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Cost of Insurance

Cost of Insurance

Shared Cost

Generally, employees or annuitants share the cost of their health benefits coverage with the Government as the employer. Temporary employees enrolled under 5 U.S.C. 8906(a), former spouses enrolled under Spouse Equity provisions, and most persons covered under temporary continuation of coverage (TCC) do not receive a Government contribution towards the cost of their health benefits.

Government's Share

The Government's share of premiums paid is set by law. Amendments to the FEHB law under the Balanced Budget Act of 1997 (Public Law 105-33, approved August 5, 1997) authorized a new formula for calculating the Government contribution effective January 1999. This formula is known as the "Fair Share" formula because it is designed to maintain a consistent level of Government contributions, as a percentage of total program costs, regardless of which health plan enrollees elect.

For most employees and annuitants, the Government contribution equals the lesser of: (1) 72 percent of amounts OPM determines are the program-wide weighted average of premiums in effect each year, for Self Only, Self Plus One and Self and Family enrollments, respectively, or (2) 75 percent of the total premium for the particular plan an enrollee selects.

OPM must determine the FEHB program-wide weighted average of premiums no later than October 1st which immediately precedes each FEHB contract year. The law directs OPM, first, to multiply each health plan premium for the upcoming year by the number of enrollees enrolled in that health plan as of the previous March 31 who received a Government contribution. OPM will then divide the total of premiums associated with Self Only enrollments, with Self Plus One enrollments and with Self and Family enrollments, respectively, by the corresponding total number of eligible individuals with each type of enrollment, to derive the weighted average of premiums.

The Government contribution for eligible employees is paid out of agency appropriations or other funds available for payment of salaries. OPM receives an annual appropriation to cover Government contributions for eligible annuitants.

Government Contribution for Part-Time Employees

The Government contribution toward part-time career employees’ health benefits is prorated in proportion to the percentage of full-time service they are regularly scheduled to perform.

Employee or Annuitant Share

During each pay period in which FEHB enrollment is in effect, the enrollee or annuitant is responsible for paying all premiums in excess of the Government contribution.

If the amount received (after retirement, FICA tax, Medicare, and Federal income tax deductions) covers the full share of the health benefits premiums, the withholding is taken from the employee’s salary or the annuity. Group life insurance withholdings follow health benefits withholdings in the order of precedence set forth in the Treasury Financial Manual.

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Premium Conversion

Premium conversion is a tax benefit that allows an employee to allot a portion of his/her pay to his/her employer, who will in turn use that amount to pay the employee’s contribution for FEHB coverage. This allotment is made on a pre-tax basis, which means that the money is not subject to Federal income, Medicare, or Social Security taxes, and in most cases state and local taxes. The allotment reduces an employee’s taxable income, so less tax is withheld, and his/her paycheck is larger.

Eligibility for Premium Conversion

An employee is eligible to have his/her FEHB premiums paid under the premium conversion plan when:

  • the employee is an employee of the Executive Branch of the Federal Government;
  • the employee’s pay is issued by an Executive Branch agency; and
  • the employee participates in the FEHB Program.

An employee who is enrolled in the FEHB Program and is employed outside the Executive Branch, or the employee’s pay is not issued by an agency of the Executive Branch, may be eligible if the employer agrees to offer participation in the plan.

The entire amount deducted from the employee’s pay qualifies for premium conversion if the employee is paying both shares, (the employee and the Government's share of the premiums).

Currently, annuitants and compensationers whose FEHB premiums are deducted from annuities and benefits are not eligible to participate in premium conversion. Note that there are special rules for reemployed annuitants. A reemployed annuitant who is employed in a position that conveys FEHB eligibility may participate in premium conversion. See "Reemployed Annuitants" in Annuitants and Compensationers for more information.

Persons enrolled through Temporary Continuation of Coverage and Spouse Equity are not eligible for premium conversion.

Enrollment in Premium Conversion

Employees who are eligible for premium conversion are automatically enrolled in premium conversion unless they waive participation.

Once an employee participates in premium conversion, his/her participation continues automatically unless they elect not to participate. Each year during FEHB Open Season an employee may decide whether or not to participate for the following year.

Election Not to Participate in Premium Conversion

An employee can opt-out or waive participation in premium conversion by completing and returning a waiver/election to his/her employing office. A copy of the waiver election is available in Attachment 3 of the Benefits Administration Letter 00-215.

