By October, if the Office of Personnel Management completes its work as currently planned, you will begin seeing a bit more take-home pay in each pay check. OPM is working on an order from President Clinton to reduce federal employees' taxable income by the amount they pay for health insurance premiums.
How much more you'll see in your take-home pay depends on how much you pay for health insurance. For example, if your combined rate of federal, local, Social Security and Medicare taxes is 35 percent, and if your health insurance premium is $1,400 per year, you would pay $490 less in taxes per year. That works out to about $19 per biweekly pay period.
The conversion of health insurance premiums to non-taxable income obviously reduces your taxable income. If your taxable income is now $60,000 a year and you pay $1,400 in health insurance premiums, your taxable income would be reduced to $58,600.
Now, that won't affect your Thrift Savings Plan contributions, nor your life insurance costs, nor the "high-three" formula used to calculate pensions, none of which are based on your taxable income.
But it will affect Social Security benefits, which are based on taxable income. For that reason, the Office of Personnel Management will allow employees to opt out of the conversion of health premiums to non-taxable income. Some employees might want to pay taxes on their health premiums now and collect slightly higher Social Security benefits later.
For most employees, the Office of Personnel Management says the premium conversion is a good thing. OPM looked at the handful of government agencies that already offer premium conversion to employees, and less than 1 percent have opted out. Private companies and other organizations that offer premium conversion typically tell their employees that the effect on Social Security benefits will be minimal and will be offset by the amount saved in taxes now.
Your Social Security benefits are calculated using your average monthly taxable earnings. The Social Security Administration also adjusts your earnings for wage inflation and plugs the adjusted earnings into a formula set in law. On average, Social Security benefits replace 42 percent of a person's earnings. That percentage is higher for low-income workers and lower for high-income workers.
How will you know if you're better off converting your health premiums to non-taxable income? Stay tuned to Pay and Benefits Watch for a way to figure it out for yourself.