each functions and how they work together so you can choose the best coverage for your needs. The rules surrounding these federal benefits can be complex, and it’s common for retirees to have questions surrounding healthcare options and costs. Understanding how your retirement healthcare options work together is the first step toward using the benefits well.
Key Takeaways for Federal Employees Preparing to Retire
- To keep FEHB during your retirement, you generally need five years of continuous coverage before retiring and must retire on an immediate annuity.
- When you turn 65, you can keep FEHB and add Medicare. Once you are retired and enrolled, Medicare generally pays first.
- Premium-free Part A is an easy decision for most retirees. Part B is optional for most retirees, and it carries its own premium.
- Declining Part B at 65 and enrolling later usually brings a lasting penalty, so it is best to decide what benefits you need during your initial window.
- Part B premiums rise with income, so Roth conversions and TSP withdrawals can affect what you pay.
A Familiar Federal Benefit With New Questions for Retirees
For most of your federal career, health insurance has been a straightforward benefit to participate in. You chose a coverage plan during federal benefits open season, you paid premiums, and you were covered.
Retirement brings new questions around your coverage, such as:
- Will FEHB follow you?
- What will change when you turn 65?
- Will you need Medicare if you already have strong coverage?
Healthcare is one of the largest expenses to plan for in retirement. As we explain in The Hidden Costs That Can Throw Off Your Retirement, even small misjudgments can shift your long-term costs and coverages. The encouraging news is that federal retirees have more healthcare options to choose from.
FEHB premiums continue in retirement and are typically deducted from your annuity, which is one reason your take-home pension can be less than your estimate. We explain that take-home gap in What Your FERS Pension Estimate Isn’t Telling You.
How to Make Sure FEHB Follows You Into Retirement
Before you examine how FEHB and Medicare work together, you need to confirm that you qualify for FEHB to follow you into retirement. According to the OPM, federal retirees can generally keep FEHB if they meet the following conditions:
- The five-year rule: You have to be enrolled in FEHB for the five years of service immediately before retirement or since your first opportunity to enroll.
- An immediate annuity: To quality, you must take pension right away rather than waiting.
If you retire under MRA+10 and postpone your annuity, then you can reinstate FEHB when your annuity begins disbursement. However, a deferred retirement does not preserve the FEHB. Our guide, When Can I Retire Under FERS?, covers each retirement in detail.
How FEHB and Medicare Work Together at 65
When you turn 65, federal retirees can keep FEHB and decide how much Medicare coverage to add. Generally, your FEHB premium will be the same no matter what choice you make.
If you choose to have both Medicare and FEHB, then Medicare generally is the primary payer for your healthcare needs, and FEHB pays second. Usually, FEHB picks up much of what Medicare leaves behind (like deductibles and coinsurance). Medicare Part A covers hospital care, and it is usually premium-free for federal employees who paid Medicare taxes. You’ll automatically be enrolled in this if you already receive Social Security.
What About Medicare Part B? How to Plan for Your Needs
Medicare Part B covers healthcare needs such as:
- Doctor visits
- Outpatient care
- Lab work
- Imaging
Part B also carries a monthly premium on top of your FEHB premium, and this coverage is optional for most federal retirees. In our experience working with federal retirees, we often find that FEHB combined with Part A meets their healthcare needs well. Medicare coverage was largely designed for retirees lacking coverage as strong as FEHB. Still, Part B can add meaningful value for some retirees. The right answer for you depends on your:
- Health outlook
- Retirement income
- Comfort with out-of-pocket costs
Main Healthcare Options for Federal Retirees at 65
Coverage Option
How It Works
What You Pay
Helpful Option For…
FEHB + Part A
Medicare helps with hospital costs. FEHB covers everything else.
Your FEHB premium. Part A is usually premium-free.
Healthy retirees with modest medical use, or higher earners facing costly Part B premiums.
FEHB + Parts A and B
Medicare pays first. FEHB pays second and often covers remaining cost sharing.
Your FEHB premium plus the Part B premium, which rises with income.
