§845. Distributions from governmental retirement plans for health and long-term care insurance for public safety officers

Pension Protection Act of 2006

Title VIII Pension Related Revenue Provisions

Subtitle D Health and Medical Benefits

(a) IN GENERAL.-Section 402 of the Internal Revenue Code of 1986 (relating to taxability of beneficiary of employees' trust) is amended by adding at the end the following new subsection:

"(l) DISTRIBUTIONS FROM GOVERNMENTAL PLANS FOR HEALTH AND LONG-TERM CARE INSURANCE.-

"(1) IN GENERAL.-In the case of an employee who is an eligible retired public safety officer who makes the election described in paragraph (6) with respect to any taxable year of such employee, gross income of such employee for such taxable year does not include any distribution from an eligible retirement plan to the extent that the aggregate amount of such distributions does not exceed the amount paid by such employee for qualified health insurance premiums of the employee, his spouse, or dependents (as defined in section 152) for such taxable year.

"(2) LIMITATION.- The amount which may be excluded from gross income for the taxable year by reason of paragraph (1) shall not exceed $3,000.

"(3) DISTRIBUTIONS MUST OTHERWISE BE INCLUDIBLE.-

"(A) IN GENERAL.-An amount shall be treated as a distribution for purposes of paragraph (1) only to the extent that such amount would be includible in gross income without regard to paragraph (1).

"(B) APPLICATION OF SECTION 72.-Notwithstanding section 72, in determining the extent to which an amount is treated as a distribution for purposes of subparagraph (A), the aggregate amounts distributed from an eligible retirement plan in a taxable year (up to the amount excluded under paragraph (1)) shall be treated as includible in gross income (without regard to subparagraph (A)) to the extent that such amount does not exceed the aggregate amount which would have been so includible if all amounts distributed from all eligible retirement plans were treated as 1 contract for purposes of determining the inclusion of such distribution under section 72. Proper adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years.

"(4) DEFINITIONS.- For purposes of this subsection-

"(A) ELIGIBLE RETIREMENT PLAN.-For purposes of paragraph (1), the term 'eligible retirement plan' means a governmental plan (within the meaning of section 414(d)) which is described in clause (iii), (iv), (v), or (vi) of subsection (c)(8)(B).

"(B) ELIGIBLE RETIRED PUBLIC SAFETY OFFICER.-The term 'eligible retired public safety officer' means 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 distributions subject to paragraph (1) are made.

"(C) PUBLIC SAFETY OFFICER.-The term 'public safety officer' shall have the same meaning given such term by section 1204(9 )(A) of the Omnibus Crime Control and Safe Streets Act of 1968 (42 U.S.C. 3796b(9)(A)).

"(D) QUALIFIED HEALTH INSURANCE PREMIUMS.-The term 'qualified health insurance premiums' means premiums for coverage for the eligible retired public safety officer, his spouse, and dependents, by an accident or health insurance plan or qualified long-term care insurance contract (as defined in section 7702B(b)).

"(5) SPECIAL RULES.- For purposes of this subsection-

"(A) DIRECT PAYMENT TO INSURER REQUIRED.-Paragraph (1) shall only apply to a distribution if payment of the premiums is made directly to the provider of the accident or health insurance plan or qualified long-term care insurance contract by deduction from a distribution from the eligible retirement plan.

"(B) RELATED PLANS TREATED AS 1.- All eligible retirement plans of an employer shall be treated as a single plan.

"(6) ELECTION DESCRIBED.-

"(A) IN GENERAL.-For purposes of paragraph (1), an election is described in this paragraph if the election is made by an employee after separation from service with respect to amounts not distributed from an eligible retirement plan to have amounts from such plan distributed in order to pay for qualified health insurance premiums.

"(B) SPECIAL RULE.-A plan shall not be treated as violating the requirements of section 401, or as engaging in a prohibited transaction for purposes of section 503(b), merely because it provides for an election with respect to amounts that are otherwise distributable under the plan or merely because of a distribution made pursuant to an election described in subparagraph (A).

"(7) COORDINATION WITH MEDICAL EXPENSE DEDUCTION .- The amounts excluded from gross income under paragraph (1) shall not be taken into account under section 213.

"(8) COORDINATION WITH DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS.-The amounts excluded from gross income under paragraph (1) shall not be taken into account under section 162(l). ".

(b) CONFORMING AMENDMENTS.-

(b)(1) Section 403(a) of such Code (relating to taxability of beneficiary under a qualified annuity plan) is amended by inserting after paragraph (1) the following new paragraph:

"(2) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE.- To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.".

(b)(2) Section 403(b) of such Code (relating to taxability of beneficiary under annuity purchased by section 501(c )(3) organization or public school) is amended by inserting after paragraph (1) the following new paragraph:

"(2) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE.- To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under this subsection.".

(b)(3) Section 457(a) of such Code (relating to year of inclusion in gross income) is amended by adding at the end the following new paragraph:

"(3) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE.- In the case of a plan of an eligible employer described in subsection (e)(1)(A), to the extent provided in section 402(l), paragraph (1) shall not apply to amounts otherwise includible in gross income under this subsection.".

(c) EFFECTIVE DATE.- The amendments made by this section shall apply to distributions in taxable years beginning after December 31, 2006.