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Insurance Services Programs

FEHB Handbook

Cost of Insurance

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SHARED COST

Generally, if you are a Federal employee or annuitant, you share the cost of your health benefits coverage with the Government as your employer. Temporary employees enrolled under 5 U.S.C. 8906(a), former spouses enrolled under spouse equity provisions, and most persons covered under temporary continuation of coverage (TCC) do not receive a Government contribution towards the cost of their health benefits.

Government's Share

The Government's share of premiums paid is set by law. Amendments to the FEHB law under the Balanced Budget Act of 1997 (Public Law 105-33, approved August 5, 1997) authorized a new formula for calculating the Government contribution effective with the contract year that begins in January 1999. This formula is known as the "Fair Share" formula because it will maintain a consistent level of Government contributions, as a percentage of total program costs, regardless of which health plan enrollees elect.

For most employees and annuitants, the Government contribution equals the lesser of: (1) 72 percent of amounts OPM determines are the program-wide weighted average of premiums in effect each year, for self only and for self and family enrollments, respectively, or (2) 75 percent of the total premium for the particular plan an enrollee selects.

OPM must determine the FEHB program-wide weighted average of premiums no later than October 1 immediately preceding each FEHB contract year. The law directs OPM, first, to multiply each health plan premium for the upcoming year by the number of enrollees enrolled in that health plan as of the previous March 31 who received a Government contribution. OPM will then divide the total of premiums associated with self only enrollments and with self and family enrollments, respectively, by the corresponding total number of eligible individuals with each type of enrollment, to derive the weighted average of premiums.

The Government contribution for eligible employees is paid out of agency appropriations or other funds available for payment of salaries. OPM receives an annual appropriation to cover Government contributions for eligible annuitants.

Government Contribution for Part-Time Employees

If you are a part-time career employee, the Government contribution toward your health benefits is prorated in proportion to the percentage of full-time service you are regularly scheduled to perform.

Your Share

During each pay period in which your FEHB enrollment is in effect, you are responsible for paying all premiums in excess of the Government contribution, usually 25% of the total premium.

If your pay (after retirement, FICA tax, Medicare and Federal income tax deductions) will cover the full employee share of your health benefits premiums, the withholding is taken from your salary. Group life insurance withholdings follow health benefits withholdings in the order of precedence set forth in the Treasury Fiscal Manual.

PREMIUM CONVERSION

What is Premium Conversion?

Premium conversion is a tax benefit.  It allows you to allot a portion of your pay to your employer, who will in turn use that amount to pay your contribution for FEHB coverage.  This allotment is made on a pre-tax basis, which means that the money is not subject to Federal income, Medicare, or Social Security taxes, and in most cases, state and local taxes.  The allotment reduces your taxable income, so less tax is withheld, and your paycheck is larger.

Am I Eligible?

You are eligible to have your FEHB premiums paid under the premium conversion plan when:

  • you are an employee of the Executive Branch of the Federal Government;
  • your  pay is issued by an Executive Branch agency; and 
  • you participate in the FEHB Program.  

If you are enrolled in the FEHB Program and are employed outside the Executive Branch, or your pay is not issued by an agency of the Executive Branch, you may be eligible if your employer agrees to offer participation in the plan.

If you are an employee paying both your and the Government's share of the premiums, the entire amount deducted from your pay qualifies for premium conversion. 

Does Premium Conversion Apply Only to Employees?

Yes.  At the present time, annuitants and compensationers whose FEHB premiums are deducted from annuities and benefits are not eligible to participate in premium conversion. There are special rules for reemployed annuitants; see below.

Persons enrolled through Temporary Continuation of Coverage and Spouse Equity are not eligible for premium conversion.

Does Premium Conversion Apply to Reemployed Annuitants?

Yes, if you are reemployed in a position that conveys FEHB eligibility, you may participate in premium conversion.  See "Reemployed Annuitants" for more information.

How do I Enroll?

You are automatically enrolled in premium conversion starting with the first pay period that begins on or after October 1, 2000.

Once you participate in premium conversion, your participation continues automatically unless you elect not to participate.  Each year during FEHB Open Season you may decide whether or not to participate for the following year.

Can I Choose Not to Participate in Premium Conversion?

