[Federal Register Volume 68, Number 190 (Wednesday, October 1, 2003)]
[Rules and Regulations]
[Pages 56525-56529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24793]


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OFFICE OF PERSONNEL MANAGEMENT

5 CFR Part 892

RIN 3206-AJ17


Health Insurance Premium Conversion

AGENCY: Office of Personnel Management.

ACTION: Final rule.

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SUMMARY: The Office of Personnel Management (OPM) is issuing final 
regulations on health benefits premium conversion. Premium conversion 
enables employees to pay Federal Employees Health Benefits (FEHB) 
premiums with pre-tax dollars, as provided in the Internal Revenue 
Code.

EFFECTIVE DATE: October 31, 2003.

FOR FURTHER INFORMATION CONTACT: Laurie Bodenheimer, (202) 606-0004, or 
e-mail to [email protected].

SUPPLEMENTARY INFORMATION: 

Background

    On July 19, 2000, OPM issued interim final regulations in the 
Federal Register

[[Page 56526]]

(65 FR 44644) to implement a health insurance premium conversion plan 
for employees participating in the FEHB Program. These interim 
regulations were effective on September 18, 2000, and are located at 
part 892.
    The premium conversion plan is part of a ``cafeteria plan'' under 
section 125 of the Internal Revenue Code. OPM executed a separate plan 
document to comply with section 125 requirements, which is available on 
OPM's Web site: http://www.opm.gov/insure/health. OPM also issued 
separate instructions to personnel and payroll offices.
    The premium conversion plan took effect on October 1, 2000. Under 
the plan, employees' health benefit premium withholdings are treated as 
a pre-tax salary deduction. Because premium conversion lowers 
employees' taxable income, it reduces their tax burden. The reduction 
in taxable income reduces the base for Federal income tax, Social 
Security and Medicare taxes, and, in most States and localities, State 
and local taxes based on income.
    While most Federal employees are now covered by OPM's premium 
conversion plan, the Federal Judiciary, the United States Postal 
Service, and some smaller Executive Branch agencies with independent 
compensation-setting authority previously implemented their own premium 
conversion plans. Employees of those entities are not covered by the 
premium conversion plan described here.
    All other employees in the Executive Branch of the Federal 
government who are participating in the FEHB Program, and whose pay is 
issued by an Executive Branch agency, automatically have their salary 
reduced (through a Federal allotment) and their FEHB premiums paid 
under the premium conversion plan. Also, individuals enrolled in the 
FEHB Program who are employed outside the Executive Branch, or whose 
pay is not issued by an Executive Branch agency, have their salaries 
reduced and their FEHB premiums paid under our premium conversion plan 
if their employer, in coordination with their payroll office, agreed to 
offer participation in the plan. However, any individual enrolled in 
the FEHB Program who does not want to participate in premium conversion 
may waive participation, subject to the limitations in these 
regulations.
    To ensure that the premium conversion plan qualifies for pre-tax 
treatment of health insurance premiums, OPM amended its allotment 
regulations at 5 CFR part 550, subpart C. Each employee participating 
in premium conversion makes an allotment to his or her employing agency 
in the amount of the employee share of the FEHB insurance premium. The 
agency then uses that amount to pay the employee's premium. The 
allotment is automatic unless the employee elects to waive premium 
conversion.
    We received comments from three Federal agencies and one Federal 
employee. One Federal agency had several questions and comments 
concerning consequences of employee failure to pay union dues when 
enrolled in a plan that requires such, the availability of belated open 
season enrollments, LWOP, insufficient pay, early plan termination, and 
part-time reemployed annuitants. Each of these issues (except 
reemployed annuitants) was addressed in the final regulation under 
Qualifying Life Events and on the Table of Permissible Changes for 
Premium Conversion Election. OPM has already provided guidance to 
agencies on issues relating to reemployed annuitants and will continue 
to do so through Benefits Administration Letters and the FEHB Handbook. 
Another commenter asked what the effective date would be for changes 
from self and family to self only or for cancellations. This document 
incorporates the change in effective dates for FEHB changes in 
enrollment first published on August 31, 1998. The answer to this 
question now would depend upon the employee's premium conversion 
status, as follows:
    For employees participating in premium conversion, a change to self 
only or cancellation can be made only during the annual open season or 
because of the occurrence of a qualifying life event as described in 
section 892.101. A change to self only made during the annual open 
season is effective on the same date as any other open-season change. A 
cancellation made during the annual open-season is effective at 
midnight of the day before the first day of the first pay period that 
begins in the next year. As of 12:00:01 a.m. on the first day of the 
first pay period that begins on or after January 1 of the next 
following year, the enrollee is no longer covered.
    A change to self only related to a qualifying life event is 
effective on the first day of the first pay period that begins after 
the date the employing office receives the employee's appropriate 
request. A cancellation made because of a qualifying life event is 
effective at midnight of the last day of the pay period in which the 
employing office receives the appropriate request to cancel the 
enrollment. For convenience, we have located all information on changes 
to self only and cancellation in part 892, which specifically applies 
to employees under premium conversion. Information on changes to self 
only is in section 892.208, and information on cancellation is in 
section 892.209.
    For enrollees who are not participating in premium conversion 
(including employees who waived this benefit, annuitants, former 
spouses, and Temporary Continuation of Coverage (TCC) enrollees), a 
cancellation or change to self only is not considered an open-season 
change, even if it is submitted during open season. For effective dates 
see Sec.  890.301(e)(2), or Sec.  890.304(d)(ii).
    Another commenter noted that premium conversion does affect Federal 
retirement plan benefits, specifically Social Security. The commenter 
correctly stated that the Federal Employees Retirement System (FERS) is 
a three-tiered retirement plan made up of Social Security Benefits, a 
Basic Benefit Plan, and Thrift Savings Plan Benefits. Since employee 
contributions to FEHB premiums are withheld pre-tax under premium 
conversion, the employee's taxable income is reduced. This is turn 
reduces the employee's Social Security taxes, which reduces career 
earnings, and thus reduces an individual's future Social Security 
benefits. The commenter requested that we disclose, discuss, and 
analyze this information so Federal employees make an informed 
decision. Our actuaries extensively analyzed the effect of premium 
conversion on future Social Security benefits. Based on that analysis, 
we concluded that most employees realize far greater savings than they 
lose in benefits. We provided information to agencies, in Benefits 
Administration Letters (BALs), and included several worksheets for 
employees to use to individually calculate savings and reductions in 
benefits. We also added a series of questions and answers on our Web 
site (http://www.opm.gov/insure) several of which specifically address 
the impact of premium conversion on Social Security benefits. A third 
commenter wondered why the rules for switching or canceling under 
premium conversion should be any different from current time frames in 
section 890.301. In order for employees to enjoy the tax benefit of 
premium conversion, our premium conversion plan must comply with 
Internal Revenue Service rules requiring an election to be irrevocable 
except during open season, or when a covered person experiences a 
qualifying life event. With this important exception, there is 
otherwise a great deal of

