Buyouts and Lifetime Health Insurance

Over the next several years,---no matter who's in the White House---tens of thousands of federal workers will get buyout offers.

Buyouts (VSIPs) are important to two groups of feds: Those who will walk away with $25,000 and those who won't. The latter will be left to do the work and, maybe, get a promotion. Buyouts will be used for two different reasons:

Agencies that will grow or change because of new or expanded missions will use buyouts to restructure and correct "skills imbalances" as in dumping people whose skills---language, IT, whatever---are considered outdated. They include places like Defense, the IRS, Homeland Security, CIA, NSA, DIA, etc.

Downsizing agencies will use buyouts the old-fashioned (1990s) way. They will pay people to take regular or early retirement. During the Clinton administration roughly 300,000 federal jobs were eliminated (many going to contractors) either via buyouts (nearly 200,000 people were paid a buyout to depart), reduced hiring and something like 30,000 layoffs. Those buyouts were first designed to get rid of blue collar workers, at military bases and naval shipyards and they were expanded to include thousands of white collar, mid-level management types, mainly at Defense, and people in so-called "overhead" jobs such as HR functions which could be consolidated and/or farmed out. One of the roadblocks getting people to take either a VSIP or an early-out (VERA) or both, was the 5-year health insurance rule.

The 5-year rule says, in effect, that a fed must have been enrolled in one of the Federal Employee Health Benefits Program (FEHBP) for the five years immediately prior to retiring. Thousands of feds piggyback on a private sector spouse's health insurance plan for most of their careers. Then when they approach retirement they join the FEHBP so they can continue to have lifetime health coverage at group rates.

To deal with the 5-year rule as it impacts VSIPs and VERAs, OPM setup procedures whereby it COULD (not guaranteed) offer waivers of the 5-year rule in certain situations. Those situations included an OPM-approved VSIP or VERA or in cases where employees took a discontinued service retirement because they were RIFfed or their job was being abolished.

Earlier this month OPM updated its waiver policy, in Benefits Administration Letter 04-208, dated September 8.

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A major reason for the update is that when the next round of buyouts gets rolling, they are likely to start in October (the beginning of the new fiscal year) and, in some agencies, run through February or March. It's most cost-effective, for federal agencies, to offer buyouts early in the fiscal year. That way for a maximum payment of $25,000 they can get an expensive employee off the payroll.

There are several buyout formulas in play. Some permit the employee taking the buyout to return to government service and not be forced to repay the buyout. Others permit agencies to hire a retiree (with specially needed skills) and allow that individual to keep both his or her federal salary and federal annuity. One authority exempts the agency from the expensive requirement that it contribute the equivalent of a portion of the employees salary to the Civil Service Retirement fund if that employee is taking a buyout.