What Is a FEGLI Deduction for Federal Employees?

FEGLI, or Federal Employees’ Group Life Insurance, is a significant benefit available to most federal employees and retirees, providing a layer of financial protection to their families. When federal employees refer to a “FEGLI deduction,” they are typically discussing the amount regularly withheld from their paychecks for this group life insurance program. This article clarifies FEGLI mechanics, covering deductions, coverage options, and financial/tax treatment.

Understanding FEGLI Basics

The Federal Employees’ Group Life Insurance program is administered by the Office of Personnel Management (OPM), providing coverage to millions of federal employees, retirees, and their families. Most federal employees are eligible for FEGLI coverage, with automatic enrollment in Basic Life Insurance upon entry into a pay and duty status unless they formally waive the coverage. This eligibility generally extends to full-time and part-time employees holding appointments of more than one year.

FEGLI comprises two primary types of coverage: Basic Life Insurance and Optional Insurance, which includes three distinct options. Basic Life Insurance coverage typically equals an employee’s annual basic pay, rounded up to the next even $1,000, plus an additional $2,000. For example, an employee earning an annual salary of $84,500 would have a Basic coverage amount of $87,000. An “Extra Benefit” is also included for employees under age 45, which can effectively double the Basic amount for those aged 35 or younger, with the extra amount gradually decreasing by 10% each year until it is phased out at age 45.

Beyond Basic coverage, FEGLI offers three Optional Insurance choices for employees to supplement their protection: Option A – Standard, Option B – Additional, and Option C – Family. Option A provides a fixed $10,000 of coverage, offering a straightforward supplemental amount. Option B allows employees to elect coverage in multiples of their annual salary, ranging from one to five times, providing a flexible way to increase personal coverage. Option C extends coverage to eligible family members, specifically providing $5,000 for a spouse and $2,500 for each eligible dependent child, also available in one to five multiples. Enrollment in any Optional Insurance requires an active election by the employee, typically within a specific timeframe after becoming eligible, and is not automatic.

FEGLI Premiums and Payroll Deductions

A “FEGLI deduction” represents the premium amount taken from a federal employee’s biweekly paycheck or an annuitant’s monthly annuity payment for their elected life insurance coverage. These premiums are automatically withheld from gross pay, ensuring continuous coverage without the need for manual payments or separate billing. For active employees, these deductions are clearly itemized on their Leave and Earnings Statement (LES). Specifically, the code “CO” or “FEGLI” typically indicates Basic Life Insurance premiums, while “FEGLI OPTNL” accompanied by an identifying letter like “A,” “B,” or “C” designates Optional Insurance deductions.

The premium structure for FEGLI components varies significantly based on the type of coverage. For Basic Life Insurance, the cost is shared between the employee and the federal government. The government contributes one-third of the total premium, with the employee responsible for the remaining two-thirds. This Basic premium is calculated as a flat rate per $1,000 of coverage, currently $0.15 biweekly for each $1,000 of Basic Insurance Amount (BIA). Basic coverage has a composite premium structure, meaning the rate remains uniform for all enrollees, irrespective of their age or health status.

In contrast, employees bear the full cost for all Optional Insurance coverages. Premiums for Option A, which offers a standard $10,000 of additional coverage, are age-based and increase every five years as the insured individual transitions into a new age bracket. Similarly, Option B and Option C premiums are also age-banded, meaning their cost escalates with the employee’s age. This age-based pricing can lead to significantly higher premiums for older employees, particularly for Option B, which offers coverage in multiples of salary. OPM provides a FEGLI calculator on its website, a valuable resource for estimating coverage levels and premiums based on age and salary.

It is important to understand that FEGLI premiums paid by an employee are not considered tax-deductible expenses for federal income tax purposes. Unlike certain other federal benefits where premiums might be paid with pre-tax dollars, FEGLI premiums are treated as personal expenses, similar to premiums paid for privately purchased life insurance policies.

Tax Implications of FEGLI

The tax treatment of FEGLI involves both the premiums paid and the benefits received, presenting distinct considerations for federal employees and their beneficiaries. Regarding the death benefits paid out from a FEGLI policy, they are generally not subject to federal income tax for the beneficiaries. The Internal Revenue Service (IRS) typically excludes life insurance proceeds received by reason of the insured’s death from the beneficiary’s gross income. This means that the lump sum amount distributed to the designated beneficiaries, such as family members, is usually received tax-free.

However, certain situations can introduce taxability. If there is a delay in the payment of the death benefit, any interest accrued on the proceeds from the date of death until the payment date is considered taxable income to the beneficiary. This interest component must be reported for federal income tax purposes, typically on forms like 1099-INT or 1099-R. While the death benefit itself is generally income tax-free, it may be included in the deceased’s gross estate for federal estate tax purposes if the total value of the estate, combined with the life insurance proceeds, exceeds the federal estate tax exemption threshold. For instance, if FEGLI proceeds contribute to an estate exceeding the federal estate tax exemption threshold (e.g., $12.92 million for a single person in 2023), estate taxes may apply.