Yes, but you need to opt-out or waive participation in premium conversion. You should obtain, complete and return a waiver/election form to your employing office.  If your employing office receives that form before the beginning of the first pay period that begins on or after October 1, 2000, the waiver will be effective.

Who Should Not Participate?

Regardless of your marital status, and the number of dependents you have, if you:

  • pay no federal income tax, or
  • earn less than $6,400 per year

you should give serious consideration to waiving participation in premium conversion.

Can I Change My Premium Conversion Participation Status?

Yes, but your opportunities to do so are limited.  You may waive participation:

  • During Open Season.  The effective date of the change is the first day of the first pay period that begins in the following calendar year. 
  • When you make a change in FEHB enrollment that is on account of and consistent with a qualifying life event.
  • When you have a qualifying life event and the change is on account of and consistent with that event (even when you don't change your enrollment).  You have 60 days after the qualifying life event to file your change with your employing office.  The waiver is effective on the first day of the pay period following the date your employing office received your change request.

You may cancel your waiver and participate:

  • During Open Season.  The effective date of the change is the first day of the first pay period that begins in the following calendar year.
  • When you have a qualifying life event; the change in FEHB coverage is consistent with the qualifying life event; and you complete an election form to participate within 60 days from the qualifying life event.

Does Premium Conversion Affect My Other Federal Benefits?

No.  All Federal retirement, thrift savings and life insurance benefits are based on gross salary and are not affected by participation in premium conversion.

What's the Impact of Premium Conversion on my Social Security Benefits?

Premium conversion may slightly reduce the Social Security benefit you will receive upon retirement. The extent of the impact depends on several factors:

  • The retirement system that you participate in;
  • Whether your salary exceeds the social Security wage base; and
  • The number of years left until your retirement.

CSRS

If you are covered under CSRS, you are generally better off with premium conversion. Your tax savings are slightly less, since you don't pay social security taxes. However, a reduction in Social Security benefits is not an issue for you since Social Security is not a component of your Civil Service Retirement.

Even if you have Social Security coverage as a result of a non-Federal job, premium conversion would not change your Social Security benefit.

CSRS Offset

Under CSRS offset, your Social Security benefits would be slightly reduced, but your CSRS Offset benefits would be increased by almost the same amount. Participating in premium conversion is most likely a benefit to you.

FERS

Your Social Security benefits are calculated on your taxable earnings, so any reduction in your taxable income will affect your Social Security calculation

The small reduction in Social Security benefits is greatly outweighed by the much larger tax savings. Here is a simple formula you can use to estimate the difference in your Social Security benefit:

  1. Take the number of years you will participate in premium conversion (from now until your estimated retirement) and divide by 35.
  2. Multiply this by your current annual FEHB premium
  3. Multiply the result of Step 2 by the marginal SSA rate (15% for most Federal employees)

The result is the annual loss of Social Security benefits.

(# of Years of Premium Conversion /35) X Annual FEHB Premium X marginal SSA rate = Annual Loss

Example:

Antonio participates in FERS. He's had a full career of FICA contributions, with an ending salary (today) of $50,000 and projected retirement at age 66 in January 2016. His estimated Social Security benefit equals $1,414 per month.

He begins participating in premium conversion and reduces his taxable income by $2,000, the amount of his FEHB premium. By changing his salary to $48,000, his monthly Social Security benefit is now $1,403, an $11.00 per month difference in today's dollars.

15/35= .4286 X 2000 = 857 X .15 = 128/12 = 10.71 or 11

Compare that to the estimated $67 increase in take home pay per month.

MAKING WITHHOLDINGS AND CONTRIBUTIONS

General

Your employing office must make the appropriate health benefits premium withholdings and contributions beginning with the first pay period that your enrollment is effective. It must submit the full cost of your enrollment to OPM on a current basis for each pay period that your enrollment continues, even if you are paid for only part of the period (except in transfer and reinstatement cases) or you are in leave without pay status.

You should check your pay statement to verify that the health benefits premium withholding is correct and report any discrepancy to your employing office immediately. You are obligated to make the correct payment, regardless of any error in withholding made by your employing office. When too little or no money has been withheld from your pay for health benefits, you incur a debt due the U.S. Government for the proper withholdings for each pay period that your enrollment continues.

