For Some Retirees, Health Insurance Is Tax-Free
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By Stephen Barr
Thursday, September 27, 2007

Since 2000, federal employees have been able to pay their health insurance premiums on a tax-free basis. The tax code does not extend this perk to federal retirees, to their dismay.

But a little-noticed provision in 2006 Pension Protection Act has made an exception for retired "public safety officers." They can request that up to $3,000 from their annual pensions be deducted to pay for medical insurance and long-term-care insurance.

The Internal Revenue Service, for 2006 tax returns, defined public safety officers as firefighters, law enforcement officers, chaplains and members of a rescue squad or ambulance crew.

Eligibility criteria may be updated by the IRS later this year when it issues a new version of the tax guide for civil service retirement benefits (publication 721), used by many federal retirees when preparing their income tax returns.

The Office of Personnel Management has determined that the pension law applies to the two major federal retirement programs, the Civil Service Retirement System and the Federal Employees Retirement System. Retired federal public safety officers whose pensions include a direct payment to a health insurance company or long-term care insurance company may claim a tax exclusion on their federal tax form and lower their federal income tax, the OPM said.

The provision in the new pension law has caused some confusion among federal retirees about who is eligible to claim the tax break. Some retirees believe they performed public safety jobs but held job titles, such as technician, that are not listed in the IRS tax guide.

"Frustration regarding who is eligible for the tax exclusion could be eliminated if all retired federal workers were offered the tax relief," said Dan Adcock, assistant legislative director at the National Active and Retired Federal Employees Association, known as NARFE.

In the group's September magazine, Adcock said the pension law "sets a new precedent of providing retirees with tax relief that will make their health costs more affordable."

NARFE has lobbied Congress in recent years to extend the tax advantage, called "premium conversion," to federal retirees.

Earlier this month, the House Committee on Oversight and Government Reform approved a bill sponsored by Rep. Thomas M. Davis III (R-Va.) that would allow all federal civilian and military retirees to pay their monthly health-care premiums with tax-free deductions from their annuities and allow active-duty military personnel to deduct from their taxable income certain supplemental premiums or enrollment fees for Tricare, their military health insurance.

John W. Warner (R-Va.) and James Webb (D-Va.) have introduced similar legislation in the Senate.

The Davis bill would provide average saving of $820 a year for federal retirees, according to a government estimate. The median federal retiree pension is $1,879 per month, the House committee said.

But the bill carries a high price, about $12.7 billion over 10 years, according to the most recent estimate by the Congressional Budget Office. Although many House members have signaled support for the legislation, the House Ways and Means Committee has not taken it up.

EEOC Honors IRS

The Internal Revenue Service was honored yesterday by the Equal Employment Opportunity Commission for its efforts to hire persons who are blind or have visual impairments.

Through a partnership with Lions World Services for the Blind, the IRS has hired 673 employees after providing them with job training that uses adaptive technologies. The IRS, through its employment program, has hired an additional 126 visually impaired computer programmers, the EEOC said.

The award was presented by Naomi C. Earp, who chairs the EEOC, as part of the agency's annual "Freedom to Compete awards. EEOC began the awards in 2002 as part of an initiative to champion access to employment opportunities by all individuals.

Stephen Barr's e-mail address isbarrs@washpost.com.