    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

       H.R. 1231, MAKING HEALTH CARE MORE AFFORDABLE: EXTENDING PREMIUM
                         CONVERSION TO FEDERAL RETIREES

    =======================================================================

                                    HEARING

                                   before the

                         SUBCOMMITTEE ON CIVIL SERVICE
                            AND AGENCY ORGANIZATION

                                     of the

                         COMMITTEE ON GOVERNMENT REFORM
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                       ON

                                   H.R. 1231

     TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO ALLOW FEDERAL CIVILIAN
      AND MILITARY RETIREES TO PAY HEALTH INSURANCE PREMIUMS ON A PRETAX
        BASIS AND TO ALLOW A DEDUCTION FOR TRICARE SUPPLEMENTAL PREMIUMS

                                   __________

                                  JULY 9, 2003

                                   __________

                               Serial No. 108-66

                                   __________

           Printed for the use of the Committee on Government Reform

      Available via the World Wide Web: http://www.gpo.gov/congress/house
                          http://www.house.gov/reform

                                     ______

    89-968              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    ____________________________________________________________________________
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512�091800
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                         COMMITTEE ON GOVERNMENT REFORM

                         TOM DAVIS, Virginia, Chairman
    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
    CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
    MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
    STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
    DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
    RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
    JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
    TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
    CHRIS CANNON, Utah                   DIANE E. WATSON, California
    ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
    EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
    JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
    JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER,
    NATHAN DEAL, Georgia                     Maryland
    CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of
    TIM MURPHY, Pennsylvania                 Columbia
    MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
    JOHN R. CARTER, Texas                CHRIS BELL, Texas
    WILLIAM J. JANKLOW, South Dakota                 ------
    MARSHA BLACKBURN, Tennessee          BERNARD SANDERS, Vermont
                                             (Independent)

                           Peter Sirh, Staff Director
                     Melissa Wojciak, Deputy Staff Director
                          Rob Borden, Parliamentarian
                           Teresa Austin, Chief Clerk
                  Philip M. Schiliro, Minority Staff Director

             Subcommittee on Civil Service and Agency Organization

                       JO ANN DAVIS, Virginia, Chairwoman
    TIM MURPHY, Pennsylvania             DANNY K. DAVIS, Illinois
    JOHN L. MICA, Florida                MAJOR R. OWENS, New York
    MARK E. SOUDER, Indiana              CHRIS VAN HOLLEN, Maryland
    ADAH H. PUTNAM, Florida              ELEANOR HOLMES NORTON, District of
    NATHAN DEAL, Georgia                     Columbia
    MARSHA BLACKBURN, Tennessee          JIM COOPER, Tennessee

                                   Ex Officio

    TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                        Ronald Martinson, Staff Director
           B. Chad Bungard, Deputy Staff Director and Senior Counsel
                           Christopher Barkley, Clerk
                Tania Shand, Minority Professional Staff Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on July 9, 2003.....................................     1
    Text of H.R. 1231................................................     4
    Statement of:
        Davis, Hon. Tom, a Representative in Congress from the State
          of Virginia................................................     9
        Fallis, Charles L., president, National Association of
          Retired Federal Employees; Sue Schwartz, Deputy Director of
          Government Relations, Military Officers Association of
          America; and William H. Young, president, National
          Association of Letter Carriers.............................    21
    Letters, statements, etc., submitted for the record by:
        Davis, Hon. Danny K., a Representative in Congress from the
          State of Illinois, prepared statement of...................    51
        Davis, Hon. Jo Ann, a Representative in Congress from the
          State of Virginia:
            Prepared statement of....................................     3
            Prepared statement of Walter Olihovik, national
              president, National Association of Postmasters of the
              United States..........................................    18
        Davis, Hon. Tom, a Representative in Congress from the State
          of Virginia, prepared statement of.........................    12
        Fallis, Charles L., president, National Association of
          Retired Federal Employees, prepared statement of...........    23
        Schwartz, Sue, Deputy Director of Government Relations,
          Military Officers Association of America, prepared
          statement of...............................................    34
        Young, William H., president, National Association of Letter
          Carriers, prepared statement of............................    42

