The $3,000 Health Insurance Tax Break for Retired Firefighters

Who qualifies

The IRS describes the eligible group directly.

“Law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew.”

IRS Publication 575

You must have separated from service either by reason of disability or after reaching normal retirement age. Someone who left the job early and is not drawing a retirement benefit under one of those two conditions does not qualify.

Where the money has to come from

This matters as much as who you are. The distribution must come from the governmental plan of the employer you retired from. Eligible plan types include qualified trusts, section 403(a) plans, section 403(b) annuities and section 457(b) plans.

What premiums count

Premiums for coverage under an accident or health plan or a long-term care insurance contract qualify. The coverage can be for you, your spouse, or your dependents.

The long-term care piece is the one most often overlooked. Retirees who would never think of their LTC premium as a pension-related expense are frequently paying for exactly the kind of coverage this provision covers.

The amount you can exclude is the smaller of the premiums you paid or $3,000, per year.

What it is actually worth

Three thousand dollars of excluded income is not three thousand dollars in your pocket. It is worth whatever that income would have been taxed at.

There is also a second-order effect worth knowing. Because this is an exclusion from income rather than a deduction, it lowers the income figure your return starts from — which can matter for other calculations that key off income.

The 2022 change that made this easier

For years the rule had a practical obstacle: the premiums had to be paid directly from the retirement plan to the insurance company. If your fund would not set up that arrangement, you were out of luck no matter how clearly you qualified.

That requirement is gone.

“The direct payment requirement for certain distributions for payment of health or long-term care insurance repealed.”

IRS Publication 575 — applies to distributions made after December 29, 2022

The exclusion can now apply whether the plan pays the insurer directly or the distribution is paid to you and you pay the premiums yourself.

How to actually claim it

This is the section that does not exist anywhere else, and it is the whole reason eligible retirees miss out.

The mechanics, as the IRS sets them out:

1. Report your total distributions on Form 1040, 1040-SR or 1040-NR, line 5a.
2. Report the taxable amount after subtracting the excluded premiums on line 5b.
3. Check the “PSO” box on line 5c.
4. If you report a disability pension on line 1h, include only the taxable amount there, and write “PSO” and the excluded amount on the dotted line next to it.

Keep documentation of the premiums you paid and the plan the distribution came from. If your preparer has not handled this before, the two words that get them to the right place are “PSO exclusion” and “Publication 575”.

You cannot take it twice

The amount you exclude under this provision cannot also be used as a medical expense deduction. One benefit, not two.

What if my fund will not help?

Retiree organizations have raised this question for years, and there has never been a satisfying answer when a fund simply declines to set up a process.

The 2022 change improves the picture considerably. Because the premiums no longer have to be paid directly by the plan to the insurer, a retiree whose fund will not administer anything may still be able to take the distribution, pay the premiums personally, and claim the exclusion on the return.

Whether that works in your case depends on your plan, your distributions and your own tax circumstances. Confirm it with your plan administrator and a qualified tax professional rather than assuming either way.

Why almost nobody claims this

It is a federal benefit that has existed for years, affects a large share of retired public safety officers, and still goes unclaimed constantly. The reasons are structural rather than complicated.

• The form does not tell you. There is no box, no asterisk, no note.
• Pension funds vary wildly in whether they mention it at all, and some published guidance still describes the pre-2022 direct-payment rule as if it were current.
• Most tax preparers see very few public safety retirees. The exclusion is not in their normal workflow.
• Nobody is responsible for telling you. Not the fund, not the insurer, not the IRS. It falls in the gap between all three.

If you retired before 2023 and have never claimed it, it is worth asking your tax professional whether anything can be done about prior years. The rules around amending a return are their territory, not a website's.

Common questions