FEHB & Medicare Explained
FEHB & Medicare
Explained
Let’s take a high level look at how FEHB and Medicare interact
so you can decide if enrolling in Medicare Part B is the right decision for
your situation.
What is Medicare?
Medicare is federal health insurance. Original Medicare consisted of Part A and Part
B. It was created in 1965 to cover
people age 65 and older, regardless of income or medical history. In 1972, eligibility was expanded to include
people under 65 receiving social security disability benefits for 24 months and
those with end stage renal disease, which is also called kidney disease. Medicare Part C was added in 1997 and Part D
went into effect in 2006.
Medicare Part A
Part A is known as hospital Insurance. Nursing care, prescription drugs, room and
board etc., at the hospital is covered in Part A. It also covers skilled nursing facility care,
nursing home care, hospice, and home health services.
It is premium free for most people since funding comes from
payroll taxes. You or your spouse must
have worked 10 years and paid Medicare taxes.
Federal employees before January of 1983 receive credit for Medicare
taxes. Employees pay 1.45% of their income
while working and that is matched by the employer. Single individuals that make over $200,000
and married couples making over $250,000 pay an additional 0.9% above that
threshold.
Why would someone sign up for Medicare Part A?
Many are surprised that there are some services not covered by
FEHB. Rehab care at hospital for example
from a fall or a knee/hip replacement surgery rehab after a hospital stay are
not covered by FEHB, but is covered under Part A; it pays for skilled nursing
facility care at 100% for the first 20 days.
FEHB supplements only kick in and pay for Medicare copayments for days
21-100. In this case, failure to enroll
in Part A can amount to tens of thousands of dollars in charges.
If you combine Part A and FEHB, deductibles are paid for
during hospital stays. This results in
virtually no out of pocket expenses.
Why would someone not enroll in Medicare Part A?
If you participate in a Health Savings Account (HSA), your ability to
contribute pre-tax dollars goes away.
This is because you are not allowed to have any other insurance besides
a high deductible health plan and take part in an HSA. You would have to weigh the economics of
continuing the tax savings of an HSA compared to the potential hospital
bills. You could continue participating
in a Flexible Spending Account if you are still working.
Most Federal Employees sign up for Part A since it is a
benefit they have earned during their careers. Enrollment is as soon as three months prior to
your birthday month when you turn 65.
However, you can enroll at any time after that with no penalty.
Medicare Part B
Medicare Part B is also known as doctor’s insurance. It covers costs for doctors’ visits, physical
therapy outside the hospital, durable medical equipment, vaccinations etc. It is paid for by a premium billed to people
that enroll in Part B, and the government covers the remaining portion through
general revenues. The premium is charged
on a sliding scale based on your income.
Medicare Part B
Premiums Based on Income
If your yearly income in 2015 (calculated in 2016, for payment in
2017) was
|
You pay each month (in 2017)
|
||
File Individual Tax Return
|
File Joint Tax Return
|
File Married & Separate Tax Return
|
|
$85,000 or less
|
$170,000 or less
|
$85,000 or less
|
$134
|
above $85,000 up to $107,000
|
above $170,000 up to $214,000
|
Not applicable
|
$187.50
|
above $107,000 up to $160,000
|
above $214,000 up to $320,000
|
Not applicable
|
$267.90
|
above $160,000 up to $214,000
|
above $320,000 up to $428,000
|
above $85,000 and up to $129,000
|
$348.30
|
above $214,000
|
above $428,000
|
above $129,000
|
$428.60
|
The initial enrollment period is three months prior to your
birthday month and up to three months after your birthday month if you are
retired. If you are still working, you
get 8 months to enroll after you retire without penalty.
Why would someone sign up for Medicare Part B?
·
More services and no or few
copayments/deductibles. Medicare Part B
pays 100% for someone to go to your home and provide home health care. Skilled
services like occupational therapy, speech language pathologist etc., are
covered. FEHB does not pay for
this. FEHB is secondary insurance and
will help only with payments if Part B is the primary. Home health care is very limited under
FEHB. FEHB will provide prescription
drug benefits if you have Medicare Plans A and B.
