[House Report 108-585]
[From the U.S. Government Publishing Office]
108th Congress Rept. 108-585
HOUSE OF REPRESENTATIVES
2d Session Part 1
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HEALTH INSURANCE PREMIUM CONVERSION OPTION FOR FEDERAL CIVILIAN AND
MILITARY RETIREES
_______
July 7, 2004.--Ordered to be printed
_______
Mr. Tom Davis of Virginia, from the Committee on Government Reform,
submitted the following
R E P O R T
[To accompany H.R. 1231]
The Committee on Government Reform, to whom was referred
the bill (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, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
CONTENTS
Page
Committee Statement and Views.................................... 2
Section-by-Section............................................... 2
Explanation of Amendments........................................ 3
Committee Consideration.......................................... 3
Rollcall Votes................................................... 3
Application of Law to the Legislative Branch..................... 3
Statement of Oversight Findings and Recommendations of the
Committee...................................................... 3
Statement of General Performance Goals and Objectives............ 3
Constitutional Authority Statement............................... 3
Federal Advisory Committee Act................................... 4
Unfunded Mandate Statement....................................... 4
Committee Estimate............................................... 4
Changes in Existing Law Made by the Bill as Reported............. 6
The technical amendment (stated in terms of the page and
line numbers of the introduced bill) is as follows:
Page 5, line 10, strike ``period'' and insert ``period,''.
Committee Statement and Views
PURPOSE AND SUMMARY
H.R. 1231 would allow federal civilian and military
annuitants to pay their Federal Employee Health Benefit Plan
(FEHBP) premiums on a pretax basis, and allow active duty
military personnel to apply a below-the-line deduction for
TRICARE supplemental premiums and enrollment fees.
BACKGROUND AND NEED FOR LEGISLATION
Under Section 125 of the Internal Revenue Code, employers
in the public and private sectors currently have the authority
to permit their employees to pay for health insurance with
wages excluded from both income and social security payroll
taxes. This benefit was extended to federal employees in
October 2000 and is available to many employees in the private
sector.
Under current law, amounts distributed from a section
401(a) qualified retirement plan and used to pay for benefits
in a former employer's section 125 cafeteria plan must be
included in the participant-retiree's income, and are therefore
taxable to the individual in the taxable year in which
distributed. As a result, public and private sector employers
are unable to make these benefits available to annuitants.
According to GAO, FEHBP premiums have increased by an
average of nearly 10 percent a year since 1998, a trend which
promises to continue into 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.
LEGISLATIVE HISTORY
H.R. 1231 was introduced by Representative Tom Davis on
March 12, 2003, and referred to the Committee on Ways and
Means, the Committee on Government Reform, and the Committee on
Armed Services. Following mark-up by the Subcommittee on Civil
Service and Agency Organization on July 16, 2003, H.R. 1231 was
reported by the committee on September 25, 2003.
Section-by-Section
Section 1: Pretax payment of health insurance premiums by federal
civilian and military retirees
Section 1 amends Section 125 of the Internal Revenue Code
to allow federal civilian annuitants to pay premiums for their
health insurance, established under Chapter 89 of Title 5,
prior to the reduction for income and social security payroll
taxes.
Additionally, Section 1 amends Section 125 of the Internal
Revenue Code to allow a member or former member of the
uniformed services to pay premiums for their health insurance,
established under Chapter 55 of Title 10, prior to the
reduction for income and social security payroll taxes.
Section 2: Deduction for TRICARE Supplemental premiums
Section 2 amends the Internal Revenue Code to provide an
annual deduction in taxable income for the expense of
purchasing TRICARE Supplemental coverage, available for taxable
years beginning after the date of the enactment.
Section 3: Implementation
Section 3 directs the Director of the Office of Personnel
Management and the Secretary of Defense to take the
administrative actions necessary to ensure the benefits
authorized by this legislation are made available to their
annuitants during the first open enrollment period that occurs
90 days following enactment.
Explanation of Amendments
No amendments were adopted by the committee.
Committee Consideration
On September 25, 2003, the Committee met in open session
and ordered reported favorably the bill, H.R. 1231 by voice
vote, a quorum being present.
Rollcall Votes
No rollcall votes were held.
Application of Law to the Legislative Branch
Section 102(b)(3) of Public Law 104-1 requires a
description of the application of this bill to the legislative
branch where the bill relates to the terms and conditions of
employment or access to public services and accommodations.
This bill would allow federal civilian and military annuitants
to pay their FEHBP premiums on a pretax basis, and allow active
duty military personnel to apply a below-the-line deduction for
TRICARE supplemental premiums and enrollment fees. Retired
legislative branch employees and their families, to the extent
that they are otherwise eligible for the benefits provided by
this legislation, have equal access to its benefits.
Statement of Oversight Findings and Recommendations of the Committee
In compliance with clause 3(c)(1) of rule XIII and clause
2(b)(1) of rule X of the Rules of the House of Representatives,
the Committee's oversight findings and recommendations are
reflected in the descriptive portions of this report.
Statement of General Performance Goals and Objectives
In accordance with clause 3(c)(4) of rule XIII of the Rules
of the House of Representatives, the Committee's performance
goals and objectives are reflected in the descriptive portions
of this report.
Constitutional Authority Statement
Under clause 3(d)(1) of rule XIII of the Rules of the House
of Representatives, the Committee must include a statement
citing the specific powers granted to Congress to enact the law
proposed by H.R. 1231. Article I, Section 8, Clause 18, the
Necessary and Proper Clause, of the Constitution of the United
States grants the Congress the power to enact this law.
Federal Advisory Committee Act
The Committee finds that the legislation does not establish
or authorize the establishment of an advisory committee within
the definition of 5 U.S.C. App., Section 5(b).
Unfunded Mandate Statement
Section 423 of the Congressional Budget and Impoundment
Control Act (as amended by Section 101(a)(2) of the Unfunded
Mandates Reform Act, P.L. 104-4) requires a statement whether
the provisions of the report include unfunded mandates. H.R.
1231 contains no intergovernmental or private-sector mandates
as defined in the Unfunded Mandates Reform Act and would impose
no costs on state, local, or tribal governments.
Committee Estimate
Clause 3(d)(2) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison by the
Committee of the costs that would be incurred in carrying out
H.R. 1231. The Committee has received the following cost
estimate for H.R. 1231 from the Joint Committee on Taxation:
Congress of the United States,
Joint Committee on Taxation,
Washington, DC, June 25, 2004.
Hon. Tom Davis,
House of Representatives, Committee on Government Reform, Rayburn House
Office Building, Washington, DC.
Dear Chairman Davis: This is in response to your letter of
April 5, 2004, requesting a revenue estimate for H.R. 1231, a
bill to modify the tax treatment of certain health insurance
premiums paid by active-duty and retired military personnel and
Federal civilian retirees.
Present law provides an income tax and Federal Insurance
Contributions Act (``FICA'') tax exclusion for employer
contributions toward health insurance and health care for
active employees. Present law also provides that, through the
use of a cafeteria plan, active employees may receive an income
and FICA tax exclusion for the health insurance premiums that
they pay through a salary reduction arrangement. Present law
also provides an income tax exclusion for employer
contributions toward health insurance and health care for
former (or retired) employees, but former employees are not
eligible to participate in cafeteria plans. Thus, under present
law, former employees cannot receive an income tax exclusion
for the health insurance premiums that they pay through a
pension reduction arrangement.
Federal civilian retirees who are enrolled in the Federal
Employees Health Benefits Program (``FEHBP'') pay about one-
fourth of the total premium for their FEHBP coverage and the
remainder of the premium is paid by the Federal Government.
Active-duty military personnel are automatically enrolled
in Tricare Prime and generally have no uncompensated health
care expenses. In general, the family members of active-duty
military personnel are automatically eligible for benefits
under Tricare Standard, Tricare Extra, and Tricare Prime, and
pay no health insurance premiums for this coverage. A very
small percentage of active-duty military personnel purchase
supplemental health insurance for their family members from
private health insurance companies.
Retired military personnel and their family members who are
under age 65 are automatically enrolled in Tricare Standard and
Tricare Extra and pay no health insurance premiums for this
coverage. Retirees and their family members may choose to
enroll in Tricare Prime. The premiums for retiree coverage
under Tricare Prime are currently $230 per year for single
coverage and $460 per year for family coverage. As an
alternative to Tricare Prime, many military retirees enroll in
Tricare Standard and Tricare Extra and purchase supplemental
health insurance for themselves and their family members from
private health insurance companies.
The Department of Defense (``DoD'') sponsors a dental
insurance plan for the families of active-duty personnel and a
separate dental plan for retirees and their families. DoD pays
a portion of the premium for Tricare Dental insurance for
active-duty families. Retirees and their families who enroll in
the retiree Tricare Dental program pay the full insurance
premium.
Section 1 of H.R. 1231 would provide an income tax
exclusion for the portion of the pension income of Federal
civilian retirees that is withheld to pay the retiree share of
premiums for FEHBP health insurance coverage. Section 1 of the
bill would also provide an income tax exclusion for the portion
of the pension income of military retirees that is withheld to
pay retiree premiums for Tricare Prime health insurance and
Tricare Dental insurance.
