How to Pick a FEHB Plan: The Ultimate Guide

Picking a FEHB Plan as Federal Retirees/Annuitants

Choosing an FEHB plan doesn’t get easier when federal employees retire. In fact, the task becomes harder as annuitants consider how Medicare impacts their cost and coverage, plus the dozens of plans available—including Medicare Advantage for those with Medicare Part B. 

Additionally, overall costs can rise as tax-advantaged methods disappear.

This guide will walk you through everything you need to know, from changing healthcare costs to  Medicare Advantage plans and enrolling in Medicare Part B to the increased importance of Part D prescription drug coverage.

How FEHB Changes in Retirement

Your core FEHB benefit doesn’t go away when you retire but there are some notable differences. 

But before we dive into the changes, the main thing that does not change is your premiums. 

As a retired federal employee you have access to the same premiums that active employees do. 

However, (as explained below) the cost does change because of the loss of tax benefits. 

Tax Benefits They Take Away in Retirement

There are several tax-preferred healthcare savings programs available only to active employees: 

• Premium Conversion – Almost all active federal employees participate in premium conversion, which allows health insurance premium payment before taxes. This reduces costs significantly as you save on federal income tax, FICA taxes (Medicare and Social Security), and most state and local income taxes. 

IRS rules limit pre-tax benefits to active employees. The impact of losing this benefit varies based on your locale and tax bracket, but many federal annuitants will pay 35% more for their enrollee share of premium.

So while their premium may stay the same, the after-tax cost will go up in retirement.

 

• Flexible Spending Accounts (FSA) – FSAs are designed to set aside a portion of your salary before taxes to pay for qualified healthcare expenses. Annuity payments are not considered salary, which prevents annuitant enrollment.

 

• Health Savings Accounts (HSA) – HSAs, available from High Deductible Health Plans (HDHP), have a higher voluntary contribution limit compared to FSAs, plus account funds can be invested. HSAs are a more powerful way for active employees to save on current and future healthcare expenses. However, once you retire and enroll in Medicare, you lose eligibility, instead receiving a Health Reimbursement Account (HRA). The HRA still receives a plan contribution from the HDHP each year, but you cannot make voluntary contributions or invest the funds in an HRA. Also, importantly, the HRA is no longer portable as the HSA was as an active employee. If you switch plans, you’ll forfeit unused money left in the HRA.

 

By losing these programs, annuitants will spend more on healthcare in retirement. Choosing a lower cost FEHB plan and maximizing the benefits of enrolling in Medicare Parts B and D become essential items for annuitants to help control their healthcare budget.

Here are the other big FEHB differences for retirees compared to active employees. 

Medicare Basics for Federal Employees/Retirees

If you are like most federal employees, you have had the same FEHB plan for a long time…a very long time. 

But Medicare is the #1 reason I see that feds change their FEHB plan after decades of loyalty. 

Because Medicare changes everything. 

Medicare is Different From Medicaid

Before we go any further, we have to make the distinction between Medicare and Medicaid. 

Medicare is what the vast majority of Americans use starting at age 65 while Medicaid only covers those in severe poverty. 

 

This guide is 100% about Medicare, not Medicaid.

What Parts of Medicare do Federal Retirees Need?

Most federal retirees use Medicare A and B. I’ll explain why below.

But with some recent changes part D will be more relevant as well. 

Medicare Part A (And What it Covers)

 

Medicare Part A covers these sorts of things:

• Inpatient care in a hospital

• Skilled nursing facility care

• Nursing home care (inpatient care in a skilled nursing facility that’s not custodial or long-term care)

• Hospice care

• Home health care

For more information on what Medicare Part A covers, go here.

 

When To Get on Medicare Part A

 

65 is the magic age when you can enroll in Medicare for the first time. The enrollment window generally includes the 3 months before your age 65 birthday month, the month of your 65th birthday, and the 3 months after your birthday month.

 

So, all together, your enrollment period is 7 months long. 

 

People will often get on Medicare A even if they are still working as Medicare A is free. 

The Cost of Medicare Part A

 

For the vast majority of federal employees, Medicare Part A will be free of charge because you already paid the premiums in FICA taxes while you were working. 

You can find more information about Medicare Part A Costs Here. 

