Guest Article

(From the December 10, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Reverses Previous Ruling on Exclusion for Governmental Pension Distributions Used to Pay Public Safety Officers' Retiree Medical Premiums to Self-Insured Plans

Citing pending technical changes to the Pension Protection Act and special considerations involving eligible retired public safety officers, IRS reversed its position on whether payments to a self-insured accident or health plan would qualify for the exclusion from income provided under Code Section 402(l) as added by the Pension Protection Act. The IRS previously stated that premiums paid for self-insured accident or health plan coverage would not qualify for the exclusion, which is available only for distributions from certain governmental plans to pay retiree medical premiums on behalf of retired public safety officers. IRS Notice 2007-99.

Income Exclusion for Retired Public Safety Officers Clarified

Code Section 402(l) excludes from the gross income of an eligible retired public safety officer those distributions which are made from a governmental retirement plan -- i.e., a governmental plan that is either a Code Section 401(a), 403(a) or 403(b) plan, or an eligible deferred compensation plan under Section 457(b) -- and used to pay accident or health insurance premiums for the retiree, spouse or dependents. The exclusion, limited to $3,000 per year, is effective for distributions made in taxable years beginning after December 31, 2006.

Previously, IRS stated that the exclusion would apply only to premiums paid for an insured accident or health plan (i.e., a plan providing insurance issued by an insurance company regulated by a State), and would not apply to a self-insured plan. (See IRS Notice 2007-7 Q&A-23) IRS has now reversed this position to allow the exclusion to apply to self-insured plans as well.

The change is the result of pending technical corrections to the Pension Protection Act, to ensure consistency with Code Section 105 which provides that an accident or health plan may be either insured or self-insured, and special considerations involving retired public safety officers.

Potential Impact on 2007 Form 1099-R

The 2007 Form 1099-R requires no special reporting for payment of qualified health insurance premiums for retired public safety officers. The exclusion is claimed by the eligible retirees on their individual tax returns. However, trustees and issuers may use a designated Distribution Code (i.e., Code 2) to indicate an exception to the additional tax on early distributions for such premium payments. (See 2007 Instructions for Forms 1099-R and 5498).

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.