FEHB Open Season Decision Time (Part 2): Enrollment Types

Enrollment Types and Tax Savings Associated with the FEHB Program

During the current Federal Employees Health Benefits (FEHB) program “open season”, federal employees who are enrolling in the FEHB program for the first time choose their enrollment type in the FEHB program. Those employees and retirees who are currently enrolled in the FEHB program can also make changes during the “open season” to their enrollment type in the FEHB program. This column discusses the three enrollment types available in the FEHB program. Also presented in this column is a discussion of the tax savings associated with the FEHB program.

The FEHB program offers three enrollment types for employees and retirees. They are:

Self only. This enrollment covers only the employee or the retiree.
Self plus one. This covers the employee or the retiree plus one eligible family member including: (1) A spouse (including a valid common-law spouse in a state recognizing common-law marriages); (2) A recognized natural child and a legally adopted child younger than age 26.; (3) A stepchild younger than age 26 who is considered a tax dependent of the FEHB program participant; (4) A child over age 26 who is incapable of self-support due to a mental or to a physical disability that occurred before the child was 18 years old; or (5) A foster child under age 26 who meets certain requirements with the employee’s certification. Note that a grandchild is not an eligible family member unless the child qualifies as a legally adopted child.
Self and family. This enrollment covers the employee or retiree and multiple eligible family members. There is no limit as to how many eligible family members can be included as part of self and family enrollment.

Two important items with respect to FEHB program enrollment:

Premium cost for self plus one enrollment is usually less than self and family enrollment for the same FEHB program health insurance plan. But during 2023, there were 84 FEHB program health plans in which a self plus one premium was higher than a self and family premium for the same FEHB program health plan.
Those employees or retirees who will benefit (pay less in premiums) by switching from self and family to self plus one enrollment may do so during the “open season”. Employees and retirees can switch enrollment type from self and family to self plus one outside of “open season” if they experience a “life event” during the year. The following example illustrates:

Example. Paul, age 53, is a federal employee enrolled in the FEHB program. During 2023, Paul has “self and family” coverage. Included on his FEHB program health insurance plan enrollment are his wife Samantha and their son James, age 25. James will become age 26 in June 2024, at which James will no longer be eligible to remain on Paul’s FEHB program health plan. In July 2024, Paul will be allowed to remove James from his FEHB program health plan and switch to “self plus one” coverage for himself and Samantha. He is able to switch FEHB program coverage at that time (rather waiting for the next “open season” in November 2024) because a family member’s loss of FEHB program eligibility is considered to be a “life event”, thus allowing an employee to switch his or her enrollment type outside of “open season”.

Don’t miss our Special FEHB Open Season Webinar on November 28th

Employees who want to enroll in “self plus one” may do so by filling out and submitting form SF 2809(Health Benefits Election Form). Some agencies use online, self-service options such as Employee Express, MyPay, Employee Personnel Page, or EBI to make changes to their employee benefits including FEHB program enrollment.Retirees who are requesting health benefit changes should go to “Open Season Online” which can be found at https://retireefehb.opm.gov/Annuitant/Home/

Tax Savings Associated with the FEHB Program, FEDVIP and Health Care FSAs for Federal Employees

There are three tax advantages for employees associated with the FEHB program are the Federal Employee Dental and Vision Program (FEDVIP), and the health care flexible spending accounts (HCFSAs). These tax advantages are discussed.

Employer share of FEHB program premiums. The employer share of health insurance – approximately 72 to 75 percent of the total FEHB program premiums are paid by the federal government on behalf of employees and retirees – is exempt from being included as taxable income and not reportable as income by employees and retirees on their federal and state income tax returns.
Employee share of FEHB program premiums. The employee portion of the total FEHB program premiums (on average about 25 to 28 percent) and the 100 percent of the FEDVIP premiums that participating employees pay are sheltered from income taxes through what is called “premium conversion”. Employees have the option to not participate in premium conversion when it comes to the FEHB program but not to their dental insurance and vision insurance premiums if they are enrolled in the FEDVIP. Retirees are not permitted by IRS rules to participate in premium conversion. More information on the benefits associated with premium conversion is presented below.
Participation in Health Care Flexible Spending Accounts. All employees, whether or not they participate in the FEHB program and/or FEDVIP, are permitted to set aside a portion of their gross salary, before all taxes – federal and state income taxes, Social Security (FICA) and Medicare Part A payroll taxes) to a health care flexible spending account (HCFSA). During 2024, they may set aside a maximum of $3,200 of their gross salary to an HCFSA. All qualified withdrawal from the HCFSA to pay out-of-pocket medical, dental and vision expenses are income-tax-free. A more detailed discussion of HCFSAs and their benefits will be presented in an upcoming FEDZONE column.

Participation in Premium Conversion

Federal employees (but not retirees) use before-taxed dollars (deducted from their bi-weekly gross salary) to pay their portion of the FEHB program insurance premiums. These before-taxed dollars include all taxes – federal and state income taxes, and Social Security (FICA) and Medicare Part A payroll taxes. This is called “premium conversion”. The Internal Revenue Code allows employees to deduct their portion of the total premiums paid for FEHB program health insurance from their gross salary. The result is a reduction of the employee’s taxable salary, leading to a decrease in the employee’s annual federal income tax liability. The amount of federal and state income tax annual savings depends on: (1) Total employee paid FEHB premiums; and (2) The employee’s federal and state marginal income tax brackets.

Those employees who are enrolled in the Federal Employee Dental and Vision Insurance Program also participate in premium conversion. Employees pay the full amount of FEDVIP premiums (no federal government contribution) for dental and/or vision insurance.

There is one difference between employee participation in premium conversion when it comes to the FEHB program and to the FEDVIP. With respect to the FEHB program employes can choose not to participate in premium conversions whereas with the FEDVIP, employees are required to participate in premium conversion.

An employee may not want to participate in premium conversion when it comes to the FEHB program for three reasons, namely: (1) “Flexibility”; (2) Effect on future Social Security retirement benefits; and (3) Itemizing medical expenses on their federal income tax returns. These reasons are discussed further below.

“Flexibility”. Those employees who waive premium conversion participation can drop their FEHB program health insurance participation in the middle of the year without giving any reason. Employees can change their enrollment type from self and family to self plus one, or to self only any time during the year, even in absence of a life event. Employees who participate in premium conversion can make these changes only if there is a qualified life event.
Effect on future Social Security monthly retirement benefits. Employee participation in premium conversion will lead to diminished future Social Security monthly retirement benefits. But the reduction in benefits is small compared to current year tax savings in federal and state income taxes.
Itemizing deductions on federal income tax returns. Employees who participate in premium conversion are not permitted to include the premiums they pay for the FEHB program and the FEDVIP premiums as qualified medical and dental expenses on their federal income tax returns. This assumes that an employee itemizes (files Schedule A) on their federal income tax return. Most individuals do not itemize. For an employee to include out-of-pocket medical expenses as deductible expenses, the total amount of medical expenses has to exceed 7.5 percent of the employee’s adjusted gross income (AGI). Most employees enrolled in the FEHB program will most likely not be able to surpass the 7.5 percent AGI threshold. However, there may be a year in which an employee anticipates above average out-of-pocket medical expenses and, when including the FEHB program premiums, they will meet or exceed the 7.5 percent AGI threshold. In that case, waiving premium conversion participation will be to the employee’s advantage. Note that employees who waive premium conversion for a particular year can reenroll in premium conversion in the following year. The election to participate or not participate in premium conversion is always made during the FEHB program open season.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.