 

Should I Get On Medicare Part A as a Federal Employee?

 

Because Medicare Part A is free for most feds, there is almost no reason not to enroll. Even if you are planning to continue working past age 65 there is still no reason not to sign up as soon as you can.

 

It will simply provide another layer of coverage.

 

And if you are only enrolled in Part A (and not Part B as well), then your Federal Health Insurance (FEHB) will remain your primary insurer and Medicare will be your secondary. 

 

Medicare Part B (And What It Covers)

 

Per the Medicare Website, Part B covers 2 types of services:

 

1. Medically necessary services: Services or supplies that are needed to diagnose or treat your medical condition and that meet accepted standards of medical practice.

2. Preventive services: Health care to prevent illness (like the flu) or detect it at an early stage, when treatment is most likely to work best.

 

Part B tends to cover things like:

• Clinical research  

• Ambulance services

• Durable medical equipment (DME)

• Mental health

  • Inpatient

  • Outpatient

  • Partial hospitalization

• Limited outpatient prescription drugs

 

However, Medicare Part B does not cover 100% of these services. 

 

In 2022, you pay $226 for your Part B deductible. After you meet your deductible for the year, you typically pay 20% of the Medicare-Approved Amount. 

You can learn more about signing up for Medicare here. 

How Much Medicare Part B Costs

Unlike Medicare Part A (inpatient hospital, home health, and skilled nursing care), which costs most annuitants $0 because of FICA taxes paid while working, enrolling in Part B requires paying an extra premium. 

The premium you pay is based on your modified adjusted gross income and tax-filing status. For individual filers with income below $97,000 and joint filers with income below $194,000, the standard Part B premium is $164.90 per month in 2023. 

If your income is above this threshold, you’ll pay the standard Part B premium plus an Income Related Monthly Adjustment Amount (IRMAA). 

 

Note: This chart shows the per person monthly price not a per couple price. This means that if you are married and you and your spouse are on Part B then you will pay twice the amount shown above in the chart. 

Medicare coverage begins when you turn 65 . There is an initial enrollment window lasting seven months that begins three months before you turn 65 and ends three months after the month you turn 65. 

For example, if you turn 65 on July 15, your initial enrollment window would begin April 15 and end October 15.

It’s essential that you make a Part B enrollment decision during this initial window. If you wait, you’ll have to pay a 10% late enrollment penalty for each year that you could have had Part B and didn’t. The late enrollment penalty stacks: Miss 10 years, pay 100% of the standard Part B premium, or double.

Should I Enroll in Medicare Part B as a Federal Retiree?

 

Yes, you probably should and here are the 3 main reasons why. 

 

1. As you age, odds are that you will have more and more medical issues and expenses. Having Medicare (along with your FEHB plan) is a great way to get very comprehensive coverage with very little out of pocket expenses. 

 

2. Having access to two different health insurance systems, FEHB and Medicare, is a great way to hedge your bets in retirement. After all, I can almost guarantee that there will be significant changes in these programs over the next decades and having access to both gives you the flexibility to pivot if needed down the road. 

 

3. Over time, more and more FEHB plans are pushing more responsibility to Medicare. In other words, some FEHB plans are choosing to not cover things that Medicare Part B would cover. This could mean more out of pocket expense for you if you don’t have Medicare Part B. 

 

Bonus Benefits: Being on Medicare gives you access to the FEHB Medicare Advantage plans and may expand what doctors you can go to. I’ll talk more about these benefits a few paragraphs down. 

 

When Do I Enroll In Medicare Part B?

If you are retired by 65, your enrollment window starts 3 months before you turn 65 and ends 3 months after the month you turn 65.

 

If you are still working at 65 then most people don’t enroll in Medicare part B until they retire. 

 

Penalties for not enrolling in Part B don’t start accruing until you are retired from the government. 

 

But Not All FEHB Plans Play Nice with Medicare

Medicare and your FEHB plan work together to coordinate benefits and reduce out-of-pocket healthcare costs. 

 

Some FEHB plans coordinate better with Medicare than others. When you are enrolled in Part B, many FEHB plans waive out-of-pocket costs for doctor services, reduce the deductible to $0 (if the plan has a deductible), and some will even reimburse or rebate a portion of the Part B premium. 

