Public Safety Officer Deduction Explained
My fellow LEO’s, please read and share!
I’ve been spreading this for years, but it still seems it is not as common as it should be. If you are a retired Public Safety Officer (and that term is broader than you might think!), you can exclude up to $3,000 of your health insurance premiums and/or your long-term care insurance premiums on your taxes.
I’m going to put the disclaimer first this time. Yes, I am a CPA. But, I am not YOUR CPA. This is an information-only article for you to discuss with your tax preparer. I believe everything below to be 100% accurate as of this writing. But again, I’m not your CPA, and I won’t be representing you if the IRS audits you, so keep that in mind. I am not giving you tax advice. If you are your own tax preparer, then discuss it with yourself over lunch, and decide whether or not to take your own advice. Understanding that if the IRS comes knocking, they’ll want to talk to both of you.
What is it?
The Pension Protection Act of 2006 (also known as Public Law 109-280, signed on August 17, 2006) altered the Internal Revenue Code to allow a special exclusion for Public Safety Officers that have retired, and are having health care (and long-term care) premiums deducted from their annuity payments. They are able to exclude up to $3,000 of their health care premiums (or LTC premiums) each year on their tax return.
If you (or your CPA) need specifics, we are referring to Internal Revenue Code Section 402(l) Distributions from Governmental Plans for Health and Long-Term Care Insurance.
Most of the time, this is called a deduction. Technically, it is an exclusion. Meaning, you can exclude (remove) the cost of the premiums from the income reported on your 1099-R. Don’t get too wrapped around the axle on this. It accomplishes much the same thing as a deduction—ultimately it reduces your taxable income. I know everyone is going to continue to call it a deduction, and we all understand what you’re talking about. But in the interest of total accuracy, it is an exclusion under IRS regulations, which is not technically a deduction. Nerd stuff over….
Who gets it?
Retired Public Safety Officers. For this particular law, we use the definition of Public Safety Officer (PSO) as defined in 42 USC 3796b(9). In part, it reads, “an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer, as a firefighter, or as a chaplain…..or member of rescue squad or ambulance crew.”
Please notice there is no qualification for the position to be federal. Of course it includes federal, and I write primarily to federal employees. But it means anyone that is a PSO. For example, if you were a police chaplain in Paducah, Kentucky, you meet the definition of PSO. Deputy Sheriff in Montana? Firefighter in Virginia? Both meet the definition.
This doesn’t necessarily mean you get the exclusion, it means you are a PSO under the law. There are some additional criteria to meet….
What are the criteria?
You need to be a retired PSO.
You need to be collecting a pension related to that PSO job.
The pension needs to be taxable (federally).
The pension needs to be an eligible plan (FERS and CSRS are specifically deemed by the IRS to be eligible plans). See OPM Benefits Administration Letter 07-201.
The health insurance premiums must be deducted from the pension and paid directly to the health insurance provider (If you are federal, you qualify—that is how FEHB works). For example, if you get a monthly deposit into your bank account, and from that bank account, you write a check for your health or long-term care insurance, that doesn’t make the cut. The money has to go directly from the pension administrator to the health insurance provider. Again, retired FEHB participants qualify.
NOTE: December 2022 law changes this direct payment requirement. See Page 902, Section 328 of Consolidated appropriations act 2023, signed into law by President Biden on December 29, 2022.
The amount you claim under this exclusion can’t also be used as a medical expense deduction somewhere else on your tax return (you can’t double dip, in other words).
YOU have to be the retired PSO. If you pass away, your wife cannot claim the PSO exclusion any more. Even though she meets some of the criteria (she is getting a FERS pension with health care expenses deducted. But she is NOT the retired PSO).
If each spouse is a retired PSO, they can each take the exclusion. For example, if you are a retired Deputy U.S. Marshal and your wife is a retired local firefighter, that could mean up to $6,000 in annual exclusions, if the remainder of the criteria is met.
Why should I take it?
When you were working, you were paying your FEHB with pre-tax dollars. Meaning, your taxable wage was lowered by the amount of your FEHB premium, which in turn, lowered your taxable income. When you retired, that went away. You now pay with after tax money. Meaning that your FEHB got noticeably more expensive even if you didn’t actually notice it.
This PSO exclusion helps get you back to where you were before you retired. If you are nerdy enough to want to look it up, Google “FEHB Premium Conversion” and IRS Section 125.
How exactly do I take it?
Here’s where some IRS Publications can be very helpful. I would recommend you familiarize yourself with Publication 721 Tax Guide to U.S. Civil Service Retirement Benefits. It is pretty specific. You can click on the link, but it basically says, you exclude up to $3,000 in premiums from the amount you report on Form 1040, Line 5a, and then report the remainder on 5b. (Other forms are mentioned, too).
However, I doubt many of you are doing your tax returns long hand. Most are probably giving it to their CPA, or they are using TurboTax, or some other service. In TurboTax, during the interview, you should see some questions related to your 1099-R. (This form is similar to the W-2 you got when you were working—it shows how much money you got from the government.) When questioned about the source of the money, one of the boxes you can check reads, “This money was from being a public safety officer.” One of the follow up questions will be “Did the Pension Administrator Pay for Health Insurance?”, and you will choose, “Yes, money was taken out to pay for health insurance” if you are in FEHB. If you did not retire from the federal government, but rather a local government, you’ll have to check with your CPA, or your former agency, or someone that knows for sure that you meet the criteria. I don’t know.
Once you complete that, TurboTax should do the rest.
What else do I need to know?
When I say “up to $3,000 in exclusions” this is what I mean. If your annual premiums are $2,900, you can exclude $2,900. If your annual premiums are $3,900, you can exclude $3,000. In other words, you can exclude the smaller amount of the two: annual premiums, or $3,000.
If you have been eligible for this exclusion for years and you have not been taking it, you should speak to a CPA about the possibility of filing amended returns.
Please be sure this exclusion applies to you before you use it. I am including several resources below for you to research it yourself, or for you to send it to your CPA to research.
Don’t be upset if your CPA was not aware of this. I hear that complaint from time to time. This is an exclusion that applies to very few people (relatively speaking). The IRS doesn’t even have a specific line for it. Their official instructions tell you to literally write “PSO” on the line. So its not widespread. Hopefully with your help, we can make it so.