An employee considering opting out of premium conversion should consult a tax advisor to fully understand the impact of this decision. An employee that pays no federal income tax should give serious consideration to waiving participation in premium conversion.

Changing Premium Conversion Participation Status

Employees have limited opportunities to change participation status. Participation can be waived:

  • During Open Season. The effective date of the change is the first day of the first pay period that begins in the following calendar year.
  • When an employee makes a change in FEHB enrollment because of and consistent with a qualifying life event.
  • When an employee has a qualifying life event and the change is because of and consistent with that event (even when the employee doesn’t change enrollment). Employees have 60 days after a qualifying life event to file a change with the employing office. The waiver is effective on the first day of the pay period following the date the employing office receives the change request.

Employees may cancel a waiver and participate:

  • During Open Season. The effective date of the change is the first day of the first pay period that begins in the following calendar year.
  • When they have a qualifying life event and the change in FEHB coverage is consistent with the qualifying life event. The employee must complete an election form to participate and submit it to his/her employing office within 60 days from the date of the qualifying life event.

Impact of Premium Conversion on Other Federal Benefits

All Federal retirement, thrift savings, and life insurance benefits are based on gross salary and there is no impact due to participation in premium conversion.

Impact of Premium Conversion on Social Security Benefits

Premium conversion may slightly reduce the Social Security benefit an employee receives upon retirement. The extent of the impact depends on several factors:

  • the retirement system that the employee participates in;
  • whether the employee’s salary exceeds the Social Security wage base; and
  • the number of years left until the employee’s retirement.

Civil Service Retirement System

Employees covered under the Civil Service Retirement System (CSRS) are generally better off with premium conversion. The tax savings are slightly less, since they don't pay Social Security taxes. A reduction in Social Security benefits is not an issue for these employees since Social Security is not a component of his/her Civil Service Retirement.

Even if an employee were to receive Social Security coverage as a result of a non-Federal job, premium conversion would not change the Social Security benefit.

CSRS Offset

For employees covered under CSRS Offset, Social Security benefits would be slightly reduced, but the CSRS Offset benefits would be increased by almost the same amount. Participating in premium conversion is most likely a benefit to these employees.

Federal Employees Retirement System

For employees covered under Federal Employees Retirement System (FERS), Social Security benefits are calculated on their taxable earnings, so any reduction in taxable income will affect the Social Security calculation.

The small reduction in Social Security benefits is greatly outweighed by the much larger tax savings. Here is a simple formula that can be used to estimate the difference in an employee’s Social Security benefit:

  1. Take the number of years the employee will participate in premium conversion (from now until the employee’s estimated retirement) and divide by 35.
  2. Multiply this by the current annual FEHB premium
  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

Antonio participates in FERS. He's had a full career of FICA contributions, with an ending salary (today) of $50,000 and projected retirement at age 66 in January 2020. His estimated Social Security benefit equals $1,414 per month.

He begins participating in premium conversion and reduces his taxable income by $2,000, the amount of his FEHB premium. By changing his salary to $48,000, his monthly Social Security benefit would be reduced to $1,403, an $11 per month reduction, in today's dollars.

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

Compare this future reduction in Social Security benefits to the estimated $67 increase in present take home pay per month.

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Making Withholdings and Contributions


The employing office must make the appropriate health benefits premium withholdings and contributions beginning with the first pay period that an enrollment is effective. It must submit the full cost of the enrollment to OPM on a current basis for each pay period that the enrollment continues, even if an individual is paid for only part of the period (except in transfer and reinstatement cases) or when an employee is in leave without pay status.

Employees should check their earnings statement and annuitants should check their annuity statement (for those that have their health benefits premium deducted from their annuity) to verify that the health benefits premium withholding is correct and report any discrepancy to the employing office or retirement system immediately. All enrollees are obligated to make the correct payment, regardless of any error in withholding made by the employing office or retirement system. When too little or no money has been withheld from pay or annuity for health benefits, those enrollees incur a debt due the U.S. Government for the proper withholdings for each pay period that the enrollment continues.

Terminated and Cancelled Enrollments

Generally, if an enrollment terminates (other than for entry into military service), the effective date is the last day of the pay period in which the terminating event occurred. If an individual cancels his/her enrollment, the effective date is the last day of the pay period in which the employing office receives the cancellation request. Withholdings and contributions for the full pay period are required.

