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If the union agrees to adopt our plan, premium conversion may apply to Federal employees on LWOP to work for a union.
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The Judiciary Branch, U.S. Postal Service, and some smaller Executive Branch agencies with independent compensation-setting authority, have already implemented their own FEHB premium conversion plans; the employees of these entities will not participate in our premium conversion plan. 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.
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There are a number of factors for you to consider if you are employed part-time. Although you will not be eligible for the full government contribution, your entire employee contribution will be pre-tax if you participate in premium conversion. That larger reduction in taxable income might offset the lower government contribution. If you are a part-time reemployed annuitant, we suggest that you consult your agency or a qualified tax advisor to review your individual situation.
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Pay-As-You-Go
Under the Pay-As-You-Go option, you pay your share of the FEHB premium directly to your employing agency while on LWOP. These payments will generally be made with after-tax monies, since there is no pay from which to make deductions.
Catch-Up
Most employees who have a period of LWOP choose to pay their FEHB premiums via the Catch-up option. Under this option, the agency remits your share of the FEHB premium to OPM while you are on LWOP. You incur an obligation to your employing agency and are required to repay it upon your return to pay status. The repayment of the amount owed will be treated on a pre-tax basis, if it's deducted from pay and you participate in premium conversion at the time the deduction is made. If you choose to repay the amount owed to your agency directly out-of-pocket your taxable income is not reduced.
Prepay
Your agency may (but is not required to) offer you the option to prepay your FEHB premium from salary before you go on a period of LWOP. The amount of FEHB premiums you prepay in advance may either be deducted from your pay or paid directly "out-of-pocket" to your agency. Payments made "out-of-pocket" do not reduce taxable income. The amount of FEHB premiums that you prepay will be treated on a pre-tax basis, if it is deducted from your pay and you participate in premium conversion. IRS rules limit the amount you may prepay on a pre-tax basis. If your period of LWOP will span two tax years, the amount that you may prepay on a pre-tax basis may not exceed the amount of FEHB premiums due for the remainder of the current tax year. If you wish to prepay the amounts due for the subsequent tax year as well, the deductions must be made after-tax. You may use the "Pay-As-You-Go" or Catch-up options for amounts due in the subsequent tax year.
Example
Sam A. participates in premium conversion and had $100 per month in FEHB premiums deducted from his pay. He will go on LWOP for three months beginning on October 31, 2002 and opts to continue his FEHB coverage. Mr. A. uses the pre-pay option to pay from his salary the $300 in FEHB premium payments that will be due while he is on LWOP. Mr. A. will receive pre-tax treatment for only $200 of his FEHB premium prepayment- the amount he will owe for the months of November and December 2002. The remaining $100 prepaid – the amount due for January 2003 – must be given after-tax treatment.
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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 the Federal Employees Retirement System (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.
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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.
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A qualifying life event (QLE) is a term defined by OPM to describe events deemed acceptable by the IRS that may allow participants in cafeteria plans (including premium conversion) to change their participation election for premium conversion outside of an open season.
With two exceptions, the rules for changing FEHB enrollment outside of Open Season do not change. Most of the time, people make changes to their FEHB enrollment on account of and consistent with a qualifying life event. The opportunities for you to enroll or change enrollment described in
5 CFR Part 890, and described in the
FEHB Employee Health Benefits Election Form (SF 2809) will continue to be allowed under premium conversion except:
- you may not cancel your enrollment at any time
- you may not change from Self and Family to Self Only at any time.
You will still be allowed to make these changes to your enrollment if the change is on account of and consistent with a qualifying life event.
The IRS has additional events that will allow you to change your participation (election) in premium conversion. Read on for more information.
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Examples
Susan L. has $100 per pay period deducted from her salary for her contribution towards FEHB coverage.
Ms. L's employing agency mistakenly deducts $150 during the last pay period prior to the effective date of her participation in premium conversion. To correct the error, the agency deducts $50 for FEHB from Ms. Lee's pay in the following pay period, during which she has begun participating in premium conversion. Except for agency error, $100 would have been deducted from her pay. However, only $50 is treated on a pre-tax basis.
Ms. L's employing agency mistakenly makes no FEHB deduction during the last pay period prior to the effective date of her participation in premium conversion. To correct the error, the agency deducts $200 from Ms. L's pay in the following pay period, during which she has begun participating in premium conversion. Since the deduction for FEHB coverage is taken after she begins participation in premum conversion, $200 is afforded pre-tax treatment.
Ms. L's employing agency mistakenly does not process her participation in premium conversion. As a consequence, Ms. L's $100 FEHB deduction is not afforded pre-tax treatment. To correct the error, the agency changes Ms. L's premium conversion status to "participant" in the following pay period. If not for the error, Ms. L. would have had $200 deducted from her pay on a pre-tax basis. However, only $100 is eligible for pre-tax treatment.
As you can see, under these rules an error correction may result in a greater or lower tax benefit than would otherwise have occurred.
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You should obtain, complete and return a waiver/election form to your employing office. You may waive participation in premium conversion (or elect to participate, if you previously waived) during the annual FEHB Open Season. Also, you may have the opportunity to waive participation in premium conversion if you've experienced a
Qualifying life event (QLE). Refer to the QLE section for more information.
