Premium Conversion Option for Federal Health Benefits

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.

 

Eligibility

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.

Be aware that under current law, annuitants and compensationers whose FEHB premiums are deducted from annuities and benefits are not eligible to participate in premium conversion. In addition, those enrolled through Temporary Continuation of Coverage and Spouse Equity is not eligible for premium conversion.

Premium conversion generally does apply to reemployed annuitants. If you are reemployed in a position that conveys FEHB eligibility, you may participate in premium conversion.

 

Enrolling

You are automatically enrolled in premium conversion starting with the first pay period that begins on or after October 1, 2013. 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.

You can choose not to participate in premium conversion by opting-out or waiving participation. To do this, you need to 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, 2013, the waiver will be effective.

There are certain people who should not participate in premium conversion. 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.

 

Changing Premium Conversion Participation Status

You may change your premium conversion participation status, 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.

 

Be aware that premium conversion does not affect your other federal benefits. All Federal retirement, thrift savings and life insurance benefits are based on gross salary and are not affected by participation in premium conversion.

However, 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.

 

Premium Conversion and 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.

 

Premium Conversion and 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.

 

Premium Conversion and 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; and

3. Multiply the result of Step 2 by the marginal SSA rate (15% for most Federal employees).

 

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.

The result is the annual loss of Social Security benefits.

 

For more information about all healthcare options, download the 2013 Federal Health Benefits Handbook.

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