OPM sets plan for pre-tax health insurance deductions

Federal employees can expect to see more money in their take-home pay next fall, when the Clinton administration implements a plan to remove health insurance costs from workers' taxable income.

The Office of Personnel Management has announced plans to issue regulations instructing agencies not to tax the premiums employees pay under the Federal Employees Health Benefits Program. 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 a year under the plan.

"We expect that the implementation of premium conversion can be completed not later than Oct. 1, 2000," wrote Abby L. Block, chief of OPM's Insurance Policy and Information Division, in a Feb. 14 benefits administration letter.

President Clinton announced his plan to convert health insurance premiums to non-taxable income as part of his fiscal 2001 budget announcement. Section 125 of the Internal Revenue Code allows employers to treat premiums as non-taxable income. Many large private companies and state and local governments already offer such a tax benefit. The federal government does not have to seek legislation for the change.

According to Garry Ewing, staff director for the House Government Reform Subcommittee on the Civil Service, OPM has not released any figures on the potential loss of revenue for the government under its 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.

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.

Block said the guidance OPM is working on will explain the waiver process to employees.