Section 2 of the bill would provide an above-the-line
deduction for health insurance that is ``purchased as
supplemental coverage to the health benefits programs
established by chapter 55 of title 10'' of the U.S. Code. We
assume that this deduction would apply to the premiums paid by
active-duty and retired military personnel for private health
insurance that is supplemental to Tricare. However, the above-
the-line deduction would not apply to the Tricare Dental
premiums paid by active-duty military personnel. The Tricare
Dental programs are established by chapter 55 of the U.S. Code,
and thus are not ``supplemental coverage to the health benefits
programs established by chapter 55.'' We also assume that the
above-the-line deduction would not apply to premiums for long-
term care insurance, under the assumption that long-term care
insurance is not ``supplemental'' coverage to the health
benefits programs established by chapter 55.''
It is our understanding that active-duty military personnel
are now paying income and FICA tax on the portion of basic pay
that is withheld to pay premiums for Tricare Dental insurance.
Chapter 125 of the Internal Revenue Code provides that such
premiums may be paid under a cafeteria plan arrangement.
Premiums paid in this way are excludable from gross income and
FICA taxes. However, the Department of Defense has not
implemented a cafeteria plan arrangement for these premiums.
H.R. 1231 would not require that the Department of Defense
implement a cafeteria plan arrangement for such premiums. Thus,
there is no revenue effect for the bill associated with the
payment of Tricare Dental premiums through a cafeteria plan.
H.R. 1231 would be effective for taxable years beginning
after the date of enactment. For the purpose of preparing a
revenue estimate for the bill, we have assumed that the bill
will be enacted on October 1, 2004. Estimated changes in
Federal fiscal year budget receipts are as follows:
[Fiscal years, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
Item 2005 2006 2007 2008 2009 2005-09 2005-14
----------------------------------------------------------------------------------------------------------------
Income tax exclusion for FEHBP premiums paid -499 -756 -829 -902 -976 -3,962 -10,881
by Federal civilian retirees through
pension reduction..........................
Income tax exclusion for Tricare Prime -22 -32 -33 -35 -35 -157 -355
premiums paid by military retirees through
pension reduction..........................
Income tax exclusion for Tricare Dental -25 -38 -42 -46 -49 -199 -546
premiums paid by military retirees through
pension reduction..........................
Income tax deduction for Tricare (\1\) (\1\) (\1\) (\1\) (\1\) -1 -2
supplemental insurance premiums paid by
active-duty military personnel.............
Income tax deduction for Tricare -3 -23 -25 -27 -29 -107 -297
supplemental insurance premiums paid by
military retirees..........................
Total Revenue Effect.................. -549 -849 -929 -1,009 -1,089 -4,426 -12,082
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\1\ Loss of less than $500,000.
Note:--Details may not add to totals due to rounding.
I hope this information is helpful to you. If we can be of
further assistance in this matter, please let me know.
Sincerely,
George K. Yin.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC.
* * * * * * *
SEC. 62. ADJUSTED GROSS INCOME DEFINED.
(a) General Rule.--For purposes of this subtitle, the term
``adjusted gross income'' means, in the case of an individual,
gross income minus the following deductions:
(1) * * *
* * * * * * *
(19) Tricare supplemental premiums or enrollment
fees._The deduction allowed by section 223.
* * * * * * *
PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
* * * * * * *
SEC. 125. CAFETERIA PLANS.
(a) * * *
* * * * * * *
(g) Special Rules.--
(1) * * *
* * * * * * *
(5) Health insurance premiums of federal civilian and
military retirees._
(A) FEHBP premiums.--Nothing in this section
shall prevent the benefits of this section from
being allowed to an annuitant, as defined in
paragraph (3) of section 8901, title 5, United
States Code, with respect to a choice between
the annuity or compensation referred to in such
paragraph and benefits under the health
benefits program established by chapter 89 of
such title 5.
(B) TRICARE premiums.--Nothing in this
section shall prevent the benefits of this
section from being allowed to an individual
receiving retired or retainer pay by reason of
being a member or former member of the
uniformed services of the United States with
respect to a choice between such pay and
benefits under the health benefits programs
established by chapter 55 of title 10, United
States Code.
* * * * * * *
PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS
Sec. 211. Allowance of deductions.
* * * * * * *
[Sec. 223. Cross reference.]
Sec. 223. TRICARE supplemental premiums or enrollment fees.
Sec. 224. Cross reference.
* * * * * * *
SEC. 223. TRICARE SUPPLEMENTAL PREMIUMS OR ENROLLMENT FEES.
(a) Allowance of Deduction.--In the case of an individual,
there shall be allowed as a deduction the amounts paid during
the taxable year by the taxpayer for insurance purchased as
supplemental coverage to the health benefits programs
established by chapter 55 of title 10, United States Code, for
the taxpayer and the taxpayer's spouse and dependents.
(b) Coordination With Medical Deduction.--Any amount
allowed as a deduction under subsection (a) shall not be taken
into account in computing the amount allowable to the taxpayer
as a deduction under section 213(a).
SEC. [223.] 224. CROSS REFERENCE.
For deductions in respect of a decedent, see section 691.
* * * * * * *