If the coverage terminates because an employee is in leave without pay status or he/she has insufficient pay to make the withholding, and he/she does not elect other payment options, the effective date is the last day of the pay period that he/she paid his/her share of the premiums.

Coverage continues at no cost for 31 days after the enrollment terminates for any reason except when the enrollment is voluntarily cancelled by the enrollee or his/her plan is discontinued.

Detailed information can be found in this Handbook under Leave without Pay Status and Insufficient Pay.

When an Employee Transfers to a Different Payroll Office (Daily Proration Rule)

Effective March 1, 1997, the Daily Proration Rule applies when an employee transfers to a position serviced by a different payroll office at a time other than at the beginning of the pay period. Each payroll office (gaining and losing) is responsible for withholdings and contributions for the actual time the employee occupied a position each office services.

If the employee owes a debt for health benefits withholdings to his/her former employing office, the gaining office must make arrangements for withholding the employee’s indebtedness and forward the amount collected to his/her former employing office.

Daily Rate

A daily rate must be computed as follows:

Daily withholding and contribution rate = Biweekly withholding and contribution rate x 26 ÷ 364

Note: The denominator of 364 is always used, even during a leap year.

Active Employees

The formula for determining the amount of withholdings and contributions for which the losing and gaining payroll offices are responsible is:

Daily Rate x Days on Payroll

During a pay period beginning August 4 and ending August 17, Henry transfers to a different agency, with his new appointment effective August 10. The biweekly employee share of his health benefits plan premium is $21.46 and the biweekly Government share is $61.51.

The daily withholding rate is $1.53 ($21.46 x 26 ÷ 364) and the daily contribution rate is $4.39 ($61.51 x 26 ÷ 364).

The losing agency is responsible for withholdings and contributions for 6 days (August 4 through 9), calculated as follows:
Withholdings: $1.53 daily rate x 6 days = $9.18
Contributions: $4.39 daily rate x 6 days = $26.34

The gaining agency is responsible for withholdings and contributions for 8 days (August 10 through 17), calculated as follows:
Withholdings: $1.53 daily rate x 8 days = $12.24
Contributions: $4.39 daily rate x 8 days = $35.12

When an Employee Retires

When an employee retires, his/her employing office's responsibility for withholdings and contributions depends on when his/her annuity starts.

  • If the annuity starts after the end of the employee’s final pay period, his/her employing office will make withholdings and contributions for the entire final pay period.
  • If his/her annuity starts before the end of the employee’s final pay period, his/her employing office will make withholdings and contributions through the day before the starting date of the annuity, using the Daily Proration Rule.

For information about determining when an annuity starts, see the CSRS/FERS Handbook for Personnel and Payroll Offices.

Mary Helen is retiring on May 31 and her annuity starts on June 1. The pay period begins on May 25 and ends on June 7. The biweekly employee share of her health benefits plan premium is $32.26 and the biweekly Government share is $61.51.

The daily withholding rate is $2.30 ($32.26 x 26 ÷ 364) and the daily contribution rate is $4.39 ($61.51 x 26 ÷ 364).

Her employing office will make withholdings and contributions for the period from May 25 through May 31 (7 days), calculated as follows:
Withholdings: $2.30 daily rate x 7 days = $16.10
Contributions: $4.39 daily rate x 7 days = $30.73

When an Enrollee Dies

The Daily Proration Rule applies when an enrollee dies and he/she has a survivor annuitant eligible to continue his/her enrollment. If there is no survivor annuity or if the enrollee had a Self Only enrollment, the employing office must make full withholdings and contributions for the pay period in which the enrollee died.

Upon Termination or Reinstatement for Military Service

The Daily Proration Rule applies if an employee’s enrollment is terminated or reinstated because of entry into, or return from, military service. The effective date of the action is the date the employee entered into or returned from military service.

Retroactive Restoration

An employee retroactively restored to duty after an erroneous suspension or removal, may either have his/her enrollment reinstated retroactively, or enroll in the plan and option of his/her choice, the same as a new employee. If he/she elects to have the enrollment reinstated retroactively, withholdings for the period of suspension or removal must be made, and his/her employing office must make contributions from the appropriate fund, as though the suspension or removal had not occurred.

