The Pension Protection Act of 2006 (PPA) has made an exception for “public safety officers” (PSO) to the early distribution penalty that would normally apply for Partial Lump-Sum Option Payments (PLOP) distributed to an individual prior to age 59 ½, (or 55 for those retiring in the year in which they turn age 55 or later).  “Public safety officer,” as defined by the PPA^* is “an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer, as a firefighter, as a chaplain, or as a member of a rescue squad or ambulance crew.” 

For PSOs, the law waives the early withdrawal penalty if retiring at age 50 or later.  Because of this change in the law effective August 17, 2006, when processing your PLOP, the 10 percent early distribution no longer applies if you are a PSO and retire in the year in which you attained age 50 or later and will not be deducted from any PLOP paid to you. 

Also as a result of the PPA, beginning with tax year 2007, eligible retired PSOs can exclude from taxable income the health and/or dental insurance premiums deducted from their retirement annuity and paid directly to their health insurance provider, up to $3,000. 

For your convenience, when you receive your 1099-R in January 2008 for your 2007 taxes, the amount of health and/or dental insurance deductions will be listed in Box 5 on the 1099-R.  To receive the tax benefit you must report the excluded amount to the IRS on your annual income tax return. Amounts used to pay qualified health insurance premiums that are excluded from gross income under this provision cannot be taken into account in determining the itemized deduction for medical care expenses under Section 213 of the Internal Revenue Code.

If you have further questions concerning these changes or how to take the exclusion when filing your taxes, please contact the Internal Revenue Service at www.irs.gov or 1-800-829-1040 or your tax advisor.

*As defined in the Omnibus Crime Control Act of 1968, 42 U.S.C 3796