Some Federal Employees May Want to Waive ‘Premium Conversion’ for FEHB Insurance

Since 2000, federal employees (but not federal retirees) have participated in “premium conversion” with respect to how they pay the employee portion of the Federal Employee Health Benefits Program (FEHB) health insurance premiums.

No matter which FEHB plan an employee is enrolled in and no matter the type of coverage (self, self plus one or self and family), employees automatically participate in premium conversion. Also, since Jan. 1, 2007, when the Federal Employees Dental and Vision Insurance Program (FEDVIP) started, employees (but not federal retirees) who enroll in a dental insurance and/or a vision insurance plan offered through the FEDVIP automatically participate in premium conversion.

During the upcoming federal benefits open season (which starts Nov. 8, 2021 and runs through the end of business Dec. 13, 2021) employees have the option of waiving their participation in premium conversion with respect to the FEHB. They do not have the option of waiving participation in premium conversion with respect to the FEDVIP. This column discusses why some employees enrolled in the FEHB may want to consider waiving participation in premium conversion for the 2022 plan year.

What is Premium Conversion and How Does it Work?

It is important to first discuss and explain what premium conversion is.

Under the FEHB premium conversion arrangement, an employee’s FEHB health insurance premiums are deducted from the employee’s biweekly gross salary. The amount of the employee’s annual taxable salary (as shown on the employee’s annual Form W-2 – Box 3) is therefore reduced. For employees, the FEHB premiums are first deducted from the employee’s gross salary and the appropriate taxes are then applied as follows:

• Federal income taxes. FEHB premiums and traditional Thrift Savings Plan (TSP) employee contributions are deducted from the employee’s gross salary before federal income taxes are applied to the net salary (bi-weekly gross salary less biweekly FEHB premium less traditional TSP contributions)

• State and local income taxes. FEHB premiums and traditional TSP contributions (most states) are deducted from the employee’s gross salary before state and local income taxes are applied to the net salary (bi-weekly gross salary less biweekly FEHB premium less traditional TSP contributions). Each state and local government with an income tax determines as to whether it allows pre-tax treatment for health insurance premium deductions under “premium conversion” plans.

• Social Security (FICA) and Medicare Part A (hospital insurance tax). FEHB premiums are deducted from the employee’s gross salary before OADSI (Social Security and Medicare hospital insurance payroll taxes are deducted). The 6.2 percent Social Security (FICA) tax and the 1.45 percent Medicare hospital insurance tax will be applied to the net salary (bi-weekly gross salary less biweekly FEHB premium).

The following example illustrates:

Howard, age 48, is a federal employee whose bi-weekly gross salary is $4,000. His bi-weekly FEHB health insurance premium is $200. Howard is in a 22 percent federal income tax bracket and in an 8 percent state income tax bracket. Howard also contributes $500 to his traditional TSP (pre-taxed contribution) account each pay date. Howard’s net take-home pay with and without premium conversion is presented in the chart below.

Note that Howard has an additional $75.30 ($2,019.30 less $1,944.00) each pay date, or 26 times $75.30 equals $1,957.80 more per year, in net take-home pay as a result of ‘premium conversion” participation.

Participation in premium conversion has no effect on other federal employee benefits. For example, an employee who contributes a certain percentage of his or her gross salary (SF 50 salary) to the TSP contributes the same amount of their salary to the TSP whether they participate in premium conversion or not.

An employee who is enrolled in the Federal Employees Group Life Insurance (FEGLI) program and is therefore enrolled in the “Basic Insurance Amount” (BIA), has the same amount of BIA with or without premium conversion. The BIA is an employee’s current SF 50 salary rounded up to the next $1,000 plus $2,000. For example, if Howard’s current SF 50 salary is $95,900, then Howard’s FEGLI BIA is $98,000 ($95,000 rounded up to $96,000, plus $2000 or $98,000).

Some Disadvantages Associated with Premium Conversion Participation

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An employee who participates in premium conversion cannot include the FEHB premiums deducted (as before-taxed dollars) from their gross salary as qualifying medical expenses on their federal income tax returns (Schedule A, itemized deductions). To be included as a potentially deductible medical expense (assuming an employee itemizes on his or her federal income tax return), the FEHB premiums paid, together with other qualifying out-of-pocket medical expenses, would have to exceed the 7.5 percent of the employee’s adjusted gross income (AGI) that year. If an employee in a particular year expects to have an above average amount of qualifying out-of-pocket medical expenses including FEHBP premiums, then waiving participation in premium conversion could result in more overall tax savings for the employee.

For a small number of employees, there may be another reason to waive participation in premium conversion for the year 2022. Under IRS rules, an employee can reduce FEHB coverage only during an FEHB open season or at the time of a qualifying life event. However, if an employee has waived participation in premium conversion for the plan year, then they can reduce FEHB coverage at any time during the plan year. Reducing FEHB coverage includes canceling participation in the FEHB or changing from self and family coverage (or self plus one coverage) to self only coverage.

The following example will help illustrate:

Gerald is a federal employee who is enrolled in the FEHB. He has self plus one coverage, with health insurance coverage for himself and his wife Sheila. Sheila is currently not employed but is actively seeking employment and hopes to get a job sometime in early 2022. She is also seeking a job in which the employer offers group health insurance benefits. Once hired, Sheila plans to enroll in her employer’s group health insurance plan with self only coverage. At that time, she would no longer need to be enrolled on Gerald’s FEHB health plan.

If Gerald elects to waive participation in premium conversion during the current (2021) open season, then when Sheila enrolls in her employer-sponsored group health plan in early 2022, Gerald can change from self plus one to self only FEHB coverage, thus reducing his FEHB premiums for the remainder of 2022. If Gerald does not waive participation in premium conversion during the current open season, then he cannot change his FEHB coverage to self only (when Sheila enrolls in her employer-sponsored health insurance plan) until the open season in November 2022, with the change taking effect on Jan. 1, 2023. He will have to pay the higher premiums associated with self plus one coverage for the remainder of 2022 even though Sheila is enrolled in another health insurance plan.

It is for these two reasons (higher than average qualifying medical expenses expected during 2022 and change of coverage from self and family or self plus one to self only) that some employees may want to consider waiving participation in premium conversion during the “open season” starting on Nov. 8,2021 and concluding Dec. 13, 2021. Employees who want to waive participation in “premium conversion” for 2022 may do so by filling out Form SF 2809 (Health Benefits Election Form) and submitting the completed form to their Human Resources or Personnel Office.