Terminated and Cancelled Enrollments

Generally, if your enrollment terminates (other than for entry into military service), the effective date is the last day of the pay period in which the terminating event occurred. If you cancel your enrollment, the effective date is the last day of the pay period in which your employing office receives your cancellation request. Withholdings and contributions for the full pay period are required.

If your coverage terminates because you are in leave without pay status or you have insufficient pay to make the withholding, and you do not elect other payment options, the effective date is the last day of the pay period that you paid your share of the premiums.

Your coverage continues at no cost for 31 days after your enrollment terminates for any reason except when you voluntarily cancel your enrollment or your plan is discontinued.

When You Transfer to a Different Payroll Office (Daily Proration Rule)

Effective March 1, 1997, the Daily Proration Rule applies when you transfer to a position serviced by a different payroll office at a time other than at the beginning of the pay period. Each payroll office (gaining and losing) is responsible for withholdings and contributions for the actual time you occupied a position each office services.

If you owe a debt for health benefits withholdings to your former employing office, the gaining office must make arrangements for withholding your indebtedness and forward the amount collected to your former employing office.

Daily Rate

A daily rate must be computed as follows:

Daily withholding and contribution rate = Biweekly withholding and contribution rate x 26 ÷ 364

Note: The denominator of 364 is always used, even during a leap year.

Active Employees

The formula for determining the amount of withholdings and contributions for which the losing and gaining payroll offices are responsible is:

Daily Rate x Days on Payroll

Example

During a pay period beginning August 4 and ending August 17, Henry transfers to a different agency, with his new appointment effective August 10. The biweekly employee share of his health benefits plan premium is $21.46 and the biweekly Government share is $61.51.

The daily withholding rate is $1.53 ($21.46 x 26 ÷ 364) and the daily contribution rate is $4.39 ($61.51 x 26 ÷ 364).

The losing agency is responsible for withholdings and contributions for 6 days (August 4 through 9), calculated as follows:

Withholdings: $1.53 daily rate x 6 days = $9.18

Contributions: $4.39 daily rate x 6 days = $26.34

The gaining agency is responsible for withholdings and contributions for 8 days (August 10 through 17), calculated as follows:

Withholdings: $1.53 daily rate x 8 days = $12.24

Contributions: $4.39 daily rate x 8 days = $35.12

When You Retire

When you retire, your employing office's responsibility for withholdings and contributions depends on when your annuity starts.

  • If your annuity starts after the end of your final pay period, your employing office will make withholdings and contributions for the entire final pay period.
  • If your annuity starts before the end of your final pay period, your employing office will make withholdings and contributions through the day before the starting date of your annuity, using the Daily Proration Rule.

(For information about determining when your annuity starts, see the CSRS/FERS Handbook for Personnel and Payroll Offices.)

Example

Mary Helen is retiring on May 31. The pay period begins on May 25 and ends on June 7. The biweekly employee share of her health benefits plan premium is $32.26 and the biweekly Government share is $61.51.

The daily withholding rate is $2.30 ($32.26 x 26 ÷ 364) and the daily contribution rate is $4.39 ($61.51 x 26 ÷ 364).

Her employing office will make withholdings and contributions for the period from May 25 through May 31 (7 days), calculated as follows:

Withholdings: $2.30 daily rate x 7 days = $16.10

Contributions: $4.39 daily rate x 7 days = $30.73

When You Die

The daily proration rule applies when you die and you have a survivor annuitant eligible to continue your enrollment. If there is no survivor annuity or if you had a Self Only enrollment, your employing office must make full withholdings and contributions for the pay period in which you die.

Upon Termination or Reinstatement for Military Service

The daily proration rule applies if your enrollment is terminated or reinstated because of entry into, or return from, military service. The effective date of the action is the date you entered into or returned from military service.

Retroactive Restoration

If you are retroactively restored to duty after an erroneous suspension or removal, you may either have your enrollment reinstated retroactively, or you may enroll in the plan and option of your choice, the same as a new employee. If you elect to have the enrollment reinstated retroactively, withholdings for the period of suspension or removal must be made, and your employing office must make contributions from the appropriate fund, as though the suspension or removal had not occurred.

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