·
You are locking in maximum out of pocket
expenses with the monthly premiums for Medicare Part B. At $134 per month, or about $1600 per year. This is insurance, so if you enroll and use
it, then it is worth its weight in gold.
If you don’t, then it is just wasted money. You are hedging your bets with insurance.
·
You want to avoid the penalties of declining to
enroll in Part B as soon as you retire or turn 65, whichever comes later. The penalties are steep and they are
permanent. The penalty is 10 per year when you decline to enroll. So if you declined to enroll in 2016, you
would be paying 10% above your rate in 2017.
Instead of $134, you would pay $147 per month. Or about a $160 penalty for the year. This 10% penalty follows you every year.
·
Political uncertainty. It is unknown how long FEHB plans will remain
a strong health insurance. Federal
employees may find no choice but to migrate to Medicare Plan B and they may be
asked to pay the penalty if they declined enrollment when first eligible.
·
Medicare is portable across the country. FEHB may not be, depending on your plan.
Why would someone not sign up for Medicare Part B?
·
If you are still working, it does not make sense
to sign up for Part B. Medicare in this
case will be a secondary payer and won’t offer much in payback for the $1600 in
yearly premiums. You can sign up when
you retire, penalty free.
·
You figure you are healthy and want to wait
until you are showing signs of being chronically ill so you wait as long as
possible in order to save the $1600 a year.
You are willing to pay the 10% yearly penalty once you sign up. Be aware that late enrollment is open January
1 through March 31 every year but the insurance won’t kick in until July 1st. So you will have to be able to predict when
you will be ill.
·
FEHB has a maximum out of pocket
protection. You don’t want to spend a
guaranteed $1600 (in 2017) in order to possibly save $3900 (if maximum FEHB out
of pocket is $5500). One thing to keep
in mind is that FEHB’s maximum out of pocket protection only applies to
preferred providers and does not include prescription drugs.
·
An individual’s income is higher than $85,000
($170,000 as a couple) so the Part B premium is more than the standard $134 per
month premium. The cost, risk and
benefit of enrolling or not enrolling needs to be looked at.
Medicare Part C & D
Medicare Part C is also known as Medicare Advantage. It is very similar to FEHB in that it is
offered by private companies, many of which also have FEHB plans. They manage your Medicare benefits for
you. Some charge an additional fee above
what Part B costs but some do not. You
do get some extra services covered like drug coverage, although there may
restrictions on getting care (referrals required to see specialists for
example). There is a maximum out of
pocket cost you would be responsible for which is appealing. A negative is some plans may not cover you
nationwide like Medicare does. Most
federal retirees that have FEHB do not elect Part C coverage.
Medicare Part D is prescription coverage. Most federal retirees that have FEHB do not
elect Part D coverage. FEHB prescription
coverage is usually at least equal to Medicare Part D.
Medicare Enrollment
Medicare enrollment is through the Social
Security Administration. You can also go to Medicare.gov
to research options and details on plans.
If you are working past your 65th birthday, fill
out form CMS-L564 (available online) to provide employment information so you
are eligible for
You can notify the Social Security Administration of changes
to your income that were not reflected in your IRS tax returns. This is to your benefit so that you are
charged the appropriate Medicare Part B premium. Please keep in mind that proceeds from the sale
of houses will impact your income as will TSP distributions.
The opinions voiced in
this article are for general information only and are not intended to provide
specific advice or recommendations for any individual. Carefully consider your
investment objectives, risk factors before investing. Investing involves risk,
including the possible loss of principal. Diversification and asset allocation
may not protect against market risk. Nothing in this article is intended as
legal or tax advice. Please consult with your independent legal or tax advisor
to seek advice based on your particular circumstances. For a list of states in
which I am registered to do business, you can visit www.adviserinfo.sec.gov and search for my name.
Alexis Hongamen founded FederalRetirementAdvice.com to
exclusively help civil servants with their financial planning & investment
needs. As a 25 year federal employee & a Chartered Retirement Planning
Counselor, he writes about financial matters of concern to government employees
& retirees. Contact: alexis@federalretirementadvice.com
or 407-900-1653