Retired Public Safety Officer Insurance Exclusion

Posted by Lee Reams Sr. on

Eligible retired public safety officers (PSOs) may elect to exclude governmental retirement plan distributions that don't exceed their health or long-term care premiums, if the distributions are paid directly to insurers. The exclusion is limited to $3,000 per year. Any amount excluded isn't deductible as a medical expense for itemized deductions and isn’t includible as health insurance for the self-employed heath insurance deduction (PPA §845). IRS Notice 2007-7 explains the exclusion for qualifying payouts to public safety officers.

Public Safety Officer - is 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 crew.

Qualified Public Safety Officer – is one that has separated from service:

(1) After attaining normal retirement age or

(2) Due to disability.

The exclusion is not available to surviving spouses or dependents after the public safety officer dies.

Qualifications for the Exclusion:

  • The distributions must be paid directly to the insurer from the pension plan.
  • The distributions must be for health or long-term care insurance.
  • The distributions can be any amount not exceeding a total of $3,000 per year.
  • The exclusion applies only if made from an eligible government plan (one described in Code Sec. 414(d) that is either a Code Sec. 403(a) or Code Sec. 403(b) plan, or an eligible governmental plan under Code Sec. 457(b)).
  • The amounts excluded may not be included on Schedule A as a medical deduction or be included as health insurance for the self-employed heath insurance deduction.

Form 1040 Instructions:

The amount shown in box 2a of Form 1099-R doesn't reflect the exclusion. Therefore enter the total distributions on line 16a and the taxable amount (after subtracting the excludable amount) on line 16b and enter “PSO” next to line 16b. (1040 Instructions, Pg. 26)

If the taxpayer is retired on disability and reporting his or her disability pension on line 7, include only the taxable amount on that line and enter “PSO” and the amount excluded on the dotted line next to line 7.

Example:  Assume the retired PSO’s 1099-R is for $45,000 and the retirement plan administrator made a direct distribution from the retirement plan to the provider of the accident or health plan or long-term care insurance contract in the amount of $2,500 (the maximum allowed is $3,000 per year).  The entries on the 1040 would look like this: