Benefits Bits Health Insurance Premium Conversion

In Reply Refer To:
Mail Stop 601

 MEMORANDUM

Supervisors, Managers, and Team Leaders:  Please ensure that employees 
without access to e-mail receive a copy of this message.

To:        All U.S. Geological Survey Employees
From:      Robert Hosenfeld
           Personnel Officer

Subject:   Benefits Bits Health Insurance Premium Conversion
 
The President has directed the Office of Personnel Management (OPM) to 
implement a tax code provision that increases after-tax income.  For the 
first time, Federal employees within the Executive Branch will be able to 
take advantage of health insurance conversion, a tax benefit that the 
majority of private sector employees and State and local government 
employees already have. 

Section 125 of the Internal Revenue Code allows an employer to provide a 
portion of an employees salary in benefits rather than cash.  Instead  of  
being paid to the employee as taxable income, this amount is used to 
purchase benefits for the employee.  The effect is that the employees 
taxable income is reduced.  Under a health insurance conversion 
arrangement, an employees taxable income is reduced by the amount of 
health insurance premiums withheld from pay.  Because taxable income is 
reduced, the amount of tax the employee must pay is reduced.  The employee 
saves on Federal income tax, Social Security and Medicare taxes, and if 
applicable, State and local taxes.  The government will continue to pay 
the same share of the premium as provided in the Federal Employees Health 
Benefits Act.  The premium conversion plan only affects the portion of 
premiums paid by employees.  This pre-tax benefit will not apply to 
retirees, survivors, or former spouses who are receiving retirement 
benefits.

To determine the amount saved, an employee must determine his/her highest 
combined tax rate and the total amount of the health insurance premium.  
For example, if an employees combined tax rate for Federal, State, and 
local income taxes, Social Security tax and Medicare is 35 percent, and 
the total health premium is $1,400, the employees annual reduction in 
taxes would be $490 ($1400 x .35 = $490).

OPM expects that implementation of the premium conversion will be 
completed not later than October 1, 2000.  There will be no open season 
for this benefit, as participation will be automatic.  A form will have to 
be completed only if the employee wishes to waive participation in the 
program.  

In a limited number of circumstances, an employee may wish to waive 
participation in this program.  An example is because premium conversion 
reduces the amount of taxable income, it may also slightly reduce the base 
on which Social Security benefits are calculated.  Guidance forthcoming 
from OPM will include a full explanation that will assist employees in 
their decision on whether to participate in premium conversion.

Once implemented, premium conversion will become a permanent benefit.  
However, each year employees may decide whether they want to participate 
for the following year.  

Additional information will be issued to employees once the guidance is 
received from OPM.  Questions regarding this new benefit should be 
directed to your servicing personnel office.