Pretax FEHB Incentive: A Guide for Federal Employees to Maximize Tax Savings

The pretax FEHB incentive is a valuable benefit for federal employees, allowing them to save on taxes while also securing their health insurance needs.

Federal employees can contribute up to $3,600 of their premium costs to their Health Savings Account (HSA) on a pretax basis, reducing their taxable income.

By contributing to an HSA, federal employees can lower their tax liability and keep more of their hard-earned money.

Federal employees with high premium costs may find this incentive particularly beneficial, as it can help offset the financial burden of health insurance.

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Premium conversion is a method of reducing your taxable income by the amount of your contribution to your FEHB insurance premium.

By participating in the premium conversion plan, you can reduce your salary through an employer allotment, which is then used to purchase your FEHB insurance.

This allotment is not paid to you as taxable income, resulting in a reduced taxable income.

As a result, you save on Federal income tax, Social Security and Medicare tax, and in most States and localities, State and local income taxes.

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If you're a federal employee, you're automatically covered by the premium conversion plan if your pay is issued by an agency of the Executive Branch of the Federal Government. This is a perk of being part of the FEHB Program.

Certain reemployed annuitants may also be considered employees for purposes of premium conversion. This means they can participate in the plan too.

Employees of organizations that have their own premium conversion plan may not be able to participate in the one described here. This is because they're already covered by their employer's plan.

If your employer signs an adoption agreement that's accepted by OPM, you'll be covered by the premium conversion plan even if you're not an employee of the Executive Branch of the Federal government.

You can also be covered if your employer makes your FEHB contribution, even if you're not directly employed by the agency that pays your salary.

For your interest: Fehb Plan Brochure

The Federal Tax Benefits of a Pretax FEHB Incentive are a game-changer for many employees. You can save up to 37% of your premium costs in federal income taxes.

By contributing to a pretax FEHB plan, you can significantly reduce your taxable income, which in turn reduces your federal income tax liability. This can add up to a substantial amount of money saved over the course of a year.

The IRS allows you to deduct up to 100% of your premium costs from your taxable income. This means that if you contribute $5,000 to a pretax FEHB plan, you can deduct that entire amount from your taxable income.

This can result in significant tax savings, especially for those in higher tax brackets. For example, if you're in the 32% tax bracket and contribute $5,000 to a pretax FEHB plan, you can save up to $1,600 in federal income taxes.

Consider reading: Share Incentive Plan

To take advantage of the pretax FEHB incentive, you'll need to contribute to a High Deductible Health Plan (HDHP) through your employer.

You must be enrolled in an HDHP to be eligible for the pretax FEHB incentive.

The annual deductible for HDHPs can range from $1,400 to $6,900 for an individual plan, depending on the plan chosen.

You can use a Health Savings Account (HSA) to save pre-tax dollars for medical expenses, including copays and prescriptions.

HSAs are portable, meaning you can take them with you if you change jobs or retire.

Contributions to an HSA are tax-free, and withdrawals for qualified medical expenses are also tax-free.

If you're newly employed or eligible for FEHB in a covered Executive Branch agency, your premium conversion will begin on the 1st day of the first pay period after your agency receives your enrollment.

You'll need to file a waiver form by the date set by your employing office, but no later than the day before your coverage starts. The waiver form is available from your employing office.

For your interest: Fehb and Medicare Part B

You can waive participation in premium conversion after the initial implementation, but the opportunity to do so is limited. You can waive participation during the annual FEHB open season, and the effective date of the waiver will be the first day of the first pay period that begins in the following calendar year.

You can also waive participation at the same time as you sign up for FEHB when first hired or hired as a reemployed annuitant. Employees who leave Federal service and are rehired after a three-day break in service or in a different calendar year may also waive participation.

Waiver of participation can also be made in conjunction with a change in FEHB enrollment, on account of and consistent with a qualifying life event. You have 60 days after the qualifying life event to file a waiver with your employer, and the waiver is effective on the first day of the pay period following the date your employer receives the waiver.

You can make changes to your FEHB enrollment, but if you are participating in premium conversion, you must have a qualifying life event to decrease enrollment type, switch a covered family member, or to cancel FEHB coverage entirely.

If you're newly employed or eligible for FEHB in a covered Executive Branch agency, your premium conversion will start on the 1st day of the first pay period beginning on or after your agency receives your enrollment.

Your salary reduction and pre-tax benefit will be effective on the same day as your premium conversion.

You'll need to file a waiver form by the date set by your employing office, but not later than the day before the effective date of coverage.

The waiver form is available from your employing office.