What FEHB and FEGLI Cost Once You Retire

Federal health insurance is the benefit people most often name as the reason they stayed. It also produces the most common surprise in the first year of retirement — not because the premium changes, but because two other things do: how it is taxed, and whether you qualify to keep it at all.

The five-year rule decides whether you keep it

To carry FEHB into retirement, 5 U.S.C. § 8905(b) requires that you be enrolled — or covered as a family member — for the five years of service immediately before retirement, or for the whole period of service since your first opportunity to enroll if that is shorter. Retiring four years and eleven months in ends the coverage outright, and OPM has essentially no discretion about it.

Two consequences that catch people. First, the rule is about the years immediately before retirement, so a gap in enrollment inside that window matters even if you were enrolled for twenty years before it. Second — and this is the one that ruins plans — a deferred annuity loses FEHB permanently. Someone who separates before eligibility and claims an annuity later has no health insurance from the federal program, ever. A postponed MRA+10 annuity keeps it, because the retirement itself was immediate and only the commencing date was moved.

The premium does not rise. The cost does

As an employee, your share of the FEHB premium is taken through premium conversion — before tax, so it reduces your taxable income. Annuitants are not eligible for premium conversion. The same premium now comes out of after-tax money.

On a $520 monthly premium, at a 22% federal rate and a 5% state rate, that change is worth about $140 a month — roughly $1,685 a year — for identical coverage. It does not appear on any statement as an increase, because nothing increased. What disappeared was a deduction.

This is why a retirement budget built from the current premium runs short. The number to plan on is not the premium; it is the premium plus what the deduction was saving you.

What actually reaches your account

Put the pieces together on a real annuity: $3,500 a month, retiring at 62, with $38,000 of your own contributions in the plan, a 22% federal rate, 5% state, a $520 FEHB premium and $45 of FEGLI.

• Tax-free part under the IRS simplified method: $146.15 a month — $38,000 spread over 260 anticipated payments.
• Taxable part: $3,353.85, or 95.8% of the annuity.
• Federal and state withholding on the taxable part: $737.85 and $167.69.
• Premiums: $565.
• Reaching your account: $2,029.46 a month, 58% of the gross figure every other calculator shows you.

The tax-free part is small under FERS for a structural reason: you contributed 0.8% of salary, against 7% under CSRS, and the divisor is identical. “Part of your pension is tax free” is technically true and practically negligible — and because that part is a fixed dollar amount rather than a percentage, every cost-of-living adjustment is fully taxable and the taxable share climbs for the rest of your life.

FEGLI is the one that changes with age

Basic FEGLI coverage continues into retirement if you meet the same five-year test, and premiums keep being withheld. At retirement you elect how the Basic coverage reduces after 65: the 75% reduction makes the coverage free from 65 while shrinking the benefit to a quarter of its value, and the lesser reductions cost more and keep more.

Optional coverage is where the surprise lives. It is priced in five-year age bands, and the bands get steeply more expensive late — the coverage a 55-year-old barely notices can become one of the larger lines on a 70-year-old’s annuity statement. Anyone carrying Option B in quantity should price the next two bands before assuming they will keep it.

One more, for households

A surviving spouse keeps FEHB only while receiving a survivor annuity. Declining the survivor election, or electing an amount that later lapses, ends their health insurance along with the payment. For most families that is the larger half of the election decision, and it is rarely the half that gets discussed.

Sources

• 5 U.S.C. § 8905(b) — continuing FEHB as an annuitant, and the five-year enrollment requirement. Text of § 8905
• IRS Publication 721 — the simplified method worksheet, and the rule that the tax-free part is a fixed dollar amount. Publication 721
• OPM — FEHB premiums for annuitants, published each autumn for the following year. OPM premium tables
• OPM — FEGLI: the post-65 reduction elections and the age-banded Option B rates. FEGLI program information

The annuity figures are computed by lib/annuity-tax.js, which applies the simplified method month by month rather than as a percentage. Premium amounts are illustrative: plan rates change every year, which is why the calculator takes them as inputs rather than carrying a table that would go stale each January.

This guide is informational only. It is not financial, tax, or legal advice, and FedAnnuity is not affiliated with OPM or the U.S. government. Retirement rules turn on the specific facts of a career, and only your agency and OPM can give you a binding figure.

Last reviewed: August 2026 · Against 5 U.S.C. § 8905(b) and IRS Publication 721.