[[Page 56527]]

similarity between FEHB opportunities to change enrollment found at 
section 890.301 and premium conversion qualifying life events.
    We have made editorial changes to section 892.101 to regroup and 
clarify qualifying life events. Within subpart B, we revised sections 
892.203, 892.207, 892.208, 892.209, and 892.211. We amended the title 
for subpart D and revised 892.401(b) and added section 892.402 to 
include more specific information for employees who participate in 
premium conversion.

Regulatory Planning and Review

    This regulation has been reviewed by the Office of Management and 
Budget in accordance with Executive Order 12866, ``Regulatory Planning 
and Review.'' Because this regulation has an economic impact exceeding 
$100 million annually, it is defined by that Executive Order as being 
``economically significant.'' It is classified as a major rulemaking in 
accordance with the Congressional Review Act because of its economic 
impact.

Analysis of Costs and Benefits

    In OPM's view, the benefits of this regulation substantially 
outweigh the costs. Under this regulation, Federal employees with 
health insurance through the FEHB Program are now paying their 
insurance premiums with pre-tax dollars, similar to how millions of 
private sector employees currently pay their health insurance premiums. 
The benefits of this change in tax status are significant: the Federal 
Government has become a more competitive employer and the tax liability 
of Federal employees decreased.
    Costs of this regulation included a start-up cost in the first year 
to implement the program. In fiscal year 2003, the tax benefit to 
employees is estimated to be $848 million: $692 million in Federal 
income taxes; $113 million in Social Security taxes; and $43 million 
Social Security taxes. We expect that these estimates will increase by 
7 percent a year in subsequent years.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency determines that a rule is not likely 
to have a significant economic impact on a substantial number of small 
entities, the RFA requires that the agency present an initial 
regulatory flexibility analysis at the time of the publication of the 
rulemaking describing the impact of the rule on small entities and must 
also seek public comment on such impact. Small entities include small 
businesses, organizations, and governmental jurisdictions.
    OPM has determined that this rule will not have a significant 
economic impact on a substantial number of small entities. The 
regulation does not impact small entities.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, this final rule does not 
include any Federal mandate that may result in an expenditure in any 
one year by State, local, or tribal governments, in the aggregate, or 
by the private sector, of $100 million or more.