FEHB Open Season
During the FEHB Open Season, you will have an opportunity to elect or waive your participation in premium conversion. An Open Season election to participate or waive participation in premium conversion must be received by your employing agency no later than the last day of the Open Season to be considered timely filed. The effective date of your election will be the same as the effective date of an FEHB enrollment election: the first payroll period that begins
on or after January 1st. If your agency accepts and processes a late Open Season enrollment election, it must also accept a late election to participate or waive participation in premium conversion.
Because elections begin with pay periods, when you change participation in premium conversion (begin or waive participation) during the FEHB Open Season, there will likely be at least one payroll paid date in the subsequent calendar year in which your FEHB deductions reflect the previous election.
Example
Mark G. had previously waived participation in premium conversion. He opted to participate again in premium conversion during the November 2002 Open Season. Mr. G. is paid on a biweekly basis, with the following payroll periods:
Payroll
Begin Date
End Date
Pay Date
Pre-Tax/ After-tax
01
12/15/02
12/28/02
1/8/03
after-tax
02
12/29/02
1/11/03
1/22/03
after-tax
03
1/12/03
1/25/03
2/5/03
pre-tax
Mr. Marks' payroll office would treat his FEHB deductions on an after-tax basis through the end of payroll period 02.
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For a small number of individuals it may make sense to waive premium conversion. There are two items to consider in making a decision to waive participation and they are:
Flexibility
Under IRS rules, you may reduce coverage (cancel, or change from Self and Family to Self Only) only during an Open Season or at the time of a
qualifying life event.
Social Security
Paying your premiums with pre-tax money reduces your earnings reported to the Social Security Administration. When you begin to collect Social Security (normally this occurs at age 65), you may receive a
slightly lower Social Security benefit. The extent of the impact will vary depending upon the retirement system you participate in, your salary compared with the Social Security wage base ($87,000 in 2003) and the number of years until you retire.
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If the organization agrees to adopt our plan, premium conversion may apply to Federal employees on assignment to an international organization.
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Premium conversion may slightly reduce the Social Security benefit you will receive upon retirement. The extent of the impact depends upon 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.
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Only the amount of your FEHB contribution will be allotted back to your agency. If your FEHB contribution changes, the allotment will change.
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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.
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If you are enrolled in the FEHB Program but 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 adopt our plan and offer participation in premium conversion.� All non-Executive branch agencies were contacted by OPM with instructions on how to become part of the plan.
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The premiums for the FEHB plan you are currently enrolled in are in the brochure you will receive from your plan during the annual Federal Benefits Open Season. The
Guide to Federal Benefits is a comparison of the plans and their benefits and premiums. There are a variety of Guides targeted to specific groups of enrollees.
The average premium is recalculated every year.
Per FEHB law, the government will pay the lesser of: 75% of the carrier’s total premium, or 72% of the average premium. The enrollee is responsible for the difference between the government contribution and the total premium.
If the average premium increases, the maximum government contribution also increases.
The total premium is the same for all enrollees, but the Government contribution is based on your employment. Some agencies, such as the Postal Service, contribute additional money towards the total premium. As a result, the share you must pay will depend upon your employment status. All Guides are available
on this website or through your Human Resources Office.
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If you are employed in the Executive Branch of the Federal Government, are participating in the FEHB Program, and your pay is issued by an Executive Branch agency, you are eligible to have your FEHB premiums paid under the premium conversion plan.
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Your Social Security benefits are calculated on your taxable earnings, so any reduction in your taxable income will affect your Social Security calculations.
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The small reduction in Social Security benefits is greatly outweighed by the much larger tax savings. In each case we tested, the increase in take-home pay far exceeded the minor loss in monthly Social Security benefits.
Here is a simple formula you can use to estimate the difference in your Social Security benefit:
- Take the number of years you will participate in premium conversion (from now until your estimated retirement) and divide by 35.
- Multiply this by your current annual FEHB premium
- 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
You participate in FERS. We assume that you've had a full career of FICA contributions, with an ending salary (today) of $50,000 and projected retirement at age 66 in January 2016. Your estimated Social Security benefit equals $1,414 per month.
You begin participating in premium conversion and reduce your taxable income by $2,000, the amount of your FEHB premium. By changing your salary to $48,000, your 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.
For more specific information on how the Social Security benefit is calculated, refer to
www.ssa.gov.
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The Office of Personnel Management (OPM) did some calculations comparing the increase in take home pay to the loss of Social Security benefits at various income and Federal income tax levels. The results presented below show how many years of additional Social Security benefits it would take to make up for the take home pay you will lose by not participating in premium conversion. The calculations were simplified; they don't account for the fact that your take home pay will increase now, but you probably won't be receiving your Social Security benefits until many years from now.
The amount of your FEHB premium does not affect the calculations.
Salary
Income Tax Rate*
Years of Social Security Benefits To Recover Lost Pay
To $6,400
0%
p
15%
11
28%
17
$6,401 to $32,100
0%
10
15%
31
28%
49
$32,100+
0%
22
15%
66
28%
104
*Marginal Federal rate. If you don't know yours call your Payroll Office.
As you can see if you don't have to pay any Federal income tax, you lose the primary benefit of premium conversion.
But some individuals might still want to participate because their Social Security and Medicare taxes will be lower. You also can see that at very low earnings levels ($6,400 or less) the decision is less clear cut. OPM's statistics indicate there are less than 100 employees in this category.
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