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: 01-318 Date: May 18, 2001 

Subject: HB-PC Election Processing Errors and Requirement for Retroactive Adjustments 

Our policy has been that the correction of administrative errors involving Health Benefits 

Premium Conversion (HB-PC) cannot include retroactive adjustments to taxable income. This 

Letter revises that policy by requiring retroactive adjustments to taxable income in the event of 

certain administrative errors related to HB-PC. 

Most administrative errors related to HB-PC involve either the deduction of the incorrect amount 

of FEHB premiums or the failure to process an FEHB plan enrollment or termination. The 

actions that agency payroll offices (APO) take to correct such errors will also adjust the affected 

employees’ taxable income and tax withholdings, although perhaps in a subsequent tax year. 

Please see BAL 01-313, “Correction of Administrative Errors - Health Benefits Premium 

Conversion,” for examples of this. 

Administrative errors, however, also occur when agencies process elections to participate or 

waive participation in HB-PC. These errors will result in FEHB premium deductions that are 

incorrectly designated as “pre-tax” or “after-tax.” If they are corrected prospectively, the impact 

of these errors on the tax liabilities of the affected employees will be permanent. Therefore, when 

FEHB premium deductions are incorrectly designated as “pre-tax” or “after-tax,” taxable income 

and tax withholdings must be adjusted retroactively to the date the HB-PC participation election 

should have been effective. 

The need to retroactively adjust taxable income and tax withholdings in this circumstance is 

illustrated by the following example: 

Bob Lockhart had previously waived participation in HB-PC. He marries (a “qualifying 

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

HB-PC should have been effective on November 18, 2001, his employing agency does 
not process it. As a consequence, Mr. Lockhart remains a non-participant in HB-PC and 

his FEHB deductions are incorrectly designated as “after-tax.” The error is not 

discovered until in March 2002. 

If Mr. Lockhart’s taxable income is adjusted prospectively, he will experience an 

increased tax liability for both tax years 2001 and 2002. To resolve this inequity, Mr. 

Lockhart’s agency must make his election to participate in HB-PC effective on 

November 18, 2001 (as it should have been), and adjust his taxable income and tax 

withholdings retroactively to this date. 

Since the error was detected after Mr. Lockhart’s Form W-2 had been filed for 2001, the 

APO must file a Form W-2c, correcting his “wages” and tax withholdings for 2001. In 

addition, the APO must adjust Mr. Lockhart’s current year-to-date taxable income and tax 

withholdings retroactively to his first pay day in 2002. 

In summary, APOs must take the following actions to adjust retroactively taxable income and tax 

withholdings, when FEHB premium deductions have been incorrectly designated as “pre-tax” or 

“after-tax:” 

If the Error Occurred in the Current Tax Year: 

Adjust year-to-date taxable income and tax withholdings retroactively to the date the 

HB-PC election should have been effective. 

If the Error Occurred in a Prior Tax Year: 

Adjust year-to-date taxable income and tax withholdings retroactively to the first pay 

day of the current tax year. 

-and- 

Correct “wages” and tax withholdings for the prior year(s) by filing corrected 

 W- 2s or W-2c’s. 

Following is another common example of a misdesignation of FEHB premium deductions and the 

corrective action that would be taken by APOs in response: 

-2- 
Ruth Roth, who had previously waived participation in HB-PC, was in leave without pay 

(LWOP) status from September 2001 through December 2001. Ms. Roth chose to continue 

her FEHB coverage during her period of LWOP, incurring a debt to her agency for the 

employee contributions that were remitted to OPM on her behalf. Upon her return to pay 

status, she elected to participate in HB-PC, but her agency designated her "catch-up" FEHB 

premium deductions as “after-tax.” 

Her employing agency has made an administrative error -- as a participant in HB-PC at the 

time the deduction was taken, Ms. Roth’s “catch-up" FEHB premium deductions should have 

been designated as “pre-tax.” To correct its error, the agency redesignates all of Ms. Roth’s 

catch-up FEHB deductions as “pre-tax.” Because the error was corrected after the APO 

filed the Form W-2 for 2001, it files a Form W-2c, correcting Ms. Roth’s “wages” and tax 

withholdings for 2001. 

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