       H.R. 1231, MAKING HEALTH CARE MORE AFFORDABLE: EXTENDING PREMIUM
                         CONVERSION TO FEDERAL RETIREES

                                  ----------

                            WEDNESDAY, JULY 9, 2003

                      House of Representatives,
              Subcommittee on Civil Service and Agency
                                          Organization,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2 p.m., in
    room 2247, Rayburn House Office Building, Hon. Jo Ann Davis of
    Virginia (chairwoman of the subcommittee) presiding.
        Present: Representatives Jo Ann Davis of Virginia,
    Blackburn, and Van Hollen.
        Staff present: Ronald Martinson, staff director; B. Chad
    Bungard, deputy staff director and senior counsel; John
    Landers, detailee; Vaughn Murphy, legislative counsel; Robert
    White, director of communications; Christopher Barkley, clerk;
    Tania Shand, minority professional staff member; and Teresa
    Coufal, minority assistant clerk.
        Mrs. Davis of Virginia. The Subcommittee on Civil Service
    and Agency Organization will come to order.
        This hearing represents an important step in our efforts to
    extend premium conversion, or the ability to pay for health
    care premiums with pre-tax money, to Federal retirees, military
    retirees, and active duty military personnel. This is a benefit
    that is widely available in the private sector, and has been
    available to executive branch Federal employees since October
    2000.
        This is a matter of equity. The Federal Government has a
    long history of treating our active employees and retirees the
    same. They have access to the same health care, why shouldn't
    they have the same ability to pay their premiums with before
    tax dollars? And why shouldn't our military personnel be able
    to do the same for their TRICARE programs?
        This is also a matter of fairness. Health care premiums are
    skyrocketing for everyone, but no one feels this pressure more
    than people on a fixed income. The average Federal pension
    check is less than $1,900 per month. Last year's Federal cost-
    of-living increase was just 1.4 percent. Over the last 6 years,
    premiums in the Federal Employees Health Benefits Plans have
    jumped at least 8 percent a year, almost completely off-setting
    the small COLA increases.
        I am honored to be an original cosponsor of H.R. 1231, the
    legislation that would extend premium conversion to the entire
    Federal family. In past years, this proposal has died an
    anonymous death because it was not referred here but to the
    Ways and Means Committee, which never gave it serious
    consideration. This year Chairman Tom Davis, the House bill's
    sponsor, who is with us here today as our first witness, and
    Senator John Warner, the chief sponsor on the other side of the
    Capitol, crafted the legislation in such a way as to ensure a
    joint referral to the Government Reform Committee. This enables
    us to hold this hearing today, and to shed some light on this
    critical subject.
        Congress recognizes the burden Americans face due to the
    rising cost of health care. Already this year we have taken a
    bold step in adding a prescription drug benefit to Medicare.
    And just yesterday, many of us went to the floor to ensure
    passage of legislation that holds Federal retirees harmless
    when this new drug benefit goes into effect. It is only
    appropriate that we now turn our attention to the issue of
    premium conversion for the entire Federal family as the next
    step in our efforts.
        [The prepared statement of Hon. Jo Ann Davis and the text
    of H.R. 1231 follows:]

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        Mrs. Davis of Virginia. I thank you, and I would like to
    now recognize the chairman of our Government Reform Committee.
        Mr. Tom Davis of Virginia. Tom Davis. [Laughter.]
        Mrs. Davis of Virginia. I was just asking if I needed to
    swear you in to make you honest. [Laughter.]
        Mr. Tom Davis of Virginia. Oath of office swears us in.
    We're done.
        Mrs. Davis of Virginia. You're done.
        Mr. Tom Davis of Virginia. The oath of office swears
    Members in.
        Mrs. Davis of Virginia. Why don't we start with you then,
    Mr. Davis, Mr. Chairman. Thank you.
        Mr. Tom Davis of Virginia. Thank you. If you forget who
    anybody is today, it is Davis. It is Davis, Davis----
        Mrs. Davis of Virginia. I know who you are.
        Mr. Tom Davis of Virginia. I know. I know that. And I am
    happy you are where you are, Jo Ann.

