Apply For A Tax Credit
One of the easiest ways to save money on your health insurance premium if youre not getting it through your employer is by using a federal tax credit thats based on your income estimate. When you apply for insurance through the federal marketplace, youll be asked your annual income amount. Depending on your answer, you could be eligible for a tax creditto lower your premium.5
Does The Written Plan Have To Be Filed With Any Government Agency
No, you are not required to submit the Section 125 Premium Conversion Plan to the IRS or any government agency. However, the IRS and the Department of Labor are free to audit the operations of the plan, and during such a review, you may be asked to submit plan documents that meet the requirements of Section 125.
Premium Conversion: What Is It And How Is It Waived
Edward A. Zurndorfer
Each year during the Office of Personnel Management s sponsored benefits open season, employees and annuitants make decisions regarding which health, dental and vision insurance plans they want to be covered by during the upcoming plan year that starts in early January. Another decision with respect to their Federal Employee Health Benefits program insurance plans that employees have to make is whether or not they want to continue participation in premium conversion. This column is the second of eight FEDZONE columns discussing choices that employees and annuitants have to make during the annual benefits open season which this year runs from November 9, 2020 through December 14, 2020. Premium conversion is explained including some of its advantages and disadvantages.
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How Premium Conversion Is Waived
During the benefits open season, employees have the opportunity to elect or to waive their participation in premium conversion. An open season election to participate or to waive participation in premium conversion must be received by an employees employing agency no later than the last day of the open season. The effective date of the premium conversion waiver election is the same as the effective date of a FEHB election which is the first day of the first payroll period of the new leave year.
This years open season dates are Nov. 9, 2020 through Dec. 14, 2020. The start of the first payroll bi-weekly pay period of the 2021 leave year at most agencies will be Jan. 3, 2021. This means that employees who wish to enroll or to waive participation in premium conversion must do so no later than the close of business on Dec. 14, 2020, with an effective date of Jan. 3, 2021.
Employees should contact someone in their Personnel Office or Human Resources Office for the necessary paperwork and forms required to elect or to waive premium conversion.
A table of permissible changes in FEHB enrollment and premium conversion election may be downloaded here.
Premium Conversion Available To Some Retirees
One of the major differences in health insurance between active employees and retirees is that in general, the former group can pay premiums with pre-tax money while the latter group cant. This can make FEHB coverage substantially more expensive for some retirees.
When looking at this issue, keep in mind an exception is the 1996 Pension Protection Act, which allows a limited premium conversion tax advantage for retired public safety officers. Originally, OPM was of the opinion that this provision didnt apply to public safety officer annuitants who were covered by CSRS or FERS. However, OPM changed its mind in Benefits Administration Letter 07-201. Heres the key portion of that guidance:
The Office of Personnel Management has determined that the Civil Service Retirement System and Federal Employees Retirement System are eligible retirement plans under section 845 of the PPA. Retired public safety officers are deemed to have a premium conversion election for this purpose. As a result, retired public safety officers whose CSRS or FERS annuity payments include a direct premium payment to a health insurance carrier or long term care insurance carrier may self-identify eligibility for, and self-report, the tax exclusion to the Internal Revenue Service. IRS Publication 721Tax Guide to U.S. Civil Service Retirement Benefits at http://www.irs.gov/pub/irs-pdf/p721.pdf contains additional information on this tax advantage.
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How Does An Employee Elect To Participate In The Premium Conversion Plan
With regard to an employees initial Premium Conversion Plan election, Section 125 is most conservatively interpreted as requiring an affirmative election. Benefit Extras has provided an enrollment form with your materials that may be completed by employees electing to participate in the Premium Conversion Plan. After a plan participant makes an initial election, it is generally viewed as an acceptable administrative practice to allow the plan to revert to a default mode under which those elections remain in force until an employee makes an affirmative election to change them.
About The Msc Premium Conversion Program
The MSC Premium Conversion Program allows City employees who have payroll deductions for health insurance premiums and optional riders to increase their take-home pay.Read More
The MSC Premium Conversion Program enables eligible employees to pay for their health plan premium deductions on a pre-tax basis, thereby reducing their gross income for tax purposes.
Currently, health plan deductions for basic and/or optional benefits are deducted from your salary. For tax purposes, payments made on a before-tax basis effectively reduce the salary on which your taxes are computed by the amount of the health plan deduction.
Therefore, federal and Social Security taxes that must be withheld are reduced. The net effect will be that you receive more money in your paycheck.
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How Do I Pay My Health Insurance Premium
You pay your health insurance premium based on where you purchased your plan.
If you bought your plan through the health insurance marketplace or a private insurer, youll pay your premium directly to the insurance company .
Make sure you continue to pay your monthly premiums to your health insurance company on time. If you don’t, the insurance company could end your coverage.
