Retirement planning is a complex process for federal employees, requiring careful attention to eligibility rules and regulations. Among the many requirements that determine post-retirement benefits, the 5-year rule plays a crucial role in three key programs: Federal Employees Health Benefits (FEHB), Federal Employees’ Group Life Insurance (FEGLI), and Roth Thrift Savings Plan (Roth TSP). Understanding these rules can ensure a smooth transition into retirement while maintaining access to critical benefits.
The 5-Year Rule for FEHB
The Federal Employees Health Benefits (FEHB) program provides health insurance to federal employees and retirees. However, to continue FEHB coverage into retirement, employees must meet specific criteria, including the 5-year rule.
Understanding the Rule
To carry FEHB coverage into retirement, a federal employee must:
Have been continuously enrolled in an FEHB plan for the five years immediately preceding retirement.
Retire with immediate retirement eligibility under the Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS).
Key Considerations
Breaks in Coverage: Temporary lapses in FEHB enrollment, such as switching to a spouse’s private-sector plan, can disqualify an employee from maintaining FEHB in retirement.
Spousal Coverage: If covered under a spouse’s FEHB plan, this still counts toward the 5-year rule.
Late Career Federal Employees: Employees who join federal service late in their careers must ensure they meet the 5-year requirement before retiring.
Immediate Retirement Requirement: Even if an employee meets the 5-year rule, they must retire under immediate retirement eligibility (MRA+30, age 60 with 20 years, or age 62 with 5 years of service) to maintain FEHB in retirement.
VERA: VERA stands for Voluntary Early Retirement Authority. VERA is a different kind of retirement offered by agencies in unique circumstances. If you retire with a VERA, you are still eligible to keep FEHB if you meet the 5 year rule.
Failing to meet these conditions means losing FEHB coverage post-retirement, which can lead to significant healthcare costs.
The 5-Year Rule for FEGLI
Federal Employees’ Group Life Insurance (FEGLI) is another critical benefit that requires adherence to a 5-year rule for post-retirement continuation.
Understanding the Rule
To continue FEGLI coverage in retirement, an employee must:
Have been enrolled in FEGLI for the five years immediately preceding retirement.
Elect to carry FEGLI into retirement when completing retirement paperwork.
Key Considerations
Basic vs. Additional Coverage: The 5-year rule applies separately to Basic, Option A, Option B, and Option C coverages. If an employee wants to continue a specific level of coverage into retirement, they must have maintained that level for the five years leading up to retirement.
Premium Costs: While Basic FEGLI remains affordable, Option B and C premiums increase significantly with age. Some retirees reduce their coverage or opt out altogether.
Reducing vs. Keeping Full Coverage: Retirees can elect to have Basic FEGLI coverage reduced to 75%. If you elect the 75 percent reduction then the coverage will become free at 65 or when you retire if that is later than 65. Otherwise, they can continue full coverage with higher premiums.
If an employee does not meet the 5-year rule, FEGLI coverage will terminate at retirement, leaving them without this life insurance benefit.
The 5-Year Rule for Roth TSP
The Thrift Savings Plan (TSP) includes both traditional and Roth options, and the 5-year rule is especially important for Roth TSP withdrawals in retirement.
Understanding the Rule
To withdraw Roth TSP earnings tax-free, an employee must:
Have held a Roth TSP account for at least five years.
Be at least 59½ years old.
Key Considerations
Starting Late: If an employee opens a Roth TSP at age 60 and retires at 62, they must wait until age 65 to withdraw earnings tax-free, even though they are older than 59½.
Traditional vs. Roth TSP: The 5-year rule only applies to Roth TSP withdrawals. Traditional TSP withdrawals are subject to standard income tax rules.
Transfers to Roth IRAs: If a Roth TSP is transferred to a Roth IRA, the 5-year clock resets unless the Roth IRA was established five years prior.
Possible Solution: If you’re not ready to make Roth contributions right now but may want to in the future, consider making a small contribution to your Roth account to start the 5-year timer as soon as possible.
Understanding this rule is crucial to avoid unexpected tax penalties and ensure full utilization of Roth TSP benefits in retirement.
Final Thoughts
The 5-year rule is a critical requirement for federal employees navigating their retirement benefits. To ensure a seamless transition into retirement:
Plan Ahead: Start reviewing FEHB, FEGLI, and Roth TSP participation at least five years before retirement.
Consult Experts: Work with financial planners and HR representatives to ensure compliance.
Stay Informed: Retirement regulations evolve, so keeping up to date is essential.
By understanding and preparing for these 5-year rules, federal employees can retire with confidence, knowing they have secured essential health, life insurance, and retirement savings benefits.