    STATEMENT OF HON. TOM DAVIS, A REPRESENTATIVE IN CONGRESS FROM
                         THE STATE OF VIRGINIA

        Mr. Tom Davis of Virginia. Madam Chairman and members of
    the subcommittee, I really appreciate the opportunity to come
    before you today to discuss this issue for our Nation's
    military and civil servants.
        I know I am preaching to the choir this afternoon, but I am
    pleased to see all but two members of this subcommittee as
    cosponsors of the legislation this year. Although we all know
    full well the deliberative nature of Congress, it has been
    1,152 days since I first introduced premium conversion
    legislation, and I am pleased to finally have the ability to
    testify on this issue. And for that, we thank you, Madam
    Chairwoman.
        As you know, we have introduced legislation in the 108th
    Congress to allow Federal civilian and military annuitants to
    pay their Federal Employees Health Benefits Program premiums on
    a pre-tax basis, and allow active duty military personnel to
    apply a below the line deduction for TRICARE supplemental
    premiums paid annually. Although not an answer to rising health
    care costs, H.R. 1231 will take the next step in helping to
    improve the quality of life for those retirees and active duty
    personnel living on a fixed income.
        I first introduced this legislation in the 106th Congress,
    and was pleased to receive the support of 111 of our colleagues
    at that time. In the 107th Congress, H.R. 2125 received even
    broader bipartisan support, yet despite 282 cosponsors, was
    never acted upon. I am pleased to say that we have moved
    quickly in the 108th Congress, and in the first 6 months have
    surpassed our total from the last Congress, with 283 cosponsors
    to date.
        The FEHBP covers 8.6 million individuals, including 2.2
    million Federal and postal employees, 1.9 million Federal
    annuitants, and 4.5 million dependents. All of us here today
    recognize the importance of the FEHBP as we seek to retain and
    recruit the best and the brightest to serve our Nation as
    members of the Civil Service. Deputy Director Blair pledged
    late last year to work closely with the members of the
    Government Reform Committee, as well as providers and plan
    participants, to keep the FEHBP a model for employer-provided
    health care coverage. OPM has continued this commitment, and I
    firmly believe that our legislation will be integral to this
    effort.
        Under current law, amounts distributed from a section
    401(a) qualified plan and used to pay for benefits in a former
    employer's section 125 cafeteria must be included in the
    participant-retiree's income. Section 402(a) stipulates that
    distributions from a qualified plan are taxable to the
    distributee in the taxable in which distributed, except for two
    instances stated in the statute. Current exemptions include
    distributions made to a spouse or former spouse under court
    order, and eligible rollover distributions transferred within
    60 days.
        In 1959, Congress created the Federal Employees Health
    Benefits Plan [FEHBP] as a recruitment and retention tool for
    the Federal Government to compete in the job market. There is
    no disputing that Federal employees, retirees, and their
    survivors enjoy the widest selection of health plans in the
    country, enabling users to compare the costs, benefits, and
    features of different plans. Market-orientation and consumer
    choice have been hallmarks of the program's success. And
    although OPM has been more successful than private sector plans
    at constraining costs, the numbers tell us that our annuitants
    are losing more and more of their monthly paychecks to health
    care premiums.
        According to GAO, FEHBP premiums have increased by an
    average of nearly 10 percent a year since 1998, a trend which
    promises to continue in the near future given the increased
    costs for prescription drugs and outpatient care. Conversely,
    COLAs have only increased by 2.38 percent for CSRS and 1.96
    percent for FERS over the last 5 years. It is critical for
    annuitants to receive relief since they have been forced in
    recent years to shoulder increasingly high health insurance and
    prescription drug costs on their average monthly annuity of
    $1,869 and average annual annuity of $22,428. It has been
    estimated this legislation would result in a savings of
    approximately $434 a year. For some, this could mean an annual
    utility bill or car insurance payment, for others it could mean
    airfare to see their family. Regardless of the choice, a modest
    amount of money to those on a fixed income will have a
    substantial impact.
        In addition, this legislation is important to establish
    parity between employees and retirees. OPM made administrative
    changes and began offering premium conversion plans to
    executive branch employees in October 2000 and Congress
    extended the tax benefit to legislative branch workers in
    January 2001. This option must be made available to those whose
    income is fixed and whose medical costs are on average much
    higher than current employees. In fact, yesterday the House
    reaffirmed parity between retirees and current employees with
    the passage of H.R. 2631, Madam Chairwoman, legislation which
    we sponsored together. This legislation represents the Federal
    Government's commitment that our annuitants will remain on
    equal footing with current employees with regard to
    prescription drug benefits. This commitment must also be made
    in terms of providing the premium conversion benefit to our
    annuitants.
        In conclusion, now more than ever is the time to show our
    appreciation to those men and women who have and continue to
    dedicate their lives to our Nation and our ideals. Our Nation's
    tax code, although arcane and complex, has many built-in
    incentives that assist individual taxpayers in areas our Nation
    holds most dear, such as education, philanthropy, and health
    care. I can think of few priorities as dear as providing
    appropriate health care for our retirees and our active duty
    military. It is my hope that this legislation will be enacted
    in the 108th Congress. I will continue to work to ensure its
    passage.
        I appreciate the subcommittee taking a look at this issue
    today and look forward to working with all of you as we remain
    vigilant in our efforts to provide the best for our Federal
    civilian and military employees and annuitants. Thank you very
    much.
        [The prepared statement of Hon. Tom Davis follows:]

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        Mrs. Davis of Virginia. Mr. Chairman, we are delighted to
    have had you here to testify today. And by tradition, we do not
    question Members of Congress who testify before the committee.
    So I thank you again, Chairman Davis, for taking the time.
        Mr. Tom Davis of Virginia. Jo Ann, you always have ample
    opportunity to ask me questions off-stage.
        Mrs. Davis of Virginia. I know where I can get you.
        Mr. Tom Davis of Virginia. So I will be happy to help as we
    work through this. I just appreciate your willingness to hold
    this hearing and try to move this at least on a fast-track
    through this committee where we will face additional obstacles,
    but we will try to work through them. Thank you very much.
        Mrs. Davis of Virginia. Thank you, Mr. Chairman.
        We are going to go ahead and proceed. We should have a
    Member or two show up here shortly.
        I ask unanimous consent that all Members have 5 legislative
    days to submit written statements and questions for the hearing
    record, and that any answers to written questions provided by
    the witnesses also be included in the record. Without
    objection, it is so ordered.
        I also ask unanimous consent that all exhibits, documents,
    and other materials referred to by Members and the witnesses
    may be included in the hearing record, and that all Members be
    permitted to revise and extend their remarks. Without
    objection, it is so ordered.
        Before we begin, I do want to enter into the record a
    statement from Walter Olihovik, the national president of the
    National Association of Postmasters of the United States.
    Without objection, it is so ordered.
        [The prepared statement of Mr. Olihovik follows:]