Federalism

    We have examined this rule in accordance with Executive Order 
13132, Federalism, and have determined that this final rule will not 
have any negative impact on the rights, roles, and responsibilities of 
State, local, or Tribal governments.

List of Subjects in 5 CFR Part 892

    Administrative practice and procedure, Government employees, Health 
insurance, Wages, and Taxes.

U.S. Office of Personnel Management
Kay Coles James,
Director.

0
Accordingly, OPM is adopting the interim rule (65 FR 44644) published 
on July 19, 2000, amending 5 CFR part 892:

PART 892--FEDERAL FLEXIBLE BENEFITS PLAN: PRE-TAX PAYMENT OF HEALTH 
BENEFITS PREMIUMS

0
1. The authority citation for part 892 is revised to read as follows:

    Authority: 5 U.S.C. 8913; 5 U.S.C. 1103(a)(7); 26 U.S.C. 125.


0
2. In Sec.  892.101 the definition of Qualifying life event is revised 
to read as follows:


Sec.  892.101  Definitions.

* * * * *
    Qualifying life event means an event that may permit changes to 
your FEHB enrollment as well as changes to your premium conversion 
election as described in Treasury regulations at 26 CFR 1.125-4 and 
includes the following:
    (1) Change in family status that results in an increase or decrease 
in the number of eligible family members as follows:
    (i) Marriage, divorce, annulment, legal separation;
    (ii) Birth, adoption, acquiring a foster child that meets the 
definition in Sec.  890.101(a) or a stepchild, issuance of a court 
order requiring an employee to provide coverage for a child;
    (iii) Last dependent child loses coverage, for example, the child 
reaches age 22 or marries, stepchild moves out of employee's home, 
disabled child becomes capable of self support, child acquires other 
coverage by court order; and
    (iv) Death of a spouse or dependent.
    (2) Any change in employment status that could result in 
entitlement to coverage; for example:
    (i) Reemployment after a break in service of more than 3 days;
    (ii) Return to pay status from non-pay status if employee 
previously elected to terminate coverage (if employee did not elect to 
terminate see Sec.  892.101 (5);
    (iii) Return to receiving pay sufficient to cover premium 
withholdings if coverage terminated;
    (iv) Your spouse or dependent changes hours from either full-time 
to part-time status, or the reverse, which significantly affects their 
eligibility for coverage;
    (v) Start or end of a period of unpaid leave of absence (leave 
without pay [LWOP], or other non-pay status) by you or your spouse. A 
period of unpaid leave is a continuous unpaid leave of absence of more 
than one pay period; and
    (vi) Start or end of your spouse's employment that affects you or 
your spouse's eligibility for coverage.
    (3) Any change in employment status that could affect the cost of 
insurance, including:
    (i) Change from temporary appointment with eligibility for coverage 
under 5 U.S.C. 8906a to an appointment that permits receipt of 
government contribution; and
    (ii) Change from full-time to part-time status or the reverse.
    (4) An employee is restored to a civilian position after serving in 
uniformed services as described in Sec.  890.304 (a)(vi)(vii).
    (5) Start of non-pay status and end of non-pay status if employee 
did not terminate coverage (if coverage terminated see Sec.  892.101 
(2)(ii)).
    (6) An employee enrolled in a health maintenance organization (HMO) 
or a covered family member moves or becomes employed outside the 
geographic area from which the carrier accepts enrollments, or if 
already lives