 

But some plans aren’t designed to merge with Medicare at all and don’t offer any reimbursements. 

 

For example (at least as of writing this in 2023), Blue Cross Basic offers a reimbursement if you are on Medicare part B but Blue Cross Standard doesn’t. 

 

So you’ll want to make sure your plan is designed to coordinate with Medicare so you can save as much money as possible. 

 

FEHB Medicare Advantage Plans

By far the most important reason to consider enrolling in Part B is to gain Medicare Advantage (MA) eligibility. 

Most FEHB MA plans have $0 out-of-pocket costs for approved healthcare services from providers that accept Medicare and the plan, except for prescription drugs. All reimburse some or all the Part B premium, and the plans’ benefit structure produces major savings compared to other popular low-cost FEHB plans.

For the same 65-year-old annuitant with self-only coverage living in the Washington, D.C. area with income below $97,000 and average healthcare expenses, there is a $1,140 difference between the lowest cost MA plan and the lowest cost FEHB plan.

 

 

There are nationwide PPO and local FEHB Medicare Advantage plans. Enrollment in MA plans requires three steps that should be completed in the following order:

1. If you’re not already enrolled in Medicare Part B, apply at Medicare.gov. You won’t be able to join an MA plan without first being enrolled in Part B. That takes the longest, so start there.

2.  Enroll with OPM in the FEHB plan that corresponds to the MA plan you want to join.

3. Wait a few days for OPM to update the insurance plan and then call the MA plan directly to enroll.

FEHB MA plans offer additional advantages because you have dual FEHB/MA enrollment. For example, a married couple with one spouse younger than 65 and one spouse who is 65 or older could enroll in one of the plans and rely on FEHB benefits for the younger spouse until he or she turns 65, with the older spouse enjoying the enhanced MA benefits from the beginning of the new plan year.

There are two words of caution with FEHB MA plans. First, you must still check to see if your providers will be available. While the plans state that you can see any provider that accepts Medicare, the provider must also accept the MA plan. Double check the online provider directory to confirm your current providers are available. Second, while you still must pay the FEHB premium to enroll in a FEHB MA plan, you’ll technically be enrolled in the MA plan and receive those benefits. 

Emergency overseas care will be one FEHB benefit you’ll lose by enrolling in the MA plan. Only one MA insurance carrier provides overseas care currently. FEHB MA plans offered by UnitedHealthcare added reimbursement for overseas care in plan year 2023. 

Doctor Availability

Deciding to enroll in Part B could expand the provider network of your existing FEHB plan. 

How? 

You can use the Part B benefit to go out-of-network to receive care from a doctor that accepts Medicare. Keep in mind, if you decide to do so, you’ll be subject to the $226 Part B deductible and you’ll have to pay 20% of the service’s cost after you’ve paid the deductible. If your existing FEHB plan doesn’t provide out-of-network coverage, enrolling in Part B could give you more doctor options.

Reasons to Not Enroll in Part B

If you’re subject to IRMAA (more than $97,000 individual or $194,000 joint in 2023) and must pay higher Part B premiums, and you expect your income to stay above the IRMAA income threshold throughout retirement, enrolling in Part B will have far less financial value than those paying the standard Part B premium. 

This is especially true if your income places you above the first tier of IRMAA. 

If your current FEHB plan does not reduce your out-of-pocket costs when enrolled in Part B, you should consider switching plans to either an FEHB plan that does or to an FEHB Medicare Advantage plan. If you don’t change to a plan that has better Medicare coordination, you’ll be paying an additional Part B premium without receiving any benefit and would be better off not enrolling in Part B.

Any federal annuitants that are subject to a Part B penalty because of missing the initial Medicare enrollment window should think carefully before joining. If the penalty is just 10%, enrolling in Part B could still be beneficial if you join either an FEHB plan that coordinates well with Medicare or an FEHB MA plan. But, if the penalty is well above 10%, the much higher Part B premium will erode any potential benefit you’ll receive from Part B enrollment.

 

The 3 Most Common Strategies

But again, there is no perfect solution for everyone so here are the main combinations that Federal Employees utilize in retirement:

Option 1: FEHB and Medicare A and B

 

This option means that you will continue paying your federal health insurance (FEHB) premiums as well as the premiums for Medicare Part B. 