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        Mrs. Davis of Virginia. If our second panel of witnesses,
    Charles L. Fallis, president of the National Association of
    Retired Federal Employees; Sue Schwartz, deputy director of
    government relations for the Military Officers Association of
    America; and William H. Young, president of the National
    Association of Letter Carriers, if you all would come forward
    and remain standing, I will administer the oath. It is the
    subcommittee's standard of practice to ask witnesses to testify
    under oath. If you will raise your right hands.
        [Witnesses sworn.]
        Mrs. Davis of Virginia. Let the record reflect that the
    witnesses have answered in the affirmative. You may be seated.
        The panel will now be recognized for an opening statement.
    We will ask you to summarize your testimony in 5 minutes. Any
    more complete statements you may wish to make will be included
    in the record.
        I would like to welcome Charles Fallis, president of NARFE.
    I thank you for being with us today. And I am going to
    recognize you first, Mr. Fallis, for 5 minutes.

    STATEMENT OF CHARLES L. FALLIS, PRESIDENT, NATIONAL ASSOCIATION
    OF RETIRED FEDERAL EMPLOYEES; SUE SCHWARTZ, DEPUTY DIRECTOR OF
    GOVERNMENT RELATIONS, MILITARY OFFICERS ASSOCIATION OF AMERICA;
    AND WILLIAM H. YOUNG, PRESIDENT, NATIONAL ASSOCIATION OF LETTER
                                CARRIERS

        Mr. Fallis. Thank you. On behalf of the Nation's 2.3
    million Federal annuitants, I am happy to testify today in
    support of H.R. 1231 and S. 623, bills that were introduced by
    Representative Tom Davis and Senator John Warner. I also want
    to commend you, Chairwoman Davis, for holding, for the first
    time ever, hearings on this premium conversion issue that is so
    important to us. I want to thank you for the lengths that you
    have gone out of way to ensure the health and economic well-
    being of Federal retirees.
        I think the reasons are clear why these bills should become
    law. Premiums for plans available for the Federal Employees
    Health Benefits Program have skyrocketed ever since 1998. It
    was these double digit premiums, these hikes that helped
    persuade OPM to revisit and reconsider earlier interpretations
    that Section 125 of the Internal Revenue Code did not apply to
    the Federal Government as an employer. And as a result of those
    reconsiderations, the premium conversion benefit was granted
    first to executive branch employees in October 2000 and then,
    thereafter, to legislative branch employees in January 2001.
        We are glad, of course, that our colleague who are still
    working receive this relief, but, of course, we were
    understandably disappointed that annuitants were left out. We
    believe very strongly that, as a matter of fairness and equity,
    Federal annuitants should be included and should have equal
    relief. Annuitants live on fixed incomes, and much of the
    meager cost-of-living increases that were received during the
    last 6 years were eroded substantially by the premium
    increases. The reality is that most of the 2003 average COLA of
    $26 was immediately consumed by these premium increases.
        But it is not just retirees who should care about this
    legislation. Indeed, imagine the shock of a newly retired
    homeland security worker when he or she retires and receives a
    first annuity check and learns that the Federal Government does
    not permit Federal retirees pre-tax earnings to pay for their
    share of health premiums. The result of that is that about a
    $434 savings which was there during the work years is lost
    immediately upon retirement, at a time when it is needed the
    most.
        It will be a rude awakening for today's active Federal and
    postal worker to learn that this inequity will continue unless
    the Davis and Warner bills are passed. For that reason, I am
    grateful to the Federal, postal, and military organizations,
    including those who are testifying here with me today, for the
    strong support they have given to H.R. 1231 and S. 623.
        On the downside, some lawmakers have expressed concerns
    that the proposed legislation, premium conversion, would be
    extended only to Federal retirees and not to all other
    retirees. Well, NARFE suggests that, because of their service
    to their country, providing premium conversion rights to
    Federal and military retirees is a reasonable first step toward
    providing it to all retirees.
        The Congressional Joint Committee on Taxation says that
    premium conversion legislation, when fully implemented, would
    cost $7.1 billion over 10 years. NARFE certainly is sensitive
    to the cost of legislation, particularly in light of the
    Federal budget deficit. Nonetheless, we also recognize that
    several proposals to use the tax code to help other Americans
    absorb skyrocketing health care costs are currently receiving
    favorable consideration, and we do not believe that H.R. 1231
    and S. 623 are out of line in that connection. Higher health
    insurance premiums have hit everyone in the Federal community,
    employees and retirees alike. That is why everyone who serves
    our country, including Federal and military retirees, should
    receive equal tax relief to make health insurance more
    affordable for all.
        We commend Congressman Tom Davis, Senator John Warner, and
    you, Chairwoman Davis, along with actually about 282 Members of
    the House, for recognizing that retirees, too, are struggling
    with rising health costs just as our other citizens.
        So, thank you again, Chairwoman Davis, for holding this
    hearing. I can assure you of NARFE's full support and
    cooperation in moving H.R. 1231 to the floor of the House as
    soon as possible. Thank you very much.
        [The prepared statement of Mr. Fallis follows:]

