By: Bob Braunstein, Federal Benefits Specialist
Published: February, 2022
If you are a retired Federal employee with FEHB coverage, when you turn 65 you are not required to enroll in Medicare – but enrollment for most will be cost effective and worth it. When you enroll in Medicare Part A and Part B (Part B has an extra individual premium), Medicare becomes your primary payer for hospital and outpatient services. When FEHB is then the secondary payer, the deductibles, copays, and coinsurance you have been paying will disappear. Additionally, many of the newer FEHB plans reimburse for a good portion of your Part B premiums – in essence, you will have an “FEHB/Medicare Wrap-Around” arrangement with regular recurring premiums. Your monthly total premiums for FEHB and Medicare will often be equivalent to or less than what you are paying for FEHB coverage alone, but with no further out-of-pocket costs for your care.
While this arrangement will be optimal for Federal retirees who pay the standard Medicare B premium ($170.10 person in 2022), it may not be for those with high incomes. Higher incomes can elevate the cost of Part B to as much as $578.30 per month due to a feature known as “Income-Related-Monthly-Adjusted-Amounts” or IRMAA. To better understand this important point, let’s consider the following two scenarios:
John and Mary are married, retired, and turning 65 in 2022. Up until now, John and Mary have had Blue Cross Blue Shield (BCBS) Standard coverage at $627.49 per month. In addition to this premium, they average an additional $3,000 per year in cost-sharing (copays, deductibles, and coinsurance). When they enroll in Medicare, they incur an additional premium cost of $340.20 ($170.10 per month per person). They change their BCBS plan to “Basic” coverage which is over $200 per month less expensive than Standard coverage. Basic coverage also reimburses them $1,600 per year ($800 per person) for the additional cost of part B giving them a resulting total monthly cost for BCBS and Medicare of $631.80 – only $4 more than what they were paying for BCBS Standard alone. And their new FEHB/Medicare Wrap-Around arrangement eliminates their cost-sharing, saving them an average of $3,000 per year.
Fred is a single retired Federal employee with FEHB and turning 65 in 2022. Fred’s 2020 $173,000 modified adjusted gross income subjects him to an IRMAA on top of his Part B premium raising it to $544.30 per month. (MAGI includes all income you take in before taxes, tax credits, and other deductions.) Despite changing his self-only BCBS Standard coverage to Basic to save $100 per month on that premium and gaining a reimbursement of $800 per year for the cost of Part B, his premium expense for FEHB and Medicare will be $728, which is $452 more than he currently pays for FEHB Standard alone. This adds $5,400 a year to his current monthly outlay for health insurance. Because he is healthy, he has been paying less than $500 in cost-sharing, so he reasons that paying $5,400 in additional premiums to save that small amount is not worth it. He, therefore, decides not to enroll in Part B.
If you are concerned that a decision not to enroll or to delay Part B enrollment increases the risk for higher out-of-pocket costs, remember that FEHB plans have annual catastrophic maximums. Depending on your plan, these maximums usually cap out-of-pocket costs at $6,500 for individuals and $13,000 for married couples. If you are also concerned about the penalty for late Part B enrollment – a 10% permanent monthly amount for every 12 months that pass from an on-time enrollment – a high IRMAA could make it worth the risk. For example, look at a possible outcome for Fred (from Scenario 2) if he decides to delay his enrollment in Part B for 5 years:
- Due to lower 2025 MAGI, he enrolls in Part B in 2027.
- The lower Part B premium offsets the 50% penalty making his monthly cost lower than it would have been in 2022.
- He then changes his BCBS Standard to Basic to lower his FEHB premium cost.
- He further lowers his Part B cost with the $800 BCBS Basic annual reimbursement for this coverage.
- He saves more on cost-sharing expenses in 2027 because of increased provider visits.
- He banks the $5,400 a year by not paying Part B from 2022 through 2026 saving $27,000.
While Fred’s positive outcome is built on some critical assumptions, those facing high IRMAA often save money by delaying enrollment in Part B. Conversely, retirees who will pay the standard Part B premium usually save money by enrolling in Part B on time. Whatever your financial situation, it is important to remember:
- Enrollment in Medicare is a choice (unless you are military-retired with Tricare).
- Medicare A is free (so enroll in this coverage when you turn 65).
- Without Medicare, FEHB cost-sharing is limited to an annual catastrophic maximum.
- Premiums for Part B will go down when your MAGI is less, and vice versa.
- The savings resulting from delaying Part B will usually outweigh the cost of the penalty.
Bob Braunstein is a retired Federal employee who was last employed as a Senior Human Resources Consultant with the Office of the Comptroller of the Currency (OCC) at the Department of the Treasury. During his Federal career, he served in a full range of HR positions spanning recruitment, staffing, employee relations, retirement and benefits, and position classification/management disciplines. He is a retirement and benefits presenter for NITP.
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