The FEHB Act provides for a government contribution and an enrollee contribution toward health benefits coverage. Under the current arrangement, the government contribution is excluded from income and employment taxation (Internal Revenue Code Sections 105 and 106), and the enrollee contribution is similarly excluded for employees based on OPM's premium conversion plan (IRC Section 125). Retirees are not eligible for this premium conversion plan, although NARFE has been pushing for a legislative fix to allow their participation.
Under the President's proposal, if enacted, the government contribution and the enrollee contribution would be taxable to both employees and retirees. Taxpayers with self only FEHBP coverage would receive a $7,500 standard deduction, and taxpayers with FEHBP family coverage would receive a $15,000 standard deduction. The deduction would be indexed to the consumer price index when it is fully implemented in 2009. If the actual FEHBP premium is below the standard deduction, the taxpayer wins and if the actual FEHBP premium is above the standard deduction, the taxpayer loses. Of course, in the FEHB Program, enrollees have an annual Open Season during which they could do their tax planning.
On Tuesday, Julie Goon, a special assistant to the President for economic policy, explained that
What this plan would do is give a flat, standard deduction for anybody who purchases any kind of health insurance, no matter how much the health insurance costs and no matter where they get it. It would be $15,000 for people purchasing family policy, $7,500 for people purchasing single policies. So if your employer is giving you insurance through your job, you get the standard deduction. If you go buy health insurance on your own, you get the standard deduction. If your policy costs $5,000, you still get $15,000 of compensation tax-free. If your policy costs $20,000, you still get $15,000 of compensation tax-free, using the family example.The President was on the road today in Lee's Summit, Missouri (home of the FEHB plan, GEHA) advocating his plan.