$3,000 Exclusion for Retired Safety


Download Full Report

Section 845(a) of the Pension Protection Act of 2006 added Internal Revenue Code Section 402(1), effective as of January 1, 2007. Section 402(1) provides an exclusion up to $3,000 annually from gross income for federal income tax purposes for distributions from eligible government plans which are used to pay the qualified health insurance premiums of an eligible retired public safety officer. In order to qualify for the exclusion, the retiree must have separated from service by reason of disability or after attainment of the normal retirement age under the government plan and, as of the date of separation, must have been a public safety officer employed by an employer which participates in the government plan. For purposes of Section 402(1), a public safety officer means an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer, a firefighter, a chaplain or as a member of a rescue squad or ambulance. The favorable tax treatment under Section 402(1) is not available unless the eligible retired public safety officer elects to have the government plan deduct an amount from the retiree's pension or account to pay the qualifying health insurance premiums. The exclusion is only available to the eligible retired public safety officer. Amounts deducted from distributions to surviving spouses or dependents to pay health insurance premiums do not qualify for the exclusion. CalPERS and County Act of 1937 pensions are eligible government plans for purposes of Section 402(1). However per IRS instructions, the Form 1099-R issued annually to report a retiree’s retirement allowance will not contain any information as to the amounts withheld for the payment of health insurance premiums and will not indicate whether the retiree qualifies as an eligible retired public safety officer. Qualifying retirees may only claim the exclusion on their Federal income tax return in accordance with the instructions which accompany their tax returns. An example is provided.