Part-Time Career Appointment

Employees who became a part-time career employee (working 16 to 32 hours a week or 32 to 64 hours biweekly) on or after April 8, 1979, are entitled to a partial Government contribution in proportion to the number of hours they are scheduled to work in a pay period.

Employees who served on a part-time basis before April 8, 1979, and who have continued to serve on a part-time basis without a break in service (in that or any other position) are eligible for the full Government contribution, as are part-time employees who work less than 16 hours or more than 32 hours per week.

The amount of the Government contribution is determined by dividing the number of hours an employee is scheduled to work during the pay period by the number of hours worked by a full-time employee serving in the same or comparable position (normally 80 hours per biweekly pay period).

That percentage is then applied to the Government contribution made for full-time employees enrolled in that plan.

The amount of the Government contribution is then deducted from the total premium (Government plus employee shares), and the remaining amount is withheld from the employee’s pay.


Faith is scheduled to work 36 hours during a biweekly pay period, and the Government contribution for her health benefits plan is $61.38 biweekly for full-time employees. The Government contribution for her health benefits is as follows:

36 (Hours scheduled during pay period) ÷ 80 (Hours worked by full-time employees) = .4500

$61.38 (Government contribution/full-time employees) x .4500 = $27.62 (Government contribution/part-time employee).

Since the total premium (Government and employee share) for her health benefits plan is $92.35, Faith's share of premiums is $64.73 ($92.35 - $27.62).

Government Contribution Factors for Part-Time Career Employees

The following chart shows the factor used to determine the amount of Government contribution for health benefits for part-time career employees who, if in a full-time position, would work 80 hours during a biweekly pay period (the amount considered as full-time employment for most positions).

If the comparable full-time position would require the employee to work a tour of duty other than 80 hours per biweekly pay period, or if the employee is paid on a monthly or semimonthly basis, divide the actual number of hours or days the employee is scheduled to work on the part-time schedule by the number of hours or days required for a full-time employee in the same position to determine the Government contribution factor.

Hours Worked on a Regular Bi-Weekly Schedule
Hours Factor
32 0.4000
33 0.4125
34 0.4250
35 0.4375
36 0.4500
37 0.4625
38 0.4750
39 0.4875
40 0.5000
41 0.5125
42 0.5250
43 0.5375
44 0.5500
45 0.5625
46 0.5750
47 0.5875
48 0.6000
49 0.6125
50 0.6250
51 0.6375
52 0.6500
53 0.6625
54 0.6750
55 0.6875
56 0.7000
57 0.7125
58 0.7250
59 0.7375
60 0.7500
61 0.7625
62 0.7750
63 0.7875
64 0.8000
< 32 or > 64 1.00

Former Spouse Enrolled under Spouse Equity Provisions

Former spouses enrolled under the spouse equity provisions must pay both the employee and Government shares of the health benefits premium. They will normally make their payments directly to their ex-spouse's employing office.

Temporary Employees

Temporary employees enrolled under 5 U.S.C. 8906a must pay both the employee and Government shares of the health benefits premium. (Exception: if the employee has a provisional appointment under 5 CFR 316.403, an interim appointment under 5 CFR 772.102, or if he/she continues coverage after his/her employment status changes from non-temporary to temporary without a break in service exceeding 3 days, he/she receives a Government contribution.)

Temporary Continuation of Coverage

Individuals who enroll under the temporary continuation of coverage (TCC) provisions usually must pay the full amount of the premiums (both the employee and Government shares) plus an administrative charge of two percent (2%) of the total premium. Payments are made directly to the servicing employing office.

Former Department of Defense employees who qualify for TCC based on a separation due to a reduction in force described in 5 U.S.C. 8905a (d)(4) continue to pay the normal employee share of premiums.

Leave Without Pay Status and Insufficient Pay

Employees must still pay the employee share of health benefits premiums if they are in a leave without pay status for an entire pay period or if their pay during a pay period doesn't cover the full amount of withholdings due, unless they want their enrollment to terminate. The employing office must notify the employee of the choices available and provide the employee with a method to make direct premium payments.

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Remittance to OPM

When Remittance is Due

The employing office must remit health benefits withholdings and contributions to OPM on the same date it pays its payroll.

Remittance Procedures

The method for remitting payments and supporting accounting information to OPM is the Retirement and Insurance Transfer System (RITS).

OPM will credit the total amount reported for health benefits to the Employees Health Benefits Fund.

