$3,000 income exclusion - Public Safety Officers

[Guest jvanheyde]

Have you seen any guidance as to how the exclusion is reported. Does the Governmental Plan reduce the amount of the taxable income by the amount of the qualifying payment for health and long-term care insurance, or does the Governmental Plan report the entire distribution, and the public safety officer deduct it on his/her federal income tax return. I have not seen how the IRS wants this reported.

[JanetM]

I read the explaination in the technical explanation of HR4. Looks like the govt plan adjusts the amount shown on 1099. Tech explanation states the following....

5. Permit tax-free distributions from governmental retirement plans for premiums for health and long-term care insurance for public safety officers (sec. 402 of the Code)

Present Law

Under present law, a distribution from a qualified retirement plan under section 401(a), a qualified annuity plan under section 403(a), a tax-sheltered annuity under section 403(b) (a “403 (b) annuity”), an eligible deferred compensation plan maintained by a State or local government under section 457 (a “governmental 457 plan”), or an individual retirement arrangement under section 408 (an “IRA”) generally is included in income for the year distributed (except to the extent the amount received constitutes a return of after-tax contributions or a qualified distribution from a Roth IRA).197 In addition, a distribution from a qualified retirement or annuity plan, a 403(b) annuity, or an IRA received before age 59½, death, or disability generally is subject to a 10-percent early withdrawal tax on the amount includible in income, unless an exception applies.198

Explanation of Provision

The bill provides that certain pension distributions from an eligible retirement plan used to pay for qualified health insurance premiums are excludible from income, up to a maximum exclusion of $3,000 annually. An eligible retirement plan includes a governmental qualified retirement or annuity plan, 403(b) annuity, or 457 plan. The exclusion applies with respect to eligible retired public safety officers who make an election to have qualified health insurance premiums deducted from amounts distributed from an eligible retirement plan and paid directly to the insurer. An eligible retired public safety officer is an individual who, by reason of disability or attainment of normal retirement age, is separated from service as a public safety officer199 with the employer who maintains the eligible retirement plan from which pension distributions are made.

Qualified health insurance premiums include premiums for accident or health insurance or qualified long-term care insurance contracts covering the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents. The qualified health insurance premiums do not have to be for a plan sponsored by the employer; however, the exclusion does not apply to premiums paid by the employee and reimbursed with pension distributions. Amounts excluded from income under the provision are not taken into account in determining the itemized deduction for medical expenses under section 213 or the deduction for health insurance of self-employed individuals under section 162.

Effective Date

The provision is effective for distributions in taxable years beginning after December 31, 2006.

The term “public safety officer” has the same meaning as under section 1204(8)(A) of the Omnibus Crime Control and Safe Streets Act of 1986.

[Guest PA consultant]

So I guess then, the criteria wouldn't be met if the retired police officers were participating in the employer's health insurance plan and their premiums were deducted from their monthly pension benefit and forwarded to the employer toward payment of group premium?

[TLGeer]

No, the rule would apply.

[Guest jaspers]

TL Geer,

If the Police Officer retiree receives a monthly pension benefit and the health insurance is deducted from the benefit how is this reported to the IRS in order to take advantage of this provision?

[Guest EBBEETS]

I have read publication 575 and it appears to me that the premiums would be included on the form 1099R and the retiree must then claim the exclusion. From publication 575 page 6:

"If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. The amount shown in box 2a of Form 1099R does not reflect this exclusion. Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Enter "PSO" next to the appropriate line on which you report the taxable amount."

Unless there has been some update to publication 575, it appears the 1099-R will include the Gross distribution including the insurance premiums. Is anyone aware of an exception to this?

[Guest jaspers]

EBBEETS,

"The amount shown in box 2a of Form 1099R does not reflect this exclusion."

It is my understanding that the taxpayer will have to reduce his pension income as reported on the 1099R. Maybe the IRS realized that all issuing entities do not know how much or how little of a premium may have been paid.

[DTH]

Are these payments subject to federal income tax withholding?