Retirees who see specialists regularly or want more predictable costs.
Medicare Advantage (FEHB suspended)
This private Medicare plan provides coverage while FEHB is suspended.
Parts A and B are required, plus any plan premium.
Retirees comfortable with a plan’s network. FEHB can generally be reinstated later.
How to Compare Costs When Choosing Health Coverage for Retirement
Many people compare the Medicare Part B premium with the FEHB catastrophic out-of-pocket maximum cost. However, that limit is a worst-case scenario and not what most retirees will spend in a typical year of healthcare needs.
The better comparison is this: Would Part B coverage eliminate more in the everyday copays and coinsurance than it costs you after any plan incentives? Some FEHB plans offers things like reduced copays or Part B premium reimbursements, so it’s important to review your option during open season. Mel Stubbs, one of our financial planners, walks through the math in his FEDweek article on Part B.
A Few Example Scenarios to Help Explain Your Options
It can be helpful to run through some hypothetical scenarios to see how these retirement healthcare options may play out in a position similar to yours. The numbers alone do not tell the whole story for either of the scenarios below. The difference lies in how each choice fits their health, income, and retirement priorities.
Meet Frank
Frank retired at 62 and turns 65 next spring. He is healthy, sees his doctor a few times a year, and plans Roth conversions that place him in a higher Medicare premium bracket. The copays that Part B would eliminate are likely far smaller than its cost. FEHB with Part A may be a sensible fit for him, as long as he understands the penalty that would apply if he changes his mind later and wants to enroll.
Meet Donna
Donna retired at 60 after 31 years of federal service. She sees two specialists regularly and has had several outpatient procedures. At the standard premium, Part B could save her about as much as it costs, or more. Just as important, she values predictable healthcare costs during her retirement. Adding Part B may give her financial savings and peace of mind.
Decide in Your Initial Enrollment Period Window and Stick With It
Your Initial Enrollment Period (IEP) for Part B is the seven months surrounding your 65th birthday, starting 3 months before your birthday month.
If you are retired and decline Part B during this window, you can generally enroll later only from January 1 through March 31 each year. You will also usually have to pay a penalty of 10% of the standard premium for each full year you waited to enroll. That penalty typically lasts as long as you have Part B coverage.
Note that this penalty applies only if you choose to enroll after the seven-month window has passed. If you decline Part B coverage and never enroll, there is no penalty. That is why a thoughtful decision during your initial eligibility window matters.
Frequently Asked Questions
Do federal retirees need Medicare Part B if they have FEHB?
For most federal retirees, enrolling in Part B is optional. Many find that combining FEHB with Part A meets their needs. Others may benefit from the reduced cost sharing that Part B provides. Many Postal Service retirees under PSHB are required to enroll.
What is the FEHB five-year rule?
You generally must be enrolled in FEHB for the five years before retirement, or since your first opportunity to enroll, and retire on an immediate annuity.
Does my FEHB premium go down if I enroll in Medicare?
Generally, no. However, some plans offer incentives for Part B enrollees, such as partial premium reimbursement.
What happens if I skip Part B at 65 and want it later?
If you are retired, you can generally enroll only from January 1 through March 31, and you will usually pay a 10% penalty for each full year you delayed enrollment. The penalty typically lasts for as long as you have Part B.
Can my income increase my Medicare premiums?
Yes. Higher-income retirees pay IRMAA, an income-based surcharge usually based on income from two years earlier. Roth conversions, TSP withdrawals, and RMDs can all affect it.
Which pays first, FEHB or Medicare?
Once you are retired and enrolled, Medicare generally pays first. While you are still working, FEHB remains your primary coverage.
Do I need a separate Part D plan?
Every FEHB plan includes prescription coverage, so most federal retirees do not need a separate Part D plan. Review your plan’s brochure each Open Season.
Need Help Navigating Your Federal Retirement? We’re Here to Help.
Ensuring that federal employees are set to get the maximum benefit from their retirements is a huge part of what we do at Christy Capital Management. When you’re ready to start planning for life after your federal service, we’re ready to help.