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        Mrs. Davis of Virginia.. Thank you, Mr. Fallis.
        We have been joined by my colleague, Ms. Blackburn from
    Tennessee. Ms. Blackburn, did you have an opening statement?
        Ms. Blackburn. No, ma'am, I do not. I appreciate the
    opportunity to step in for just a few moments and be with you
    all. I think we are all interested in this, interested in
    seeing it move forward, but we have been in the middle of a
    day-long markup in Judiciary. Thank you, Madam Chairman.
        Mrs. Davis of Virginia. Thank you, Ms. Blackburn.
    Unfortunately, that is the problem with several of our
    colleagues today, there are meetings on top of meetings, as it
    so often happens here on the hill.
        I would now like to recognize Sue Schwartz of the Military
    Officers Association of America. I want to thank you, Ms.
    Schwartz, for being here today. You have 5 minutes.
        Ms. Schwartz. Good afternoon, Madam Chairwoman and
    distinguished members of the subcommittee. The Military
    Officers Association of America [MOAA] is grateful for the
    invitation to present our views on H.R. 1231 and S. 623, to
    allow active duty servicemembers and Federal civilian and
    military retirees and survivors to pay health insurance
    premiums on a pre-tax basis and to allow a deduction for
    TRICARE supplemental premiums.
        Madam Chairman, we are also most appreciative of your
    leadership as an original cosponsor of H.R. 1231, as well as
    for your continued support for equity in the treatment of
    uniformed services and Federal employees. H.R. 1231 would allow
    8.6 million current and retired military servicemembers, their
    families, and survivors the same privilege already enjoyed by
    millions of other Americans.
        Many uniformed services beneficiaries, active duty,
    including Ready Reservists and National Guardsmen, and
    retirees, pay premiums for a variety of health programs. For
    the vast majority of military beneficiaries, these are not tax
    deductible because their health care expenses do not exceed 7.5
    percent of their adjusted gross income. This creates
    significant inequity with many private sector and Federal
    workers, many of whom already enjoy tax exemptions for health
    and dental premiums through employer-sponsored health benefit
    cafeteria plans. Since 2000, OPM has offered current Federal
    employees pre-tax benefits under the Federal Flexible Benefits
    Plan, called FedFlex.
        This year the gap between military and Federal employee
    benefits will widen even further. OPM will soon expand FedFlex
    by offering the option to enroll in flexible spending accounts
    [FSAs]. Federal employees will soon enjoy even greater benefits
    covering additional out of pocket costs.
        MOAA firmly believes that military beneficiaries are
    Federal employees too and should be able to enjoy the same
    equal tax relief regarding their health care expenses.
        A survey of private sector employees conducted last year by
    the Society for Human Resource Management shows that 69 percent
    of the private sector organizations surveyed offer flexible
    medical spending account benefits. Even my employer, MOAA, a
    private, non-profit organization with less than 100 employees,
    offers the premium conversion benefit. If MOAA can provide this
    benefit to 95 employees to maximize employee benefits, why
    cannot the Federal Government provide the same benefit for
    those who currently serve or those who have served their Nation
    in uniform?
        As DOD competes with the private sector in the ``war for
    talent,'' premium conversion can offer a valuable recruitment
    and retention tool. DOD is challenged to search for new ways to
    attract qualified candidates away from the private sector to
    choose military service, as well as to enhance retention.
        Compensation issues continue to be of concern to our
    military families. Pay and benefit improvements are integral to
    retaining a top quality all-volunteer force to wage the war
    against terrorism at home and abroad. The stresses of military
    life along with the recent increase in operations tempo
    associated with fighting two wars since September 11 are taking
    their toll on military families. Sacrifices are taken for
    granted as a part of the military life. However, in response to
    the hardships we impose upon our military families, it is
    important that every attempt is made to provide them with a
    quality of life that is competitive with the private sector.
        MOAA firmly believes that sailors, soldiers, airmen, and
    marines who sacrifice so much in service to their country are
    also Federal employees in every way and deserve to be afforded
    the same tax relief for their health care premiums as current
    Federal workers.
        It is most unfortunate that Federal annuitants are
    prohibited from participating in FedFlex. Both military
    retirees and Federal annuitants also bear the burden of
    increasingly high premiums. One example of where military
    retirees would greatly benefit concerns the TRICARE Retiree
    Dental Program.
        One of the greatest complaints we hear from our retiree
    members is the high cost of the retiree dental program. Unlike
    the active duty dental program, the Government does not
    subsidize retiree premiums, a significant dissatisfier for
    retired beneficiaries. While the program is clearly successful,
    participation could be greatly enhanced by offering premium
    conversion to offset the high costs of the program.
        MOAA strongly supports enactment of this legislation to
    correct this significant inequity in the tax code affecting the
    military. Rising health care costs affect all Federal
    employees, civilian or uniformed, active or retired, and this
    proposal is essential to ensure all are provided similar
    relief.
        Our hope is that the precedent set in 2000 for currently
    serving Federal civilian employees will pave the way to ensure
    equal treatment for all military and Federal personnel.
        Madam Chairman, I look forward to answering your questions.
    And thank you again for this opportunity.
        [The prepared statement of Ms. Schwartz follows:]