[[Page 56528]]

or works outside the area, moves further from this area.
    (7) Transfer from a post of duty within the United States to a post 
of duty outside the United States, or the reverse.
    (8) Separation from Federal employment when the employee or 
employee's spouse is pregnant.
    (9) An employee becomes entitled to Medicare. (For change to self 
only, cancellation, or change in premium conversion status see Sec.  
892.101 (11)).
    (10) An employee or eligible family member loses coverage under 
FEHB or another group insurance coverage including the following:
    (i) Loss of coverage due to termination of membership in an 
employee organization sponsoring the FEHB plan;
    (ii) Loss of coverage of employee or eligible family member due to 
discontinuance in whole or part of FEHB plan;
    (iii) Loss of coverage under another Federally-sponsored health 
benefits program, including, TRICARE, Medicare, or Indian Health 
Service;
    (iv) Loss of coverage under Medicaid or similar State-sponsored 
program of medical assistance for the needy; and
    (v) Loss of coverage under a non-Federal health plan, including 
foreign, State or local government, or private sector group health plan 
as described in Sec.  890.301 (i)(6).
    (11) An employee or eligible family member gains coverage under 
FEHB or another group insurance plan, including the following:
    (i) Another Federally-sponsored health benefits program, including, 
TRICARE, Medicare, or Indian Health Service;
    (ii) Medicaid or similar State-sponsored program of medical 
assistance for the needy; and
    (iii) A non-Federal health plan, including foreign, State or local 
government, or private sector group plan.
    (12) A change in an employee's spouse or dependent's coverage 
options, for example:
    (i) Employer starts offering a different type of coverage;
    (ii) Employer stops offering the type of coverage that the 
employee's spouse or dependent has (if no other coverage is available);
    (iii) A health maintenance organization (HMO) adds a geographic 
service area that now makes the employee's spouse eligible to enroll in 
that HMO;
    (iv) Employee's spouse is enrolled in an HMO that removes a 
geographic area that makes the spouse ineligible for coverage under 
that HMO, but other health plans or options are available (if no other 
coverage is available see Sec.  892.101 (10); and
    (v) Change in the cost of coverage.

Subpart B--Eligibility and Participation

0
3. Section 892.203 is revised to read as follows:


Sec.  892.203  When will my premium conversion begin?

    If you are newly employed or newly eligible for FEHB in a covered 
Executive Branch agency (as described in Sec.  892.201(a)), your salary 
reduction (through a Federal allotment) and pre-tax benefit will be 
effective on the 1st day of the first pay period beginning on or after 
your employing agency receives your enrollment.

0
4. Section 892.207 is revised to read as follows:


Sec.  892.207  Can I make changes to my FEHB enrollment while I am 
participating in premium conversion?

    (a) Subject to the exceptions described in paragraphs (b) and (c) 
of this section, you can make changes to your FEHB enrollment for the 
same reasons and with the same effective dates listed in Sec.  890.301 
of this chapter.
    (b) However, if you are participating in premium conversion there 
are two exceptions: you must have a qualifying life event to change 
from self and family enrollment to self only enrollment or to drop FEHB 
coverage entirely. (See Sec.  892.209 and Sec.  892.210). Your change 
in enrollment must be consistent with and correspond to your qualifying 
life event as described in Sec.  892.101. These limitations apply only 
to changes you may wish to make outside open season.

0
5. Section 892.208 is revised to read as follows:


Sec.  892.208  Can I change my enrollment from self and family to self 
only at any time?

    If you are participating in premium conversion you may change your 
FEHB enrollment from self and family to self only under either of the 
following circumstances:
    (a) During the annual open season. A change to self only made 
during the annual open season takes effect on the 1st day of the first 
pay period that begins in the next year.
    (b) Within 60 days after you have a qualifying life event. A change 
to self only made because of a qualifying life event takes effect on 
the first day of the first pay period that begins after the date your 
employing office receives your appropriate request. Your change in 
enrollment must be consistent with and correspond to your qualifying 
life event. For example, if you get divorced and have no dependent 
children, changing to self only would be consistent with that 
qualifying life event. If both you and your spouse are Federal 
employees, and your youngest dependent turns age 22, changing from a 
self and family to two self only enrollments would be consistent and 
appropriate for that event.

0
6. Section 892.209 is amended by revising paragraphs (a) and (b) as 
follows:


Sec.  892.209  Can I cancel FEHB coverage at any time?