 

The major advantage of this option is that your coverage is often very comprehensive with very little out of pocket expenses and if you sign up for Medicare Part B right away then you won’t see any price increase for delaying (there is a paragraph later in this article all about this).

 

The obvious disadvantage is that your monthly premium cost (especially if you have high income) can be quite high. 

 

However, more and more FEHB plans are offering Medicare Part B premium reimbursements if you are on both at the same time. 

 

Aetna, Blue Cross Blue Shield, and Kaiser all offer plans with premium reimbursements built in. 

So for some people, they can actually save money in retirement by switching to a Medicare-friendly FEHB plan once they get on Medicare Part B.

 

In this scenario, Medicare would be primary and FEHB would be secondary. 

 

Option 2: Just FEHB and Medicare Part A

 

This option is basically deciding to forego Medicare Part B and remain on FEHB as the primary insurer. 

 

Many people pick this option when their income would make Medicare Part B premiums extremely high or when they feel that their current FEHB plan is plenty for their needs. 

 

If you were to go with this option you will often want to be on a FEHB plan that is fairly comprehensive (like Blue Cross Standard) to limit your potential out of pocket expenses in retirement. 

The major downside of this option is that you may have to pay a steep penalty if you ever want/need to get on Medicare Part B in the future. 

 

Penalty for Delaying Medicare Part B

 

If you choose not to enroll in Medicare Part B at 65 and never enroll in it later then you don’t have to worry about a penalty. 

 

However, if you choose not to enroll in Medicare Part B when you are first eligible but then decide to enroll later, you will pay a 10% penalty for every year that you waited to enroll. 

 

For example, if you were first eligible at age 65 but didn’t enroll in Medicare until 70 then your premiums would be 50% higher for the rest of your life.  

 

This is why it is so crucial to make sure you really don’t need Medicare Part B before opting out. 

 

Note: If you are still working at age 65 and are covered by FEHB then this clock for the 10% penalty doesn’t begin until you retire. Or if you are retired but covered under your spouse’s FEHB who is still working then the clock doesn’t start until they retire. 

 

Option 3: Just Medicare

 

This is certainly the least common option. FEHB is a great benefit and giving it up in retirement is rarely the best option.

 

But if you did decide to just have Medicare you will want to consider getting a Medicare Supplement plan that will fill some of Medicare’s gaps in coverage. 

 

Federal Retirees Have Ignored Part D, Until Now!

Historically, federal annuitants found little value enrolling in Part D as FEHB plans’ prescription drug coverage was as good or better. However, reforms enacted by the Inflation Reduction Act of 2022 (IRA) strengthen Part D’s value and you should now evaluate your options.

●      Insulin Prices Capped – Insulin covered by Part D plans is capped at no more than $35/month starting in 2023. Part D plans will not have to cover all insulin products but will have to offer one of each dosage form—vial, pen—and insulin type—rapid-acting, short-acting, intermediate-acting, and long-acting.

●      Catastrophic Coverage Coinsurance Dropped – Once total spending between the Part D enrollee, Part D plan, and drug manufacturers reaches $7,400 in a year, catastrophic coverage begins. Currently, the enrollee pays 5% of expenses in the catastrophic coverage phase. Beginning in 2024, Part D plans will eliminate the 5% enrollee share.

●      Part D Premium Increase Limits – Starting in 2024 and lasting through 2030, the IRA limits Part D premium growth to no more than 6% per year. Part D premiums increased 10% on average from 2022 to 2023, so the 6% cap offers some protection from large price hikes.

●      Out-of-Pocket Spending Cap – In 2025, there will be a new $2,000 enrollee out-of-pocket spending cap in Medicare Part D plans. Additionally, enrollees will have the ability to spread out that $2,000 over the course of a year. This provision will limit out-of-pocket drug costs to no more than $167 a month for any Part D enrollee.

This Part D upgrade will produce substantial savings for annuitants with high out-of-pocket drug costs. For those needing expensive brand or specialty drugs to treat cancer, multiple sclerosis, or other medical conditions, joining a Part D plan will be a huge cost saver unless FEHB plans modify their offerings to match this benefit.