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        Mrs. Davis of Virginia. Thank you, Ms. Schwartz.
        And finally, last, but not least, I would like to welcome
    William Young, president of the National Association of Letter
    Carriers. I want to thank you for being with us today. And you
    are on.
        Mr. Young. Thank you very much, Chairwoman Davis, for this
    opportunity to testify before the Civil Service and Agency
    Organization Subcommittee. I would like to mention that
    appearing with me today is our director of retirees, Don
    Southern. I have two of my national trustees here, Randy Keller
    and Danny Rupp. And last, but not least, I have the president
    emeritus of the National Association of Letter Carriers,
    Vincent R. Sombrotto, who is here because he has a personal
    stake as a retiree. This legislation would affect him
    personally, and he is over here to make sure that I do not say
    anything to mess it up for him. [Laughter.]
        I am here representing the nearly 305,000 members of the
    National Association of Letter Carriers. One of the great
    strengths of our organization is that a large number of our
    retirees, some 86,000, are also members of our union. At the
    outset, I would like to thank you, Madam Chair, for your
    leadership on another issue, protecting the prescription drug
    benefits of retirees enrolled in the Federal Employees Health
    Benefits Program. As you are quoted as saying in this morning's
    Washington Post, ``This is an issue of the Federal Government
    leading by example.'' I could not agree with you more. And that
    is why I am here with you today to support premium conversion
    for retirees, because this, too, is an issue where the Federal
    Government can lead by example.
        Most of our retired members, some 63,000, in fact, are also
    enrolled in the NALC's Health Benefit Plan, which provides a
    comprehensive package of health benefit insurance. As you know,
    NALC HBP is part of the Federal Employees Health Benefits
    Program.
        In October 2000, premium conversion for Federal employees
    went into effect, enabling them to take advantage of a benefit
    that was already available to active letter carriers. The NALC
    takes great pride in having been a leader in establishing
    premium conversion within the Federal community. Thanks to the
    collective bargaining process in place for postal employees, we
    were able to establish premium conversion for our active
    members nearly a decade before it became available to the rest
    of the Federal work force.
        Over that time, this bargained for contractual provision
    has saved active letter carriers throughout the country
    millions of dollars. I would like to commend you, Madam Chair,
    as well as Chairman Tom Davis and Senator John Warner for
    leading the effort to expand this benefit to include retirees.
    H.R. 1231, which has more than 280 cosponsors, will allow
    Federal civilian, military, and postal retirees to pay health
    insurance premiums on a pre-tax basis. This will provide
    significant out of pocket savings to these individuals.
        As a general rule, letter carriers are a healthy group. The
    physical demands of delivering the Nation's mail inherently
    supports a healthy lifestyle. At the same time, a full career
    of walking the streets and battling the elements every day also
    presents our retirees with some unique and very physical
    challenges. Thank goodness our members can rely on a
    comprehensive and affordable health plan to take care of their
    needs during their hard-earned retirement.
        Like many of the Nation's retirees, our members often
    confront some difficult financial decisions. In addition, as
    Federal retirees, many of our members are faced with obstacles
    unique to the Federal and postal community such as the Windfall
    Elimination Provision and the Government Offset Provision which
    deprive Civil Service retirees of earned benefits. That makes
    it even more difficult for them when it comes time to pay for
    health insurance premiums.
        To give you an idea of how helpful H.R. 1231 would be to
    our retired members, consider the case of a new annuitant with
    30 years of service under CSRS. That annuitant will qualify for
    an annual annuity of approximately $24,000 a year, which is
    worth $20,400 after Federal taxes at the 15 percent tax
    bracket. If the annuitant is a union member and is enrolled in
    the NALC health plan, he or she must pay premiums worth more
    than 10 percent of their after-tax annuity income, some $2,300
    a year, for family coverage. This proposal would save that
    retired letter carrier $345 each and every year. Now that may
    not sound like a lot, but to people who must live on a modest
    fixed income in the face of escalating health care costs and
    rising premiums, such savings are not insignificant.
        Premium conversion has been a win-win for active letter
    carriers, both in demonstrating the value of collective
    bargaining which established it and for the resulting savings
    which have enabled letter carriers to pump millions of dollars
    back into the economy. We are grateful that you, Chairwoman
    Davis, recognize the importance of expanding premium conversion
    to include all Federal retirees. We look forward to working
    with you, Ranking Member Davis, and the members of this
    subcommittee to see that it becomes law. Thank you very much.
        [The prepared statement of Mr. Young follows:]

