Civil Service Federal Employees Federal Employees Federal Employees

Retirement Group Life Health Benefits Retirement

System Insurance Program System

PRESIDENT EXTENDS HEALTH INSURANCE PREMIUM CONVERSION TO

ALL EXECUTIVE BRANCH EMPLOYEES

February 7, 2000

 Today, President Clinton announced that Federal employees

throughout the Executive Branch of the Government will for the

first time be able to take advantage of tax benefits, that most

employees in the country already enjoy. As a result, most

employees participating in the Federal Employees Health Benefits

Program will see an increase in their take-home pay and the

Federal Government will become more competitive as an

employer.

The President’s Action Achieves Two Objectives.

Equal treatment for Federal employees. Right now, the majority of private 

sector employees and State and local government employees are able to

 take advantage of tax code provision that increases their after-tax income.

 Employees of the United States Postal Service, the Federal Judiciary and a 

number of smaller Federal agencies already have this tax advantage, while

the majority of Federal employees are now excluded. The President’s action will

allow all employees of Executive Branch agencies to enjoy the same tax benefit.

Improving the Government’s ability to recruit and retain staff. Because most

Federal agencies have been unable to provide their employees with the same tax

benefit as the other employers in the labor market, the President’s action will

improve the Government’s competitive position as an employer. 

Guidance to Federal Employees and Agencies. The President has directed the Office of

Personnel Management to issue guidance promptly to ensure smooth implementation of

premium conversion across the Executive Branch. At this time, we expect

implementation can be completed by all agencies no later than October 1, 2000.

The Office of Personnel Management Will Continue to Pursue Improvements. The Office

of Personnel Management is working on a series if initiatives to improve Federal

compensation benefits. For example, as announced in the President’s Fiscal Year 2001

Budget, the Administration is seeking ways to strengthen the Federal Employees Health

Benefits Program, including enhanced dental benefits and other improvements in the

program.
 

Civil Service Federal Employees Federal Employees Federal Employees

Retirement Group Life Health Benefits Retirement

System Insurance Program System

HEALTH INSURANCE PREMIUM CONVERSION

QUESTIONS AND ANSWERS

Q. What is premium conversion and how does it work?

A. Premium conversion reduces an employee’s taxable income by the amount of his

or her insurance premium. As a result, the employee pays less tax.

Section 125 of the Internal Revenue Code allows an employer to provide a portion

of an employee’s salary in benefits rather than cash. Instead of being paid to the

employee as taxable income, this amount is used to purchase benefits for the

employee. The effect is that the employee’s taxable income is reduced. Under a

health insurance premium conversion arrangement, an employee’s taxable

income is reduced by the amount of health insurance premiums withheld from

pay. Because taxable income is reduced, the amount of tax the employee must

pay is reduced. The employee saves on Federal income tax, Social Security and

Medicare tax and, if applicable, State and local income taxes.

Q. How are health insurance premiums taxed now?

A. An employee receives salary and then has a withholding from salary to pay the

premiums for health insurance. The employee must pay tax on the salary

received, that is, the amount received before the health insurance premium is

withheld. The employee pays tax on a larger amount of income than he or she

receives as take-home pay.

Q. How much does an employee save with premium conversion?

A. To determine the amount saved, an employee must determine his or her highest

combined tax rate and the total amount of health insurance premiums. If for

example, an employee’s combined rate for Federal and local income taxes, Social

Security tax and Medicare tax is 35%, and if the employee’s annual health

insurance premiums total $1,400, the employee’s annual reduction in taxes would

be $490 (1,400x.35=490).

Q. When will premium conversion begin?

A. The Office of Personnel Management expects that the implementation of premium

conversion can be completed not later than October 1, 2000.
 

Civil Service Federal Employees Federal Employees Federal Employees

Retirement Group Life Health Benefits Retirement

System Insurance Program System

Q. Will there be an open season to sign up for premium conversion?

A. No. Participation in premium conversion will be automatic. Employees willhave no

forms to fill out, unless they waive participation.

Q. Why would an employee waive premium conversion?

A. In the vast majority of cases, employees will want to participate in premium

conversion. In a limited number of circumstances, however, it may be to an

employee’s advantage to waive it. The Internal Revenue Code imposes certain

annual limitations that may affect some employees who expect to change plans

during a calendar year. Also, because premium conversion reduces the amount

of taxable income, it may also slightly reduce the base on which Social Security

benefits are calculated. The Office of Personnel Management’s guidance will

include a full explanation that will help employees decide whether to participate

in premium conversion.

Q. What about employees who already have premium conversion?

A. Employees of the United States Postal Service, the Federal Judiciary, the

Comptroller of the Currency, the Federal Deposit Insurance Corporation, the

Office of Thrift Supervision, and the Federal Reserve System already have health

insurance premium conversion. They are not affected by the President’s action to

extend premium conversion to other agencies.

Q. Will the Government still pay the same share of my premium?

A. Yes. The Government will still pay the same share of premiums as provided in the

Federal Employees Health Benefits Act. The premium conversion plan only

affects the portion of premiums now paid by employees.

Q. Is this a permanent benefit?

A. Yes, but each year employees may decide whether they want to participate for the

following year.

Q. Is the plan “Family Friendly?”

A. Absolutely. The plan will make health premiums more affordable and will increase

employees’ take-home pay.

Q. Is this benefit comparable to what the private sector offers to its employees?

A. Yes, most large private sector employers, as well as most State and local

governments, offer their employees premium conversion plans.

Q. Will this out me in a different grade or step?

A. No. Participating in the premium conversion plan will not affect your grade and

step. It will only reduce the amount of tax you pay.
 

Civil Service Federal Employees Federal Employees Federal Employees

Retirement Group Life Health Benefits Retirement

System Insurance Program System

Q. Was there a change in tax policy that permitted this recent development?

A. No. Section 125 of the Internal Revenue Code already permitted employers to

offer premium conversion plans.

Q. Will this pre-tax benefit also apply to retirees, survivors, and former spouses who

are receiving civil service benefits?

A. No. Under section 125 of the Internal Revenue Code, the tax advantages of a

premium conversion plan are only available to current employees.

Q. Can I purchase health benefits outside of the Federal Employees health Benefits

Program with pre-tax dollars?

A. No, the tax advantage only applies to premiums for the Federal Employees Health

Benefits Program.

Q. Will a premium conversion plan help the Federal Government better manage its

human resources?

A. The plan will enhance the Federal Government’s ability to compete with the

private sector in recruiting and retaining qualified employees. Agencies have

expressed a strong desire for pre-tax benefits as recruitment and retention tools.

Q. How many Federal employees will now be able to benefits from the tax

advantages of a premium conversion plan?

A. Approximately 1.6 million Federal employees will now be able to enjoy the tax

advantages already enjoyed by almost 1 million employees of the Postal Service

and other smaller Federal agencies.

Q. What is a flexible spending account?

A. A flexible spending account (FSA) is an arrangement under which an employee

elects to have his or her employer place a portion of salary into an account that

can be used to reimburse the employee for medical or dependant-care costs. 

Subject to restrictions in the Internal Revenue Code and Internal Revenue

Service regulations, the amounts placed in the account are not subject to taxation

at the time they are disbursed from the account.

The agencies mentioned above that now offer health insurance premium

conversion also offer FSAs, which are commonly available to private–sector

employees and State and local government employees. The Office of Personnel

Management is considering the feasibility of extending FSAs and other modern

benefit options to all employees in the Executive Branch.