Civil Service 

Retirement 

System 

Federal Employees’ 

Group Life 

Insurance Program 

Federal Employees 

Health Benefits 

Program 

Federal Employees 

Retirement 

System 

Long Term 

Care Insurance 

Program 

United States 

Office of 

Personnel Management 

The Federal Government’s Human Resources Agency

Retirement and Insurance Service 

Benefits Administration Letter 

Number: 01-320 Date: June 29, 2001 

Subject: Clarification of BAL 01-318 -- Retroactive Adjustments for HB-PC Processing Errors

We have received several inquiries about Benefits Administration Letter (BAL) 01-318. In that 

BAL, we revised our policy by requiring retroactive adjustments to taxable income in the event of 

certain administrative errors involving Health Benefits Premium Conversion (HB-PC). This 

Letter clarifies one important aspect of the instructions presented in BAL 01-318 for reporting 

retroactive adjustments to the Internal Revenue Service. 

When Federal Employees Health Benefits Program (FEHB) premium deductions are incorrectly 

designated as “pre-tax” or “after-tax,” BAL 01-318 requires that Federal income tax (FIT) and 

FICA wages/withholdings be adjusted retroactively to the date that the appropriate HB-PC 

designation would have been effective. However, IRS regulations as described in Publication 15, 

preclude the adjustment of amounts reported as FIT withholdings in a prior calendar year in this 

circumstance. Thus, when it's discovered that FEHB premium deductions have been incorrectly 

designated in a prior calendar year, FIT withholdings may not be adjusted beyond the beginning of 

the current calendar year.

The revised illustration below reflects this proviso: 

Patricia Dickey had previously waived participation in HB-PC. She marries (a “qualifying life 

event”) and elects to participate in HB-PC. Although her election to participate in HB-PC 

should have been effective on November 18, 2001, her employing agency does not process it. 

As a consequence, Ms. Dickey remains a non-participant in HB-PC and her FEHB deductions 

are deducted “after-tax.” The error is discovered in March 2002. 

Ms. Dickey received taxable income of $50,000 in 2001. Since the error occurred, she had 

$900 in FEHB premiums deductions taken from her pay, $500 of which was deducted in 2001. 

 
Ms. Dickey’s tax year 2001 Form W-2 both “as reported” and as “should have been reported” 

would be as follows: 

W-2 As Reported As Should Have 

Been Reported 

Gross Pay 50,000 50,000 

Pre-tax FEHB Premium Deductions 0 500 

Wages, Tips, and Other 50,000 49,500 

FIT Withheld 10,000 9,900 

Social Security Wages 50,000 49,500 

Social Security Tax Withheld 3,100 3,069 

Medicare Wages 50,000 49,500 

Medicare Tax Withheld 725 718 

Ms. Dickey’s APO must adjust her 2002 year-to-date income subject to Federal income taxes and 

FIT withholdings as well as her FICA wages/withholdings retroactive to the first pay day of 2002. 

 In addition, the APO must file a Form W-2c, correcting her 2001 income subject to Federal 

income taxes, and her FICA wages/withholdings for 2001. The W-2c reporting for 2001 would 

be as follows: 

W-2c As previously 

reported 

Correct 

information 

Increase 

(Decrease) 

Wages, Tips, and Other 50,000 49,500 (500) 

FIT Withheld 10,000 10,000 0 

Social Security Wages 50,000 49,500 (500) 

Social Security Tax Withheld 3,100 3,069 (31) 

Medicare Wages 50,000 49,500 (500) 

Medicare Tax Withheld 725 718 (7) 

In summary, APOs must take the following actions when FEHB premium deductions have been 

incorrectly designated as “pre-tax” or “after-tax:” 

If the Error Occurred in the Current Tax Year: 

Adjust current year-to-date income subject to Federal income taxes and FIT wages/ 

withholdings as well as FICA wages/withholdings retroactively to the date the 

appropriate HB-PC designation should have been effective. 
If the Error Occurred in a Prior Tax Year: 

Adjust year-to-date income subject to Federal income taxes and FIT wages/ 

withholdings as well as FICA wages/withholdings retroactively to the first pay day of 

the current tax year. 

-and- 

Correct income subject to Federal income taxes and FICA wages/withholdings for (the) 

prior year(s).

If you have any questions regarding this information, we would prefer that you email us at 

finance@opm.gov, so that we have a record of our communication. You may also phone us on 

(202) 606-0606. 

Robert A. Yuran, Chief 

Financial Policy Staff