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        Mrs. Davis of Virginia. Thank you, Mr. Young. And thank you
    to all of our panelists.
        I would like to recognize my colleague from Maryland who
    has joined us, Mr. Van Hollen, to see if you have an opening
    statement you would like to make.
        Mr. Van Hollen. Just a very short remark, thank you, Madam
    Chairwoman. Let me thank the witnesses for their testimony. I
    want to thank you, Madam Chairwoman, for your leadership on
    this important issue which, as we heard from the testimony of
    Mr. Young, is very important to retired Federal employees. I
    represent an area, the Eighth Congressional District in
    Maryland, that has lots of current Federal employees and lots
    of retired Federal employees, and I can tell you this is
    something I hear about whenever I talk to them. You are right,
    it may not be a huge amount, but for people who are retired on
    fixed incomes it can mean quite a lot. So I want to thank you,
    Madam Chairwoman, and I also want to thank the chairman of the
    full committee, Congressman Tom Davis, for his leadership on
    this issue. I am proud to be a cosponsor of this legislation
    and I look forward to its hopefully speedy passage.
        I would also like to say I want to thank you and the
    chairwoman of the committee for your quick leadership: I was
    pleased to join with you in this effort to make sure that the
    bill we just passed with respect to prescription drug coverage
    for people on Medicare did not inadvertently hurt our Federal
    retirees. We may have big differences on whether or not we
    thought the bill was otherwise a good idea, but, clearly, we
    all agreed on the fact that whatever the merits of the
    underlying bill, we did not want it to harm Federal employees.
    And so I appreciate the bipartisan consensus on that. Thank
    you, Madam Chairwoman.
        Mrs. Davis of Virginia. Thank you, Mr. Van Hollen. And I
    want to thank you for joining in and supporting our Federal
    retirees and our active military and military retirees.
        I am going to start with a few questions, if you will put
    me on a timer for 5 minutes, then I will go to you, Mr. Van
    Hollen.
        I do not think we are going to be able to change the IRS'
    mind about premium conversion for retirees unless we enact this
    legislation. I have to say that the current tax policy is just
    too hit and miss to make sense to me. I do not understand it,
    but I am not an accountant either. The law says that if an
    employer sets up a cafeteria plan, then health insurance
    premiums can be pre-tax. But if the same employer does not want
    to go to the administrative expense of setting up the cafeteria
    plan, then the same health insurance premiums are not pre-tax.
    And then when a person retires, as you pointed out in your
    testimony, those same health insurance premiums are never pre-
    tax. And if a person is not employed and has to pay for health
    insurance out of his or her own pocket, that is not pre-tax
    either. The situation cannot possibly make sense to taxpayers
    and, as I said, it does not make sense to me. I think it is
    time for a change in this system and I do not see any reason
    why we should not start with our Federal civilian and military
    retirees.
        With the rapidly growing cost of health care premiums,
    would you not say that Federal civilian and military retirees
    as a group are facing an uphill battle in being able to afford
    their health care needs? Anybody want to comment on that? I
    think you all probably did in your testimony. It seemed to me,
    and correct me if I am wrong, but that your increase in your
    COLA was less than the cost of the increase in the health care;
    was that about right?
        Mr. Fallis. Just about the same. If you take the average
    COLA for last year, it is $26 a month. And plans like the Blue
    Cross/Blue Shield's standard option was I believe $22.52 a
    month.
        Mrs. Davis of Virginia. So you netted about $3.50 a month
    increase?
        Mr. Fallis. That is right.
        Mrs. Davis of Virginia. Do you have any examples of
    anything that you brought with you that your members would like
    to share from each of your organizations, anything to put in
    the record to help here?
        Mr. Fallis. I think our membership in NARFE, of course, is
    speaking with one voice on this. No member of NARFE has premium
    conversion. We think it is terribly unfair. Quite frankly, I
    believe with a little compassion and understanding, the IRS
    could have come up with a different solution here. I do not
    really truly see our retirement plan is what they call a
    ``qualified plan.'' They indicate ``qualified plans'' are not
    included in this. But if you take a situation where in a
    qualified plan a 40 year-old worker leaves employment in the
    private sector where there is a retirement fund, that employee
    is allowed to take not only his or her contributions, but those
    that are made by the firm or the company or whatever. That is
    quite different in the Federal Government. When one leaves
    Government service he or she is not allowed to take anything
    other than his or her own contributions. And so I think that
    alone makes it different from what we would call a ``qualified
    plan.'' So, yes, I believe that it could be done; probably will
    not be. But I think the IRS could have given us a better
    decision and have avoided all of this.
        Mrs. Davis of Virginia. I think that would have been the
    easier way to go. But, quite frankly, I do not think it is
    going to be the way. Unless we do the legislation, I do not
    think it is going to happen.
        Ms. Schwartz. Madam Chair, may I add one other.
        Mrs. Davis of Virginia. Certainly.
        Ms. Schwartz. There is also a very deserving group of
