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For a small number of individuals it may make sense to waive premium conversion. There are two items to consider in making a decision to waive participation and they are:
Under IRS rules, you may reduce coverage (cancel, or change from Self and Family to Self Only) only during an Open Season or at the time of a qualifying life event.
Paying your premiums with pre-tax money reduces your earnings reported to the Social Security Administration. When you begin to collect Social Security (normally this occurs at age 65), you may receive a slightly lower Social Security benefit. The extent of the impact will vary depending upon the retirement system you participate in, your salary compared with the Social Security wage base ($87,000 in 2003) and the number of years until you retire.
FEHB Open Season
During the FEHB Open Season, you will have an opportunity to elect or waive your participation in premium conversion. An Open Season election to participate or waive participation in premium conversion must be received by your employing agency no later than the last day of the Open Season to be considered timely filed. The effective date of your election will be the same as the effective date of an FEHB enrollment election: the first payroll period that begins on or after January 1st. If your agency accepts and processes a late Open Season enrollment election, it must also accept a late election to participate or waive participation in premium conversion.
Because elections begin with pay periods, when you change participation in premium conversion (begin or waive participation) during the FEHB Open Season, there will likely be at least one payroll paid date in the subsequent calendar year in which your FEHB deductions reflect the previous election.
Mark G. had previously waived participation in premium conversion. He opted to participate again in premium conversion during the November 2002 Open Season. Mr. G. is paid on a biweekly basis, with the following payroll periods:
Mr. Marks' payroll office would treat his FEHB deductions on an after-tax basis through the end of payroll period 02.
If you are covered by the Federal Employees Retirement System (FERS) and participate in premium conversion, FEHB premium deductions will also be excluded from gross pay before Old-Age, Survivors, and Disability Insurance (OASDI) and Medicare taxes are applied. Employer FICA contributions will also be reduced in concert with the decrease in employee withholdings.
The premiums for the FEHB plan you are currently enrolled in are in the brochure you will receive from your plan during the annual Federal Benefits Open Season. The Guide to Federal Benefits is a comparison of the plans and their benefits and premiums. There are a variety of Guides targeted to specific groups of enrollees.
The average premium is recalculated every year.
Per FEHB law, the government will pay the lesser of: 75% of the carrier’s total premium, or 72% of the average premium. The enrollee is responsible for the difference between the government contribution and the total premium.
If the average premium increases, the maximum government contribution also increases.
The total premium is the same for all enrollees, but the Government contribution is based on your employment. Some agencies, such as the Postal Service, contribute additional money towards the total premium. As a result, the share you must pay will depend upon your employment status. All Guides are available on this website or through your Human Resources Office.
Under the Pay-As-You-Go option, you pay your share of the FEHB premium directly to your employing agency while on LWOP. These payments will generally be made with after-tax monies, since there is no pay from which to make deductions.
Most employees who have a period of LWOP choose to pay their FEHB premiums via the Catch-up option. Under this option, the agency remits your share of the FEHB premium to OPM while you are on LWOP. You incur an obligation to your employing agency and are required to repay it upon your return to pay status. The repayment of the amount owed will be treated on a pre-tax basis, if it's deducted from pay and you participate in premium conversion at the time the deduction is made. If you choose to repay the amount owed to your agency directly out-of-pocket your taxable income is not reduced.
Your agency may (but is not required to) offer you the option to prepay your FEHB premium from salary before you go on a period of LWOP. The amount of FEHB premiums you prepay in advance may either be deducted from your pay or paid directly "out-of-pocket" to your agency. Payments made "out-of-pocket" do not reduce taxable income. The amount of FEHB premiums that you prepay will be treated on a pre-tax basis, if it is deducted from your pay and you participate in premium conversion. IRS rules limit the amount you may prepay on a pre-tax basis. If your period of LWOP will span two tax years, the amount that you may prepay on a pre-tax basis may not exceed the amount of FEHB premiums due for the remainder of the current tax year. If you wish to prepay the amounts due for the subsequent tax year as well, the deductions must be made after-tax. You may use the "Pay-As-You-Go" or Catch-up options for amounts due in the subsequent tax year.
Sam A. participates in premium conversion and had $100 per month in FEHB premiums deducted from his pay. He will go on LWOP for three months beginning on October 31, 2002 and opts to continue his FEHB coverage. Mr. A. uses the pre-pay option to pay from his salary the $300 in FEHB premium payments that will be due while he is on LWOP. Mr. A. will receive pre-tax treatment for only $200 of his FEHB premium prepayment- the amount he will owe for the months of November and December 2002. The remaining $100 prepaid – the amount due for January 2003 – must be given after-tax treatment.
Susan L. has $100 per pay period deducted from her salary for her contribution towards FEHB coverage.
Ms. L's employing agency mistakenly deducts $150 during the last pay period prior to the effective date of her participation in premium conversion. To correct the error, the agency deducts $50 for FEHB from Ms. Lee's pay in the following pay period, during which she has begun participating in premium conversion. Except for agency error, $100 would have been deducted from her pay. However, only $50 is treated on a pre-tax basis.
Ms. L's employing agency mistakenly makes no FEHB deduction during the last pay period prior to the effective date of her participation in premium conversion. To correct the error, the agency deducts $200 from Ms. L's pay in the following pay period, during which she has begun participating in premium conversion. Since the deduction for FEHB coverage is taken after she begins participation in premum conversion, $200 is afforded pre-tax treatment.
Ms. L's employing agency mistakenly does not process her participation in premium conversion. As a consequence, Ms. L's $100 FEHB deduction is not afforded pre-tax treatment. To correct the error, the agency changes Ms. L's premium conversion status to "participant" in the following pay period. If not for the error, Ms. L. would have had $200 deducted from her pay on a pre-tax basis. However, only $100 is eligible for pre-tax treatment.
As you can see, under these rules an error correction may result in a greater or lower tax benefit than would otherwise have occurred.
Premium conversion may slightly reduce the Social Security benefit you will receive upon retirement. The extent of the impact depends upon several factors:
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