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108th Congress                                            Rept. 108-585
                        HOUSE OF REPRESENTATIVES
 2d Session                                                      Part 1

======================================================================



 
  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
----------------------------------------------------------------------------------------------------------------
\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.

           *       *       *       *       *       *       *