Public Safety Officer Health Insurance Premium Exclusion
Understand the federal tax provision allowing retired public safety officers to pay for health insurance with pre-tax retirement funds, reducing taxable income.
A federal tax provision established by the Pension Protection Act of 2006 allows eligible retired public safety officers to exclude a portion of their retirement income from federal income tax. This benefit applies to funds used to pay for health or long-term care insurance premiums. The intention of this tax rule is to help offset healthcare costs for these individuals after they have concluded their service. This exclusion provides financial relief by lowering the annual taxable income reported to the Internal Revenue Service (IRS).
Eligibility for the Exclusion
To qualify for this tax exclusion, an individual must meet criteria related to their former profession and retirement status. The definition of a public safety officer is based on the Omnibus Crime Control and Safe Streets Act. This includes individuals who served with a public agency as:
- Law enforcement officers
- Firefighters
- Chaplains
- Members of a rescue squad or ambulance crew
The position could have been compensated or voluntary. Beyond the professional role, the officer’s retirement circumstances are also a factor. The individual must have separated from service from the employer that maintains the retirement plan for one of two reasons: the officer retired after reaching the plan’s normal retirement age, or they separated due to a service-connected disability.
The retirement plan itself must be a governmental plan, such as a qualified pension plan under Internal Revenue Code section 401, a section 403 plan, or a section 457 plan. It is from this eligible plan that the distributions used for insurance premiums must originate.
Qualified Health Insurance Premiums
The tax exclusion is capped at a specific dollar amount. A retired officer can exclude up to $3,000 from their gross income annually. If the total premiums paid for the year are less than $3,000, the exclusion is limited to the actual amount of the premiums paid.
These funds must be used for qualified health insurance premiums, which covers premiums for accident or health insurance and long-term care insurance. The coverage is not limited to the retiree alone; it can also extend to their spouse and any dependents.
The exclusion applies only to the out-of-pocket premium costs paid from the retirement distribution. Amounts already subsidized by an employer or another program cannot be included in this calculation.
How to Claim the Exclusion
Claiming the exclusion involves a specific payment process and proper tax reporting. A previous requirement stated that insurance premiums must be paid directly from the retirement plan to the insurance provider. The retiree could not pay the premiums out-of-pocket and then seek reimbursement.
The SECURE 2.0 Act removed the direct payment requirement for premiums paid on or after December 30, 2022. However, retirees should confirm the current procedures with their plan administrator to ensure compliance.
When filing federal income taxes, the retirement plan issues a Form 1099-R, which reports the total distribution for the year. The taxpayer reports the total distribution from Form 1099-R on line 5a of Form 1040. On line 5b, the taxpayer enters the reduced figure after subtracting the qualified insurance premiums, up to the $3,000 limit.
To notify the IRS of this adjustment, the taxpayer should write “PSO” (for Public Safety Officer) on the dotted line next to line 5b of the Form 1040. This annotation clarifies the reason for the difference between the gross distribution and the taxable amount. The excluded amount cannot also be used to claim a medical expense deduction on Schedule A.