Premium Conversion Law and Legal Definition

Premium conversion is an arrangement that allows employees to make a pretax contribution to an employer sponsored health or welfare plan. Premium conversion is a tax benefit. It uses federal tax rules to allow you to deduct your share of health insurance premiums from your taxable income, thereby reducing your taxes.

If you pay Social Security taxes on your salary, you should also be aware that premium conversion will reduce your taxable earnings and will subsequently reduce your deductions to social security. This may reduce your social security benefits. In rare situations, it may be advantageous to pay full Social Security taxes rather than the lower Social Security taxes you pay under premium conversion.