Medicare and FEHB – Do you need both?

Federal employees age 65 and up are eligible to enroll in Medicare. Most feds are happy with their Federal Employee Health Benefits (FEHB) coverage and don’t feel any natural interest in Medicare. Medicare, however, demands enrollment and threatens non-subscribers with penalties. This forces feds into a position of having to choose whether they will enroll in Medicare just to spare themselves the penalty.

Let’s investigate these Medicare penalties to see if there truly is a penalty to be scared of.

Medicare penalties do not apply if you are still covered by “active employment coverage.” FEHB is considered active employment coverage while you are still employed with the federal government. (When you retire, FEHB is no longer “active employment coverage” but rather “annuitant coverage.”)

This point has a couple important ramifications:

  • Feds who are age 65, still at work and covered by FEHB will not be penalized for not taking Medicare. Medicare simply can’t threaten while covered by active employment coverage.
  • Even people who are retired, but still covered under FEHB (or an employer plan) through their working spouse are considered covered by active employment coverage, and are not penalized for not taking Medicare.

Medicare Part A does not have a late penalty. For most Americans Part A is free. Even if you enroll late, there is no penalty.

If Part A is free, why wouldn’t someone enroll in Part A immediately? What could possibly be wrong with FREE? As wonderful as FREE sounds, there is a drawback.

Part A will preclude enrollees from contributing to a Health Savings Account. HSA functions much like a flexible spending account, only offers more robust benefits, such as:

  • Higher contributions limits: $3,450 for those enrolled in a self-only health plan; $6,900 for those enrolled in Self Plus One or Family Plans (2018 limits);
  • $1,000 additional “catch-up” contribution is allowed for anyone over age 55;
  • No “use or lose;”
  • No account limits;
  • Account can be invested;
  • HSA money can be used to pay for a broader range of qualified expenses (including long term care insurance premiums, Medicare Part B premiums, non-prescription drugs and services); and
  • Access HSA money in retirement.

These benefits of an HSA cannot be overstated. They translate into thousands of dollars of savings on an annual basis. Because enrollment in Medicare (Part A or B) precludes participation in HSA, we shouldn’t necessarily rush to enroll in the free Part A coverage. Remember, late enrollment in Part A has no penalty.

Medicare penalties are only for LATE enrollment. Late enrollment, as opposed to NON-enrollment. If you NEVER enroll then you won’t need to pay the penalty!

This is the heart of the dilemma — will you ever enroll in Medicare B if you’re covered by FEHB?

Do you need both?

There are a couple of ways to answer this question:

Answer #1 —You don’t need both. Obviously every insurance plan is nuanced. Just as we find differences between each plan in FEHB, we will find some differences between FEHB and Medicare. However, to quote OPM “generally, plans under the FEHB program help pay for the same kinds of expenses as Medicare.”

In many cases FEHB proves to be more comprehensive, often including emergency care outside the U.S., as well as dental and vision, which Medicare does not cover. In fact, because FEHB offers a menu of plans, should you ever find your current coverage is inadequate, you will be able to switch to a more robust plan during an open season, even in retirement.

Since FEHB and Medicare coverage is generally the same, why should you pay for both?

Answer #2 —There’s a benefit to having both. While the above answer suggests that you don’t need both, there is a benefit to having both. Many FEHB plans have a special “coordination of benefits” with Medicare, where the FEHB plans pick up the secondary tab right away and waive their deductibles, co-pays and co-insurance. This coordination can result in no out-of-pocket costs to you.

So it turns out that an FEHB enrollee who pays for Medicare is essentially paying to have no out-of-pocket exposure.

Is that a smart thing to do? What would be your out-of-pocket exposure if you didn’t have Medicare?
Ultimately, the decision whether to have both FEHB and Medicare boils down to a comparison between the cost of Medicare and the out-of-pocket exposure you would have without Medicare.

Here are a couple of examples:

Example #1: A FEHB Self-Plus-One Plan has an out-of-pocket maximum exposure of $6,500. Medicare Part B premiums for a couple (based on their joint income) happens to cost just about $6,500. Is it worth spending $6,500 in Part B premiums just to avoid a potential $6,500 loss if a catastrophic event occurred? Most likely not.

Example #2: An FEHB Self-Plus-One-Plan has an out-of-pocket maximum exposure of $12,000. Medicare Part B premiums for a couple (based on their joint income) happens to cost about $3,000. Is it worth spending $3,000 in Part B premiums just to avoid a potential $12,000 loss if a catastrophic event occurred? This example highlights how each person may feel different about assuming the risk of their out-pocket-exposure. Some may not feel comfortable with such exposures, while others may reason that is they don’t have a catastrophic event for 4 years, they will have saved $12,000 of Part B premiums ($3,000 x 4 years = $12,000).

If we consider all the above points, we may discover that our FEHB coverage not only provides protection from the cost of illness, but also protects us from Medicare threats, too!

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Stephen’s retirement guidance, benefits guidance and allocation guidance for Thrift Savings Plan (TSP) investing is available online at www.StephenZelcer.com and www.tspplanning.com, but should only be relied upon when reviewed with a competent advisor as part of a thorough financial plan.

Stephen Zelcer is a financial advisor for federal employees, and a pre-retirement/financial literacy instructor for federal agencies. Zelcer has personally delivered over 300 pre-retirement seminars, teaching thousands of federal employees about the interrelationship between Federal Benefits and personal financial planning. Stephen is also a blogger and author of the retirement readiness workbook “Ready, Aim, Retire!” Learn more about how Stephen helps federal employees at www.StephenZelcer.com.