If you bought your plan through your employer, a portion of your premium is usually paid for by your employer, and the premium balance is deducted from your paycheckusually pretax, which means youre not paying income taxes on the portion of your premium you pay.
Unless you make other arrangements with your employers plan administrator, you wont have to remember to make your premium payment because it will be automatically deducted from your paycheck.
What Is Section 125
Section 125 refers to Section 125 of the Internal Revenue Code. This section provides that if an employee is given a choice between taking pay or taking a benefit offered by the employer, the employee will not be subject to income tax for electing the benefit. The employer also receives a tax benefit because the contributions to the Section 125 Premium Conversion Plan are not subject to payroll taxes.
Example Of A Health Insurance Premium
Suppose youre shopping for health insurance on the individual market because your employer does not offer coverage as part of its benefits package. Insurer XYZ has two plans.
The first plan has a monthly premium of $800 with a yearly deductible of $1,000 and a coinsurance set at 20%. The second plan offered by XYZ has a monthly premium of only $400, but a higher deductible of $5,000 and a coinsurance of 30%.
The first option will cost you twice as much in premiums. Consequently, if you incur relatively few medical expenses for the year, your medical costs will be more expensive than if you purchase the second plan.
However, you may wish you had that first plan if you end up with an overnight hospital visit or need several trips to the doctors office throughout the year. When you pay the first $1,000 in covered medical expenses, your plan will pay 80% of the remaining costs until you reach the out-of-pocket maximum. Keep in mind, though, that you would still be responsible for paying 20% in coinsurance.
One advantage of high-deductible health plans, which come with lower premiums, is that they enable you to pay out-of-pocket expenses through a health savings account . Contributions to an HSA are tax-free, and so are withdrawals, as long as theyre used for a qualified medical expense. For 2021 and 2022, individual plans with deductibles of over $1,400 and family plans with deductibles of at least $2,800 qualify as high-deductible health plans.
What Is Premium Conversion
Premium conversion is an arrangement in which employees pay their portion of their FEHB program health insurance premiums using before-taxed salary dollars. Before taxed salary means before all taxes this includes Federal and state income taxes , Social Security and Medicare Part A payroll taxes are deducted from an employees gross salary to pay the health insurance premiums due each pay date. The following example illustrates:
Paula is enrolled in the FEHB program and pays $500 in FEHB health insurance premiums each pay date for her FEHB program health insurance plan. The $500 is deducted from Paulas gross salary to pay the premium due. Assuming Paula is in a 24 percent federal marginal tax bracket and in an 8 percent state marginal tax bracket, Paula saves the following amount in total taxes by having the full $500 deducted from her gross salary to pay the FEHB program premium due:
24 percent plus 8 percent plus 6.2 percent
plus 1.45 percent
equals 39.65 percent
39.65 percent of $500 equals $198.25
Over 26 pay dates Caroline is saving 26 times $198.25, or $5,154, in total taxes through participation in premium conversion.
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Are There Annual Reporting Requirements Ie Irs Form 5500
Code 6039D used to require that a cafeteria plan sponsor file an annual return on Form 5500 for its cafeteria plan, including limited financial information on Schedule F. This reporting requirement has been suspended. However, any ERISA plans offered under the cafeteria plan are still subject to ERISAs annual reporting requirements, unless an exemption applies. Please contact your accountant if you have any questions regarding the filing requirements under ERISA.
This is not intended to give legal or accounting advice, but to simplify your understanding of the IRS rules and how they pertain to Section 125. This is only meant as an overview.
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How Are Premiums Calculated
- Age: Older people can only be charged three times more than younger people.
- Location: Medical costs vary greatly from one location to another.12
- TobaccoUse: If you smoke, your premium can be up to 50% more.
- PlanType: Individual and family premiums vary because of the number of people covered. Premiums also vary based on the metallic tier,13 which determines the level of covered benefits.
Insurers cant charge men and women different rates, and cant charge more for people with preexisting conditions.14
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What Discrimination Rules Apply To The Section 125 Premium Conversion Plan
Section 125 indicates that a cafeteria plan cannot discriminate in favor of highly compensated individuals as to eligibility to participate in the plan and is prohibited from discrimination in favor of highly compensated participants as to benefits or contributions. In addition to the above two rules, cafeteria plans are subject to a 25% key employee concentration test.
What Federal Employees Need To Know About Fehb Premium Conversion
Federal employees shelter their share of the FEHB plan premium from income taxes through what is called “Premium Conversion.” Employees have the right to opt out of this program. This increases very slightly future Social Security benefits. However, in what economists call “present value” terms, that offsetting amount is a very small fractiona few pennies on the dollarof the gains from the Premium Conversion program. We strongly advise all employees NOT to opt out of Premium Conversion tax savings.
