I love getting and answering questions. This week I received a question from a reader of my “Weekend Reading on Your Federal Benefits” newsletter (subscribe here) named Roberta who said:
I was chatting with a coworker today about some of our colleagues taking early retirement. One of the things we are not clear on is what these early retirees will do for healthcare until they are eligible for Medicare. Will they be able to continue their current discounted coverage, or will they have to fill in the gap with private insurance?
Well, Roberta, Federal retirees have access to something that most private sector retirees don’t, employer-provided health insurance. But whether the employee retires from service, retires early, or simply leaves service will determine if the employee is able to keep his coverage. So let’s talk about what happens to your health insurance after leaving Federal service and why it depends on how you leave.
These days most of us get our health insurance through our employer who usually shares in the cost and provides a group health program as an employee benefit. The Federal government is no different in that respect. It provides its employees with health insurance coverage in much the same way that private sector employers do. There are some differences though.
Private sector employers usually choose a health insurance carrier to provide the program for all its employees – who rarely have much of a say in which company is chosen. The Federal government contracts with many carriers – each of which may offer several different plan options for Federal employees to choose. At private sector companies, the enrollment period each year usually involves learning about any new plan options, recognizing changes to costs and coverage, and updating those who will be covered. Your annual Open Season involves those types of questions but can be much more complex because it also offers the ability for you to change carriers and change plans. Another difference-- private sector companies usually don’t subsidize their employees’ coverage at the same level as the Federal government which pays approximately 70-72% of the costs for coverage for its employees.
Here’s the biggest difference. After retiring from the company, the typical private sector worker doesn’t get to take his health insurance coverage with him into retirement. But after retiring from Federal service, you have the opportunity to keep your health care insurance. To do that, you must be eligible to retire on an immediate annuity. Most Federal employees (about 96% these days) are covered under the Federal Employees Retirement System (FERS). If you retire and meet one of the age and service requirements to begin receiving your pension, you can also continue your health insurance into retirement. The cost will be subsidized for you as a retiree, just as it was when you were an employee. And your premiums will be automatically deducted from your monthly retirement check (12 times per year) rather than being taken out of your bi-weekly paycheck (26 times per year.) Although the costs are subsidized, you’ll still see increases during retirement as insurance costs change from year to year.
Once a retiree turns age 65, he will need to decide whether to also enroll in Medicare. Your premium costs will increase if you’re paying for your health insurance and Medicare, but some plans reduce or eliminate costs (deductibles, co-pays, etc.) for those enrolled in Medicare. Should you enroll in both, and if so, when? The Office of Personnel Management (OPM) offers a booklet to help answer many of the questions retirees have after becoming eligible. It’s called the ‘The Federal Employee’s Health Benefits and Medicare Guide' and it’s available at this link (PDF).
For someone leaving service prior to age 65, Medicare isn’t an option. An employee retiring on an immediate annuity/pension will be able to remain covered, but what about someone who is leaving but isn’t yet eligible to begin receiving a pension?
Employees who leave voluntarily or who are forced to leave (for example, due to a Reduction in Force or RIF) and are not eligible for a pension have access to Temporary Continuation of Coverage (TCC) which allows the employee to continue coverage for himself and covered family members. His agency will notify him after separating that he is eligible to continue his coverage. The entire cost (plus a 2% administrative fee) is paid by the former employee (no more subsidization) so the cost will increase dramatically. Should the former employee decide to continue the coverage, it will terminate after 18 months unless it is converted to a non-group policy with guaranteed insurability – which almost no one ever does. (The words ‘non-group’ and ‘guaranteed insurability’ have lots of dollar signs just dripping off them.)
An employee who is eligible for a ‘deferred’ pension (this means the former employee with 5 or more years of service can apply later usually after ‘aging-in’ to meet one of the eligibility requirements) may receive his pension later but will currently lose his health insurance and will not be able to later get it back. It is permanently lost. Remember, you must retire and begin receiving your pension immediately to keep your coverage. If you lose it because you were unable to begin receiving your pension, you will not be able to re-apply for it later when you do start receiving your retirement benefit. Obtaining private insurance until age 65 or possibly coverage through a spouse’s employer is an option, along with looking into coverage through the Affordable Care Act (ACA).
There is an exception which permits someone who is receiving his retirement benefit early due to being offered a Voluntary Early Retirement Authority (VERA) to continue coverage. Although someone leaving early would generally not be able to keep health coverage, the VERA provides an agency the temporary ability to modify the retirement requirements to allow an employee (really a group of employees) to begin receiving his pension today. As a current retiree, he will also be able to keep his health insurance coverage.
So let’s see if we’ve got all this. Employees get health insurance, and retirees (even 'early retirees' under VERA) get health insurance, but former employees (even when they later become Federal retirees) do not, except for a brief, expensive period under Temporary Continuation of Coverage (TCC) right after leaving Federal service. For those without coverage, Medicare is the answer starting at age 65, but before age 65 your best option (for now anyway) is under the Affordable Care Act (also referred to as Obamacare) which Congress has been attempting to repeal (and replace). OPM provides information about your choices on their Healthcare Eligibility page. And for those who may be offered early retirement (VERA) or a cash buyout (VSIP), my explanation of what happens to all your benefits (not just health insurance) can be found in my video called 'An Employee's Guide to VERA and VSIPs' on the Federal Benefits Online YouTube channel.
What happens to your health insurance after leaving Federal service and why depends on how you leave and when. If Roberta's coworkers are being offered 'early retirement' (i.e, a VERA), they will likely be able to keep their Federal health coverage. But, if they're simply 'retiring early' (i.e., leaving service, but not currently retiring from service), they may need to find coverage somewhere else.
I hope your coworkers will find the right solutions for them, Roberta. And thanks again for your question.