    beneficiaries within DOD, and those are our Guardsmen and
    Reservists who do so much for our Nation. And within the
    TRICARE program, their dental premiums are not subsidized by
    the Federal Government, just as the retiree premiums are not.
    And there has been a real problem with dental readiness for the
    Guardsmen and Reservists because it is very expensive for them
    to buy into this program. If we were able to get the premium
    conversion benefit for our Guardsmen and Reservists, it would
    give a significant tax break for them and maybe make them
    better able to afford the program. Many Guardsmen and
    Reservists could not deploy because their dental readiness was
    not adequate. So I think that is a group that really would
    benefit from this, and we appreciate the subcommittee helping
    them out as well.
        Mrs. Davis of Virginia. Certainly, our Guardsmen and
    Reservists have been very active in the last year. They are
    doing yeoman's work and we could not be doing it without them.
        Ms. Schwartz. Yes. Right. Thank you.
        Mrs. Davis of Virginia. Mr. Young.
        Mr. Young. Madam Chairwoman, I bring a rather unique view
    to this because, as I said in my testimony, all of the active
    members that I represent, which is the majority of the 305,000
    number, already have pre-tax because the employer that we work
    for, the U.S. Postal Service, was able to administer a
    cafeteria plan. To us, to the letter carriers, it is a basic
    issue of fairness. It is just not fair the way it is set up
    right now. What it boils down to to me is that one group of
    employees I represent, the actives, they have a voice. At the
    bargaining table, I am able, or whoever the president is at the
    time, is able to speak on their behalf. What has happened to
    our retirees is, to be honest with you, they have no voice. And
    you have moved way up in their charts, I can tell you that, and
    the other people that support this, and I mean that sincerely,
    because for all practical purposes you are their voice, their
    only voice.
        And so I hope that the issue of fairness surfaces here and
    that people understand. Like I said, for most of the people I
    represent, we have it. But it is not fair, it really is not.
    And it is even more unfair when you add into the equation that
    the people who can afford to take the hit the least are the
    very ones that are being asked to absorb it. And so I would ask
    the committee to keep their mind on the issue of fairness as
    they deal with this, because the way it is set up it is just
    not right, it is not fair.
        Mrs. Davis of Virginia. Thank you, Mr. Young.
        I am going to yield to my colleague from Maryland, Mr. Van
    Hollen, for questions.
        Mr. Van Hollen. Thank you, Madam Chairwoman. I do not have
    a lot to add. I think that is a very important point you
    raised, Mr. Young, with respect to fairness. I am ready to vote
    on this. My only question is when. I do not know when we are
    scheduled to vote on this as a subcommittee or a full
    committee. But, really, I do not have any questions. As I said,
    I am a cosponsor of this bill. It is an issue I have talked
    about on many occasions within my congressional district. So I
    appreciate your all being here today. And, again, thank you for
    your leadership.
        Mrs. Davis of Virginia. Mr. Van Hollen, you are going to
    get your chance to vote on it next Wednesday, I believe. It is
    the 16th, whatever day that falls on.
        Mr. Van Hollen. Terrific. That is great.
        Mrs. Davis of Virginia. We will be having a mark-up. We are
    having a hearing that day and I believe the markup is going to
    be right after the hearing. So I would certainly appreciate it
    if you were there and can vote.
        Mr. Van Hollen. All right. Thank you.
        Mrs. Davis of Virginia. But we do plan on bringing it up
    for a markup next Wednesday. And then I would assume our
    chairman of the full committee, Mr. Davis, would bring it to
    the full committee very quickly. And then, of course, as you
    know, it would probably have to go over to Ways and Means after
    that. And that is where you are going to have to work.
    [Laughter.]
        Where we are going to have to work. But we certainly have
    the cosponsors, the people who are behind you on it. I mean,
    283 cosponsors is more than what we need to pass it on the
    House floor. So we just have to get it out of the committee and
    get it out there to the floor.
        I do not have any further questions. But I do appreciate
    your taking the time to come and get all this on the record so
    that we can take the bill forward and try and do what I believe
    is fair and equitable to all people. I think the biggest
    argument for it, Mr. Fallis, and I think you are the one who
    said it, is think of the poor man or woman who is sitting here
    an active employee right now, they retire and they get a big
    hit in their paycheck. It is like they get a demotion.
        Mr. Fallis. Retirees are fast becoming known as the
    stepchildren of the Federal community.
        Mrs. Davis of Virginia. Well, we appreciate all the service
    that our retirees have given us. And I appreciate all the
    service that our active men and women in the military are
    giving us right now. My heart is with them. Thank you, Mr.
    Young. My sister-in-law was a postmaster for many years. I know
    that is not a letter carrier, but----
        Mr. Young. Close enough.
        Mrs. Davis of Virginia. Close enough, yes. Thank you all
    for coming.
        And with that, the hearing is adjourned.
        [Whereupon, at 3 p.m., the subcommittee was adjourned, to
    reconvene at the call of the Chair.]
        [The prepared statement of Hon. Danny K. Davis follows:]

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