Reporting of HELPS $3,000 Exclusion

The Pension Protection Act of 2006 (PPA) included a provision permitting eligible retired public safety officers to elect to exclude up to $3,000 of their retirement benefit from income if used for qualified health insurance premiums or long-term care insurance premiums.  This provision was found in Section 845 of the PPA and is generally referred to as the HELPS election.  Although there was some concern over initial guidance from the IRS that indicated that only payments to insured plans would qualify for the exclusion, as noted in the Ice Miller LLP Governmental Plan Alert "IRS Issues Notice 2007-99 – Guidance Modifies Deduction Exclusion," the IRS has clarified that payments to self-insured plans are also permissible.

Although many governmental plans anticipated that special reporting would be necessary on the part of plans which chose to offer direct payment of premiums for their members, the IRS has taken a different approach.  The governmental plan deducting and paying the insurance premiums will not be responsible for reporting the amount paid in premiums on the Form 1099-R issued to the retiree.  Rather, the retiree will be required to report the amount claimed as an exclusion on his or her Form 1040.  The 2007 Instructions to the Form 1040 instruct the retiree to reflect the taxable amount received from the plan (after adjustment for qualified premiums deducted and paid directly by the plan, up to but not exceeding $3,000) on line 16b of the Form 1040.  Next to the entry, in the margin, the retiree must write the letters "PSO."

Some have raised concerns that members who file a Form 1040-EZ will not be able to take advantage of this provision.  This does seem to be the case, as there is no mention of claiming the exclusion in the Form 1040-EZ Instructions.  However, it is also clear from those Instructions that Form 1040-EZ may not be filed when the taxpayer has received taxable income reported on a Form 1099-R.  Therefore, members of a governmental plan receiving taxable income reported on a Form 1099-R cannot file Form 1040-EZ in any event.  In other words, the fact that the HELPS deduction cannot be claimed on a Form 1040-EZ should not pose a problem, as anyone having taxable income from a governmental plan cannot file a Form 1040-EZ.

Although a governmental plan which is deducting and paying qualified premiums for a retiree does not adjust for those amounts in box 1 or 2a of the Form 1099-R, the plan may choose to reflect the qualified premiums paid in the Notes section of the form.  This may be helpful to your retirees as they complete their Form 1040 for the year.  Alternatively, a governmental plan could provide affected retirees with a separate sheet stating the amount of qualified premiums which you deducted and paid on their behalf.  In addition, you may wish to provide additional educational materials to your members, informing them of the definition of eligible retired public safety officer and directing them to the Form 1040 Instructions for information on claiming the deduction.  However, a governmental plan is not required to determine whether an individual retiree is an eligible retired public safety officer nor to obtain any certification from the individual on that point.  Therefore, we recommend that you phrase any additional information you provide carefully so as to provide information and assistance but, make it clear that the retiree must ultimately determine whether he or she qualifies to claim the deduction.

For further assistance with reporting of the HELPS deduction or communications to your retirees, please contact Mary Beth Braitman, Terry A.M. Mumford, Lisa E. Harrison or Katrina M. Clingerman or the Ice Miller LLP Employee Benefits attorney with whom you work.