Why such big savings? Because the soon-to-be $2,000 out-of-pocket maximum in Part D is significantly lower than almost all catastrophic limits seen in FEHB plans, which range from as low as $1,500 to as high as $9,100 when using in-network providers for self-only enrollment.

There will be two Part D enrollment options available to annuitants for plan year 2024—FEHB Medicare Advantage Plans and FEHB Prescription Drug Plans (PDP).

FEHB MA plans bundle a Part D plan for prescription drug coverage. For most annuitants, the FEHB MA plans will be the least expensive plan choice as you’ll receive improved Part D coverage as well as substantial savings on all other healthcare costs compared to regular FEHB plans.

For plan year 2024, there is a new plan option available to federal annuitants—Medicare Part D Prescription Drug Plans (PDP). The FEHB PDP’s have equal or better prescription drug benefits than what’s available from the FEHB plan, without having to pay an extra premium for the coverage. If you are currently enrolled in one of the plans below and have Medicare Parts A only or Medicare Parts A & B, and don’t have an existing MA or Part D plan, you will be auto-enrolled in the PDP plan.

·       Blue Cross Blue Shield – Standard, Basic, FEP Blue Focus*

·       NALC High

·       MHBP – Standard, Value, Consumer Option

·       APWU High

·       Rural Carrier High

·       Foreign Service High

·       SAMBA – High & Standard

·       HealthPartners – High & Standard

·       Aetna Direct Consumer Option

·       Aetna Open Access – High & Basic

*Special Note about BCBS auto enrollment – If you have Medicare Part A only, you will not be auto-enrolled and must contact the plan to enroll.

Importantly, some of the FEHB PDP’s have an annual $2,000 maximum out-of-pocket per person which could dramatically lower out-of-pocket costs for annuitants with high prescription drug costs. Also, the $2,000 prescription drug max applies to the overall plan catastrophic max. The Aetna plans, MHBP plans, BCBS Standard, and Rural Carrier offer the $2,000 max.

Your plan will notify you of auto-enrollment in a PDP plan and will provide an option for you to disenroll if you wish. Even though annuitants won’t be subject to an extra premium with an FEHB PDP, IRMAA still applies if you have a high income. For 2024, Part D IRMAA will be an extra $12.90/month in the first income tier and up to an extra $81.00/month in the fifth income tier.

Annuitants will benefit greatly from enhanced prescription drug benefits through Part D coverage. There are very few cases where you wouldn’t want to keep the PDP. Even in the case of IRMAA, the benefit of the coverage will most likely outweigh the extra IRMAA amount.

However, annuitants should still do their homework. Review the PDP closely to confirm pharmacy networks. Check that your existing prescription drugs will be covered. Confirm that your expected out-of-pocket cost will be the same or lower in the PDP.

The Final Word

With the loss of tax-advantaged programs, federal annuitants must look for other ways to reduce healthcare costs in retirement.

Plan choice has the largest impact on healthcare costs. For annuitants that decide to enroll in Part B, they must find a plan that reduces out-of-pocket costs. Furthermore, all annuitants with Part B must consider enrolling in an FEHB MA plan. While this may not be the right choice for all, the savings available are too significant to ignore.

Annuitants have not had to consider Part D coverage in the past, but improved benefits now make this coverage a must. The 2024 Open Season will have new plan options available to annuitants, both FEHB MA plans and FEHB PDP plans, which will be available for the first time. 

The right choice for you will largely be determined by your anticipated prescription drug usage and whether you are subject to higher Part B and D premiums through IRMAA.

If you have low usage and aren’t auto-enrolled in an FEHB PDP, you can delay Part D enrollment. There is no penalty since your FEHB plan drug coverage is considered creditable coverage by OPM. If your situation changes in the future, you can enroll in Part D then.

For annuitants with moderate or high prescription drug usage, including annuitants that take insulin, joining Part D can be an important way for you to save on your out-of-pocket drug expenses.

For annuitants that aren’t subject to IRMAA, FEHB MA plans will be the best way to receive enhanced Part D benefits and save a considerable amount of money on total healthcare expenses. Annuitants subject to IRMAA will need to decide if enhanced Part D benefits are worth paying the extra IRMAA amount.