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Adjusting Errors

Errors in Withholdings and Contributions

Payroll offices must adjust errors in withholdings and contributions on a subsequent payroll and must include the adjustments in a subsequent withholdings and contributions report.

The employing office must ensure that an employee’s individual payroll record shows not only the regular (current) deductions for health benefits withholdings, but also the adjustments.

Where annual appropriations are involved and the fiscal year changes between the processing of the erroneous withholdings and/or contributions and the processing of the adjustment, the proper appropriation must be adjusted.

When an employee participates in premium conversion, IRS rules require that no adjustments to taxable income be made as a result of an error correction (even when the employing office is at fault). When the employing office processes a correction, the actual amount of FEHB premiums deducted from an employee’s pay will receive pre-tax treatment.

Wendy has $100 per pay period deducted from her pay for FEHB. Her employing office mistakenly deducted $150 during the last pay period before the effective date of her election to participate in premium conversion. To correct the error, the agency deducts $50 for FEHB from Wendy's pay in the following pay period, during which she becomes a premium conversion participant. Although if not for the error, $100 would have been deducted from her pay, only $50 is deducted and is treated on a pre-tax basis.

Errors Involving Current Employees – Overdeductions

When too much money has been withheld from pay, or when withholdings have been made when an individual is not enrolled, the payroll office must adjust the withholdings on a subsequent payroll on which the individual’s name appears. This adjustment automatically corrects any excess agency contribution.

Errors Involving Current Employees – Underdeductions

When too little or no money has been withheld from pay for health benefits withholdings, the employing office must send the correct payment to OPM no later than 60 calendar days after it determines the amount of the underdeduction. This payment must be made to OPM regardless of whether or when the underdeduction is recovered by the employing office.

The underdeduction represents an overpayment of pay. The employing office must determine whether to waive collection of the overpayment (up to $1,500), in accordance with 5 U.S.C. 5584. The law provides that an employing office can waive recovery of the overpayment if, in its judgment, the employee is without fault and recovery would be against equity and good conscience. (If the employing office involved is excluded from the provisions of 5 U.S.C. 5584, it can use any applicable authority to waive the collection.)

If the employing office waives the collection of the unpaid health benefits withholdings, it must remit the payment, along with any applicable Government contributions, out of its own funds.

Waiver is not available for unpaid withholdings when an employee is in a leave without pay status or when pay is insufficient to make the withholding.

Errors Involving Separated Employees

When an adjustment in withholdings is necessary after an employee has separated from service, the payroll office must make the adjustment in the employee’s final pay (or payment to the employee’s beneficiary or estate).

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Reporting Number of Enrollees Covered

Semiannual Headcount Report

Employing offices must submit a semiannual headcount report on OPM Form 1523 for the last payroll paid during the 1st through the 15th of March and September. It must also report the number of enrollees from whom it made withholdings (or who paid directly or through advanced pay) for that particular pay period for each enrollment code. An enrollee for whom more than one payroll deduction was made in that pay period should be counted only once.

Separate supplemental reports are required for:

  • former spouses enrolled under the Spouse Equity provisions;
  • temporary employees enrolled under 5 U.S.C. 8906a; and
  • temporary continuation of coverage (TCC) enrollees.

Quarterly Report of Enrollees

Each payroll office is required to generate a quarterly report for each plan that lists enrollee names, enrollment code, and total money (withholdings and contributions) submitted to OPM for each enrollee.

This report gives enrollment information for the payroll paid during the 1st and 15th of the last month of each quarter. If there are two payrolls paid during that period, the enrollment information for the second payroll paid is reported.

The plans must be listed in enrollment code order and the enrollees within each enrollment code must be listed in the order of their Social Security numbers. There must be subtotals for each enrollment code and grand totals for each plan.

National Finance Center

Some agencies have agreements with the Department of Agriculture's National Finance Center (NFC) in New Orleans, Louisiana to perform the payroll functions for enrollees who are making direct payments under the Spouse Equity and temporary continuation of coverage (TCC) provisions. These agencies have the same responsibilities regarding FEHB enrollments as the agencies that retain the payroll function for these enrollees; however, NFC acts as their agent in servicing these enrollments. The agency must resolve any disputes between NFC and enrollees; OPM will not intervene. The agency's responsibility in both initial and reconsideration decisions about enrollees' enrollment complaints is explained in "Initial Decision and Reconsideration"

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