A plan to remove health insurance costs from federal employees' taxable income is set to go into effect in October, the Office of Personnel Management announced Wednesday.
OPM issued interim regulations stating that beginning on Oct. 1, employees' health insurance premiums will be deducted from pre-tax dollars. As a result, most employees will benefit from lower taxable income. For example, an employee who pays $1,400 a year in health insurance premiums and pays 35 percent of their income to federal, state, and local taxes will see $490 more in take-home pay each year.
According to OPM, employees can calculate their tax savings by multiplying their annual FEHBP premium by the percentage of income they have withheld in taxes.
Participation in the premium conversion program is automatic, but employees can choose to waive participation. Employees who plan to change health insurance plans may want to waive conversion. In addition, conversion can reduce Social Security benefits because Social Security is based on taxable income.
Pre-tax premiums do not affect the amount of an employee's health insurance premium, base pay for retirement, life insurance or the Thrift Savings Plan.
Several agencies already have converted health insurance premiums to non-taxable income, including the Postal Service, the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Federal Reserve System. The federal judiciary also offers employees non-taxable health insurance premiums.
Rep. Tom Davis, R-Va., has proposed a bill, H.R. 4277, that would extend the pre-tax benefit beyond current executive branch employees to federal retirees, legislative branch employees and members of the armed services.
COLA Breaks
The Office of Personnel Management Monday issued interim regulations to increase the cost-of-living allowance rate from 22.5 percent to 25 percent for employees living in Guam, Honolulu, or the Northern Mariana Islands.
Uncle Sam pays special COLAs to certain employees in lands far-flung from Washington. OPM calculates the rate of the adjustment by comparing local living costs to those in the nation's capital.
Appropriations Update
In case you missed it, the House Appropriations Committee Tuesday approved the Treasury-Postal appropriations bill. Several measures affecting federal pay and benefits were included in the bill:
- Reauthorized funding for a law that allows federal agencies to subsidize child-care for lower-income employees. The child care legislation was included in last year's budget as a one-year pilot program and has been extended for another year.
- A repeal next year of the the 0.5 percent retirement contribution increase imposed on federal employees as a budget-reduction tactic. The temporary increase in employee contributions began in January 1999 and is currently not scheduled to end until 2002.
- A requirement that FEHBP providers continue to cover prescription contraceptives, as currently required by law.