During the Federal Employees Health Benefits (FEHB) program open season, many federal employees take a fresh look at their health plan options — and for good reason.
This is also when questions about retirement tend to surface, especially around whether FEHB premiums change once you leave federal service.
Does Your FEHB Premium Change in Retirement?
You may have heard conflicting answers: some say your premium stays exactly the same, while others insist it goes up. The surprising truth? Both are correct.
To clear up the confusion, it’s important to understand how FEHB Premium Conversion works and why the shift from pre-tax to after-tax premiums creates a very real difference in what you pay—without the actual plan premium changing at all.
How FEHB Premium Conversion Works
While employed, FEHB Premium Conversion offers a significant tax advantage. Your FEHB premiums, such as those paid to Blue Cross Blue Shield, are deducted with pre-tax dollars. This means the premium amount is not counted as taxable income, so you do not owe taxes on the money allocated to your FEHB carrier.
However, once you are in retirement, you must pay your FEHB premiums with after-tax dollars. Although the premium may still be automatically deducted from your retirement check, the amount is now considered taxable income and must be reported as such on your tax return.
Impact of FEHB Premium Conversion in Retirement Working vs. Retired Tax Burden Example
Consider an employee in the 24% tax bracket enrolled in the Blue Cross Blue Shield High Self Plus One plan, with an annual premium of $8,758 (based on the 2024 rate).
While Employed:
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The $8,758 premium is not reported as income, thanks to tax-sheltering.
This tax shelter saves the employee $2,766 per year in taxes.
In Retirement:
The tax shelter ceases to exist.
The $8,758 used for the FEHB premium must now be claimed as taxable income.
To have $8,758 after paying the 24% tax, the required gross income increases to $11,524.
The result is a $2,766 increase in the annual tax liability, as the premium amount is now taxed.
Key Takeaway: The premium amount itself remains the same, but the loss of the tax-sheltering benefit while employed increases your tax burden in retirement.
Federal Couples
Married federal employees have a distinct advantage in extending the tax benefits of their FEHB coverage by enrolling under the spouse who plans to retire last. This strategy allows both individuals to avoid paying taxes on the premiums for a longer period if one spouse chooses to work for additional years.
You can initially transfer coverage to the plan of the spouse retiring later. Once both of you are retired, you have the option to switch back to two separate Self-Only FEHB plans if you prefer. However, for a period, this approach allows you to postpone the tax implications while one spouse remains employed.
It is clear why federal employees often find the topic of FEHB Premium Conversion in retirement confusing.
As open season encourages you to re-evaluate your FEHB coverage, it’s also the perfect time to understand how your costs will change once you retire. While your FEHB premium amount itself remains consistent, the loss of Premium Conversion means your tax burden increases, often catching retirees off guard.
By understanding this distinction now — and planning for it — you’ll be better prepared to manage your retirement income and avoid surprises down the road. Armed with this knowledge, you can make clearer decisions today and ensure you’re truly ready for the transition into retirement.
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