Tax Treatment of FEHBP Premiums
Although most federal employees who participate in the FEHBP have their premiums withheld from pay prior to being taxed, under Internal Revenue rules, this pre-tax “premium conversion” benefit usually isn’t available to federal retirees.
Retired public safety officers cannot have their FEHBP premiums withheld from their pension on a pre-tax basis either, however, since January 1, 2007, they are allowed to exclude up to $3000 from their federal retirement income each year when they file their federal taxes IF they are having their FEHBP premiums withheld from their monthly retirement payments from OPM.
So unless you will be a retired public safety officer, the cost of your FEHBP coverage will not reduce your taxable income in retirement, but it’s still good coverage compared to most independent plans because the government continues to pick up its share of the premiums.
Requirements to Continue FEHBP Coverage Into Retirement
A federal employee is allowed to continue his/her FEHBP coverage into retirement as long as the following two requirements are met:
- The employee retires under the “immediate annuity” provisions (one that may begin within 30 days after separation), AND
- The employee was covered under the FEHBP for the 5 years of federal service immediately preceding the date of separation for the immediate annuity (or since their first opportunity to enroll, if less than 5 years).
Immediate Annuity
The first requirement refers to an employee who is immediately eligible to begin receiving his/her pension as soon as he/she leaves federal service. There are various retirement options under the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS) that fall under the “immediate annuity” provisions. When some individuals leave federal service, if they have already reached both the age and service requirements for an immediate annuity, they stop receiving pay from their agency and they are immediately eligible to begin earning and receiving retirement pay from OPM.
This would also include a “Postponed” annuity under the FERS MRA+10 provision. Under this type of separation, if the employee is younger than age 62, they could have started collecting their pension under FERS immediately upon separation from federal service IF they have already reached their FERS minimum retirement age (MRA) and have at least 10 years of creditable service.
But under this situation, they may choose to postpone the application for retirement to avoid the permanent reduction for early age if they don’t have the 20 or 30 years of creditable service necessary for an immediate unreduced annuity. This person IS eligible to start earning their pension within 30 days of their separation, but they may choose to postpone the annuity to avoid the age reduction.
Under this situation, if the separating FERS employee chooses to postpone the MRA+10 retirement, the FEHBP coverage will be suspended. When this individual later applies for the Postponed annuity from OPM, the FEHBP coverage will automatically be reinstated along with the pension. This person just needs to obtain some temporary health insurance coverage for the period beginning 31 days after the date of separation until the commencement date of the person’s Postponed annuity.
CSRS employees do not have Postponed annuity options, and FERS employees should not confuse Postponed retirement with Deferred retirement. Postponed annuities are only available under the FERS MRA+10 provisions (described above), while Deferred annuities are available under both CSRS and FERS.
Deferred annuities are for individuals who have at least 5 years of creditable federal civilian service under CSRS or FERS, but leave federal service before they are old enough to collect an immediate annuity. Deferred annuitants cannot collect their annuity until they reach the necessary age, which is dependent upon how many years of creditable federal service they have at the time of separation. Deferred annuitants are NOT eligible to have their FEHBP coverage reinstated when they apply for Deferred retirement.
Note: If you are a FERS employee and do not understand the difference between “Postponed” and “Deferred” retirement under the FERS law, or if you are CSRS or CSRS Offset and you are not sure when you will be eligible for an immediate retirement, then it is recommended that you speak with your agency benefits or retirement officer for more details. Your agency can review your service records and assist you with this.
The 5-year Rule
A lot of folks get confused with the second requirement regarding the 5-year coverage rule. In most cases, you must be covered under the FEHBP program for the LAST 5 years of federal service immediately preceding your separation for an immediate retirement (if you want the coverage in retirement). The exception to this rule states that if you enrolled during your first opportunity to enroll, you would not have to meet the 5-year test.
One example of many for this exception could be as follows: A person could have been a federal employee with FEHBP coverage for a few years at the beginning of his/her career. He/she might have left federal service to work in the private sector for many years before returning to federal service later. But when returning to federal service, it’s possible that he/she may have initially been placed under a temporary appointment that might not have been eligible for FEHBP coverage. While under the temporary appointment, he/she might not have been able to enroll (even if they wanted the coverage).
Later, the appointment might have been converted to a permanent position allowing FEHBP coverage. A couple of years after that, it’s possible that the employee may have enough creditable service and might be old enough to retire under the immediate retirement provisions.
In this situation, even though the employee might not have been covered under the FEHBP for the last 5 years of federal service immediately preceding his/her separation for retirement, as long as he/she enrolled under the FEHBP as soon as they were eligible to do so, they would not have to meet the 5-year test to continue his/her coverage into retirement.