How much employees gain from this tax subsidy varies depending on employee salary, spousal salary, other income, state income tax rate, number of dependents, amount of deductions, whether they file jointly, and whether they are in FERS . The overall marginal tax rate can often reach 40 percent, or even more in some high tax states.
At income ranges typical of Federal employees, whether in single- or dual-earner families, and whether in the FERS or CSRS retirement systems, almost everyone will save at least 25 percent, and very few will save much more than 40 percent, from tax-sheltered health care premiums or other expenses.
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Health Benefits Premium Conversion
Most employees whose Agency has an Approved Adoption Agreement with Office of Personnel Management are eligible to have their Federal Employees Health Benefits premiums paid under the premium conversion plan. Reemployed annuitants enrolled in the Federal Employees Health Benefits will automatically participate in the premium conversion, provided they are employed in a position that conveys Federal Employees Health Benefits eligibility and by an Agency covered by premium conversion.
Participation in the Health Benefits Premium Conversion Plan is automatic unless an employee chooses to waive coverage. The part of an employees salary that is deducted for health insurance premiums is non-taxable. As a result, health benefits premiums are not subject to Federal income, Medicare, or Social Security taxes. In most cases, State and local taxes are also not applicable.
Agencies must deduct Federal Employees Health Benefits premiums on a pre-tax basis from the pay of these individuals unless they waive participation in Health Benefits Premium Conversion. Health Benefits Premium Conversion has no effect on the following:
- The amount of an employees health insurance premiums
- The amount of the Governments share towards the Federal Employees Health Benefits premium on behalf of any employee
- The base pay for retirement, life insurance, and/or Thrift Savings Plan
Determine The Type Of Policy You Are Converting To
Conduct a financial analysis to decide on the best type of coverage for you and your loved ones.
The most common conversion option of a life insurance policy is from term to permanent.
You will want to, with the help of an independent agent, understand the specific life insurance products available to convert to, like universal or whole life.
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Choose A High Deductible
The way deductibles affect your premium is important enough to repeat here: The higher your plans deductible, the lower your premium.
For 2021 and 2022, the IRS defines high-deductible health plans as at least $1,400 for individuals and $2,800 for families.6
Saving money on your premium is easy here. All you need to do is choose a plan with a deductible thats high enough to satisfy the IRSs requirements.
If you choose a high-deductible health insurance plan, you have a great opportunity to open a Health Savings Account where you can save money for potential medical expenses.
Enrollment / Make Changes
New employees may enroll in the Plan when they become eligible to enroll in any of the eligible health benefits plans. Normally, this is within ninety calendar days of the date he/she was hired.
Employees wishing to enroll in PCP, shall make their selection in Section 3 of the EUTFs EC-1 enrollment form and submit it to their departmental HR Representative.
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Premium Conversion Legislation For Retirees
John R. Smith, Director
On July 16 – more than three years after the legislation was first introduced – the House Civil Service and Agency Reorganization Subcommittee approved Rep. Tom Davis’ bill to allow federal and military retirees to pay health care premiums with pre-tax dollars. The full House Government Reform Committee, which Davis chairs, approved this “Premium Conversion” bill on Sept. 25.
Since 2000, active federal employees have been paying their health insurance premiums with pre-tax dollars through a similar Premium Conversion program. Davis’ legislation would extend this perk to retirees enrolled in the Federal Employees Health Benefits Plan .
Retirees have a great concern for this legislation, and only in part because being on fixed incomes means they are especially squeezed by rising insurance costs. It’s also a matter of fairness.
Shown Here: Introduced In Senate
Requires the Secretary of Defense to establish such a plan for members and retired members of the uniformed services. Requires that all such plans be completed so that such option shall become available not later than the first day of the first applicable pay period beginning on or after January 1, 2002.
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When Your Situation Changes We’re Here For You
If the health and dental insurance coverage provided by your employer is about to end or has recently ended, we’ve designed a plan that offers you the opportunity to continue to receive the security you’re used to.
Group Conversion lets you continue health and dental coverage without interruption so you and your family can enjoy the peace of mind that comes from knowing you’re protected from the financial hardship of unexpected health costs.
Your group plan doesn’t even need to have been provided by Blue Cross. Group Conversion is available for the initial transfer from any recognized Canadian group benefits plan within 60 days as long as you have been covered for at least 6 months under a group plan. And there’s no need to complete a medical questionnaire, so there’s no need to worry about prescription medications that you’re already taking.
Should You Convert Your Life Insurance Policy
At the heart of your decision to convert a life insurance policy or not should be three primary factors:
Conduct a needs analysis, with the help of an independent agent, to determine the best option for your life insurance coverage.
A life insurance policy conversion could make sense in the following scenarios:
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