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• The small reduction in Social Security benefits is greatly outweighed by the much larger tax savings. In each case we tested, the increase in take-home pay far exceeded the minor loss in monthly Social Security benefits.

Here is a simple formula you can use to estimate the difference in your Social Security benefit:

1. Take the number of years you will participate in premium conversion (from now until your estimated retirement) and divide by 35.
3. Multiply the result of Step 2 by the marginal SSA rate (15% for most Federal employees)

The result is the annual loss of Social Security benefits.

(# of Years of Premium Conversion /35) X Annual FEHB Premium X marginal SSA rate = Annual Loss

Example

You participate in FERS. We assume that you've had a full career of FICA contributions, with an ending salary (today) of \$50,000 and projected retirement at age 66 in January 2016. Your estimated Social Security benefit equals \$1,414 per month.

You begin participating in premium conversion and reduce your taxable income by \$2,000, the amount of your FEHB premium. By changing your salary to \$48,000, your monthly Social Security benefit is now \$1,403, an \$11.00 per month difference in today's dollars.

15/35= .4286 X 2000 = 857 X .15 = 128/12 = 10.71 or 11

Compare that to the estimated \$67 increase in take home pay per month.

For more specific information on how the Social Security benefit is calculated, refer to www.ssa.gov.

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• You receive a salary and then your contribution to pay for FEHB coverage is withheld (post-tax). You pay tax on the salary received -- the amount before the health insurance premium is withheld. Thus, you pay tax on a larger amount of income.
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• If you are enrolled in the FEHB Program but are employed outside the Executive Branch, or your pay is not issued by an agency of the Executive Branch, you may be eligible if your employer agrees to adopt our plan and offer participation in premium conversion.ï¿½ All non-Executive branch agencies were contacted by OPM with instructions on how to become part of the plan.
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• Your Social Security benefits are calculated on your taxable earnings, so any reduction in your taxable income will affect your Social Security calculations.
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• The Office of Personnel Management (OPM) did some calculations comparing the increase in take home pay to the loss of Social Security benefits at various income and Federal income tax levels. The results presented below show how many years of additional Social Security benefits it would take to make up for the take home pay you will lose by not participating in premium conversion. The calculations were simplified; they don't account for the fact that your take home pay will increase now, but you probably won't be receiving your Social Security benefits until many years from now.

Salary Income Tax Rate* Years of Social Security Benefits To Recover Lost Pay To \$6,400 0% p 15% 11 28% 17 \$6,401 to \$32,100 0% 10 15% 31 28% 49 \$32,100+ 0% 22 15% 66 28% 104

*Marginal Federal rate. If you don't know yours call your Payroll Office.

As you can see if you don't have to pay any Federal income tax, you lose the primary benefit of premium conversion.

But some individuals might still want to participate because their Social Security and Medicare taxes will be lower. You also can see that at very low earnings levels (\$6,400 or less) the decision is less clear cut. OPM's statistics indicate there are less than 100 employees in this category.

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• The average premium is a program-wide average of the enrollment charges for all individuals who are eligible to receive a Government contribution, with separate determinations for Self Only and for Self and Family enrollments.

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.

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• If the organization agrees to adopt our plan, premium conversion may apply to Federal employees on assignment to an international organization.
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• Only the amount of your FEHB contribution will be allotted back to your agency. If your FEHB contribution changes, the allotment will change.
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• No, since your Social Security covered income does not change.
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• No. Whether you participate in CSRS or FERS, your retirement benefit is based upon your gross salary
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