[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


                                 ______

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                            WASHINGTON : 2003
____________________________________________________________________________
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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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