August 22, 2006
New Law Allows Retired Public Safety Officers to Make Non-Taxable Withdrawals from Governmental Retirement Plans for Qualified Health Insurance Premiums
On August 17, 2006, President Bush signed the Pension Protection Act of 2006 (“PPA”). The Act creates sweeping reforms for the funding of defined benefit pension plans and makes permanent several tax relief provisions for defined contribution plans. Tucked deep within this nearly 1,000 page piece of legislation is tax relief aimed at assisting eligible retired public safety officers pay for qualified health insurance premiums.
Current Law. Typically, taxation of money contributed to an eligible retirement plan such as a 457(b) can be “deferred.” When the money is eventually distributed from the plan, the recipient must pay taxes. Under the PPA, certain former governmental employees may access this money to pay for health insurance without ever paying taxes.
Law After December 31, 2006. The new law, after December 31, 2006, permits an eligible retired public safety officer to direct the distribution of up to $3,000 per year from an eligible governmental retirement plan to pay for qualified health insurance premiums. And, those amounts are not taxable.
Eligible Governmental Retirement Plan. An eligible governmental retirement plan includes a governmental qualified retirement or annuity plan, 403(b) annuity, or 457 plan.
Eligible Retired Public Safety Officer. 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 officer with the employer who maintains the eligible retirement plan from which pension distributions are made. A public safety officer includes individuals who served in a public agency in an official capacity, with or without compensation, as a law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew.
Qualified Health Insurance Premiums. The tax free withdrawal applies to qualified health insurance premiums including premiums for accident or health insurance or qualified long-term care insurance 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.
Election. 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. The election authorizes direct payment to the insurance carrier. There is no reimbursement aspect to the new law.
Maximum. The aggregate amount of distributions cannot exceed the amount paid by the individual for qualified health insurance premiums. In no case can this amount be over $3,000 per taxable year.
Permissive. The new law permits plans to include this provision. Offering this feature will require review and adjustment of plan documentation and vendor cooperation. Where bargained employees are concerned, it may also raise negotiating issues (i.e., opportunities).
Details Lacking. Notably, the PPA authorizes the new feature but provides little practical detail. We hope guidance from the IRS will follow that addresses issues like: when do the elections have to be made, how often can they be changed, what happens when you change carriers, does the $3,000 maximum apply to all eligible plans or each eligible plan, what kind of reporting is necessary, and who is responsible for the tracking of elections and payments.
We will keep you updated as we hear more. Please contact us if you have any questions.