    If you are participating in premium conversion you may cancel your 
FEHB coverage:
    (a) During the annual open season. A cancellation made during the 
annual open season is effective at midnight of the day before the first 
day of the first pay period that begins in the next year.
    (b) Within 60 days after you have a qualifying life event. A 
cancellation made because of a qualifying life event takes effect at 
midnight of the last day of the pay period in which your employing 
office receives your appropriate request to cancel your enrollment. 
Your cancellation of coverage must be consistent with and correspond to 
your qualifying life event. For example, if you get married and you 
gain other insurance coverage because your spouse's employer provides 
health insurance for your spouse and you, then canceling FEHB coverage 
would be consistent with that qualifying life event. If you add an 
eligible family member, canceling coverage would generally not be 
consistent with that qualifying life event.
    7. Section 892.211 is revised to read as follows:


Sec.  892.211  What options are available to me if I go on a period of 
leave without pay (LWOP) or other types of non-pay status?

    (a) Your commencement of a period of LWOP is a qualifying life 
event as described in Sec.  892.101. You may change your premium 
conversion election (waive if you now participate, or participate if 
you now waive). (b)(1) You may continue your FEHB coverage by agreeing 
in advance of LWOP to one of the payment options described in paragraph 
(b)(2), (b)(3), or (b)(4) of this section.
    (2) Pre-pay. Prior to commencement of your LWOP you may allot 
through payroll deduction the amount that will be due for your share of 
your FEHB premium during your LWOP period, if your employing agency, at 
its discretion, allows you to do so. Contributions under the pre-pay 
option may be made through premium conversion on a pre-

[[Page 56529]]

tax basis. Alternatively, you may pre-pay premiums for the LWOP period 
on an after-tax basis.
    (3) Direct pay. Under the direct pay option, you may pay your share 
of your FEHB premium on the same schedule of payments that would be 
made if you were not on LWOP, as described in Sec.  890.502(b) of this 
chapter. You must make the premium payments directly to your employing 
agency. The payments you make under the direct pay option are not 
subject to premium conversion, and are made on an after-tax basis.
    (4) Catch-up. Under the catch-up option, you must agree in advance 
of the LWOP period that: you will continue FEHB coverage while on LWOP; 
your employer will advance your share of your FEHB premium during your 
LWOP period; and you will repay the advanced amounts when you return 
from LWOP. (Described in Sec.  890.502(b) of this chapter.) Your catch-
up contributions may be made through premium conversion.
    (5) If you remain in FEHB upon your return from LWOP, your catch-up 
premiums and current premiums will be paid at the same time.
    (c) Your return from LWOP constitutes a qualifying life event as 
described in Sec.  892.101. You may change your premium conversion 
election (waive if you now participate, or participate if you now 
waive). The election you choose upon return from LWOP will apply to 
your current as well as your catch-up premiums.
0
8. The title for Subpart D and paragraph (b)(1) of Sec.  892.401 are 
revised to read as follows:

Subpart D--Reemployed Annuitants and Survivor Annuitants


Sec.  892.401  Am I eligible for premium conversion if I retire and 
then come back to work for the Federal Government?

* * * * *
    (b)(1) If you do not waive premium conversion, your FEHB coverage 
will be transferred to your employing agency, and your employing agency 
will assume responsibility for contributing the Government share of 
your FEHB coverage. Your coverage, including what FEHB plans you are 
eligible to enroll in, will be based on your status as an active 
employee and your employing agency will deduct your premiums from your 
salary.
* * * * *
0
9. A new Sec.  892.402 is added to read as follows:


Sec.  892.402  I am a survivor annuitant as well as an active Federal 
employee; am I eligible for premium conversion?

    (a) If you are a survivor annuitant enrolled in FEHB who is 
receiving an annuity and you are employed in a position that conveys 
FEHB eligibility and is covered by the premium conversion plan, you are 
eligible to participate in premium conversion. (b)(1) If you wish to 
participate in premium conversion, you must notify your employing 
agency. Your employing agency will transfer in your FEHB coverage from 
the retirement system, and your employing agency will assume 
responsibility for contributing the government share of your FEHB 
coverage. Your coverage, including what FEHB plans you are eligible to 
enroll in, will be based on your status as an active employee and your 
employing agency will deduct your premiums from your salary.
    (2) If you do not notify your employing agency that you wish to 
participate in premium conversion, you will keep your FEHB coverage as 
a survivor annuitant, but your contributions towards your FEHB premiums 
will be made on an after-tax basis. Your status as an annuitant under 
the retirement regulations and your right to continue FEHB as a 
survivor annuitant following your period of employment is unaffected.
[FR Doc. 03-24793 Filed 9-30-03; 8:45 am]
BILLING CODE 6325-50-P