OPM.gov Home | Subject Index | Important Links | Contact Us | Help

U.S. Office of Personnel Management - Ensuring the Federal Government has an effective civilian workforce

Insurance Services Programs

Federal Employees Health Benefits Program

Taxes FAQ

How are my FEHB insurance premiums taxed without Premium Conversion?

You receive a salary and then your contribution to pay for FEHB coverage is withheld (post-tax).� You pay tax on the salary received -- the amount before the health insurance premium is withheld. Thus, you pay tax on a larger amount of income.

How much money will I save?

Based on information from the Department of the Treasury, the average Federal employee who participates in the FEHB Program will save $434 per year in Federal income, Social Security and Medicare taxes.� In most jurisdictions, state and local income taxes also will be reduced.

How do I figure out my savings?

The quickest way to determine the amount of money you will save yearly is simply to calculate (separately or combined) the tax rate multiplied by the total amount of health insurance premiums.� These examples show the savings for a typical employee in the 28% tax bracket:

Self-only

Self-and-Family

Yearly FEHB premium:

$700.00

$1,600.00

Federal income tax savings

$196.00

$448.00

FICA tax savings (7.65%)

$53.55

$122.40

Annual Savings

$249.55

$570.40

These examples do not include savings on state and local taxes.�

Are my state and local taxes reduced by premium conversion?

Yes, taxes in 49 states and most localities will be reduced; exceptions include the state of New Jersey and the Commonwealth of Puerto Rico. OPM monitors changes in state and local tax regulations, and provides guidance to your agency as needed. Regardless of where you live, FEHB premiums are not subject to Federal taxes.

FICA Taxes

If you are covered by FERS and participate in premium conversion, FEHB premium deductions will also be excluded from gross pay before Old-Age, Survivors, and Disability Insurance (OASDI) and Medicare taxes are applied.� Employer FICA contributions will also be reduced in concert with the decrease in employee withholdings.

Are my taxes avoided or simply deferred?� Won't I owe the IRS money come next April?

Taxes are avoided, not deferred.� Premium conversion eliminates the taxes you pay on the part of your salary that pays your FEHB premiums.� Since your taxable income is lower with premium conversion, the amount you owe in taxes is reduced.� You won't owe the IRS money in April because of premium conversion.

What impact does premium conversion have on my ability to deduct my FEHB premiums as a medical deduction on my income tax return?

If you participate in premium conversion, you are not able to deduct FEHB premiums as a medical deduction on your income tax return.� That is because you are no longer paying the premium--it's being paid by your employing agency.

How will premium conversion affect the amount I receive under the Earned Income Tax Credit (EITC)?

Premium conversion does not affect your EITC.� The EITC is based on Total Earned Income (TEI), which includes both taxable and nontaxable earned income.� Taxable earned income includes money earned as wages, salaries and tips while nontaxable earned income includes salary deferrals and reductions.� Premium conversion falls under the category of nontaxable earned income because salary is reduced by an amount equal to a health insurance premium payment and a health insurance premium is then paid with these pre-tax dollars.� The EITC amount is unaffected by premium conversion because premium conversion shifts health insurance premium payments from taxable to nontaxable earned income, both of which are included in the TEI when calculating the EITC.�

U.S. Office of Personnel Management 1900 E Street NW, Washington, DC 20415 | (202) 606-1800 | TTY (202) 606-2532

Are my state and local taxes reduced by premium conversion?	Yes, taxes in 49 states and most localities will be reduced; exceptions include the state of New Jersey and the Commonwealth of Puerto Rico. OPM monitors changes in state and local tax regulations, and provides guidance to your agency as needed. Regardless of where you live, FEHB premiums are not subject to Federal taxes.
FICA Taxes	If you are covered by FERS and participate in premium conversion, FEHB premium deductions will also be excluded from gross pay before Old-Age, Survivors, and Disability Insurance (OASDI) and Medicare taxes are applied.� Employer FICA contributions will also be reduced in concert with the decrease in employee withholdings.
Are my taxes avoided or simply deferred?� Won't I owe the IRS money come next April?	Taxes are avoided, not deferred.� Premium conversion eliminates the taxes you pay on the part of your salary that pays your FEHB premiums.� Since your taxable income is lower with premium conversion, the amount you owe in taxes is reduced.� You won't owe the IRS money in April because of premium conversion.
What impact does premium conversion have on my ability to deduct my FEHB premiums as a medical deduction on my income tax return?	If you participate in premium conversion, you are not able to deduct FEHB premiums as a medical deduction on your income tax return.� That is because you are no longer paying the premium--it's being paid by your employing agency.
How will premium conversion affect the amount I receive under the Earned Income Tax Credit (EITC)?	Premium conversion does not affect your EITC.� The EITC is based on Total Earned Income (TEI), which includes both taxable and nontaxable earned income.� Taxable earned income includes money earned as wages, salaries and tips while nontaxable earned income includes salary deferrals and reductions.� Premium conversion falls under the category of nontaxable earned income because salary is reduced by an amount equal to a health insurance premium payment and a health insurance premium is then paid with these pre-tax dollars.� The EITC amount is unaffected by premium conversion because premium conversion shifts health insurance premium payments from taxable to nontaxable earned income, both of which are included in the TEI when calculating the EITC.