Tax Relief for Our Heroes: Understanding the HELPS Act
For those who dedicated their lives to keeping our communities safe – our retired police officers, firefighters, and other public safety personnel – managing healthcare costs in retirement can be a significant concern. Fortunately, a valuable tax benefit known as the Healthcare Enhancement for Local Public Safety (HELPS) Retirees Act is designed to provide some much-needed relief.
This post will break down the HELPS Act in simple terms, covering its background, recent changes, who qualifies, how to get started, and the potential savings it offers.
A Little Background: The HELPS Act's Origins
The HELPS Act was first signed into law as part of the Pension Protection Act in 2006. Its core purpose was to allow eligible retired public safety officers to exclude a portion of their retirement distributions used for health or long-term care insurance premiums from their taxable income.
Think of it this way: when you were working, you likely paid for your health insurance with pre-tax dollars, meaning that money wasn't taxed before it went towards your premiums. The HELPS Act essentially extends a similar pre-tax benefit into retirement, helping to ease the financial burden of healthcare.
The Big Change in 2022: More Flexibility for You!
Initially, to qualify for the HELPS Act tax exclusion, your retirement plan administrator had to directly pay your health insurance premiums to your insurance provider. This "direct payment" requirement could sometimes be a hurdle for retirees.
However, a significant change arrived with the SECURE 2.0 Act, signed into law in 2022. For distributions made after December 29, 2022, the direct payment requirement was repealed!
This is a game changer. It means you no longer have to rely on your retirement plan to send payments directly to your insurer. You can receive the distribution yourself and then use it to pay for your qualified health or long-term care insurance premiums, and still claim the tax exclusion. This offers much greater flexibility and control over your healthcare payments.
Who Qualifies for HELPS?
To be an "eligible retired public safety officer" for the HELPS Act, you generally need to have retired from a public agency as:
Law enforcement officers: This includes police, corrections, parole, probation, and judicial officers, with legal authority and responsibility to arrest, apprehend, prosecute, adjudicate, correct, or detain individuals for violating criminal law.
Firefighters
Members of a rescue squad or ambulance crew
Chaplains to a fire or police department
You must have retired either because you reached retirement age or due to a disability. The retirement must also be from the employer who has the retirement plan from which you are receiving a benefit.
It's important to note that the exclusion applies only to the retired public safety officer. It does not extend to a surviving spouse or dependents after the officer's death, though the exclusion can be used for premiums that cover your spouse and dependents while you are living.
What Premiums Qualify?
The tax exclusion applies to qualified health insurance premiums, which generally include:
Medicare Supplemental
Medicare Part D
Medical insurance
Dental insurance
Vision insurance
Long-term care insurance
The maximum amount you can exclude from your gross income is up to $3,000 per tax year. This amount cannot be more than the actual premium amount you paid for the insurance. If both you and your spouse are eligible retired public safety officers, you may each be able to exclude up to $3,000, for a total of $6,000.
How to Get Started
Since the 2022 change, the process has become simpler. Here's a general idea of how to get started:
Confirm Eligibility: First, ensure you meet the criteria for an eligible retired public safety officer.
Understand Your Retirement Plan: While the direct payment requirement is gone, it's still a good idea to understand how your specific governmental retirement plan handles distributions and if they have any internal processes related to the HELPS Act.
Pay Your Premiums: Pay your qualified health or long-term care insurance premiums as usual.
Claim the Exclusion on Your Tax Return: This is crucial. The $3,000 exclusion does not typically appear on your Form 1099-R from your pension fund. You will need to claim this reduction on your personal tax form, Form 1040 (or 1040-SR).
You generally report your total distributions on Line 5a.
You then report the taxable amount on Line 5b, which will be your total distribution minus the excluded amount (up to $3,000).
You should also write "PSO" (for Public Safety Officer) and the amount excluded on the dotted line next to the applicable line.
Consult a Tax Professional: If you want to maximize your savings on this credit check to see if you have taken it since 2023. If not you can amend your returns to capitalize on this credit! If it seems like too much hassle we are happy to do that for you.
Average Savings: What to Expect
The actual tax savings you'll realize from the HELPS Act depends on your individual tax bracket. However, considering the maximum $3,000 exclusion, it can lead to significant savings annually. For example, if you are in a 25% tax bracket, a $3,000 exclusion could translate to approximately $750 in federal tax savings ($3,000 * 0.25). This can make a meaningful difference in your retirement budget, especially with rising healthcare costs.
Real-Life Success Story
Recently, I reviewed prior-year returns for a retired Omaha police officer. Although their returns had been prepared by a CPA, the CPA had overlooked the PSO deduction. By amending their last three years of tax returns, I helped this officer secure over $2,300 in total tax savings. That's real money back in their pocket!
Potential Savings
If you're in the 25% tax bracket, excluding the full $3,000 would save you around $750 in federal taxes each year. Over retirement, these savings can significantly ease financial stress, especially with rising healthcare costs.
Did You Miss Out?
If you didn't claim this benefit since the changes took effect in 2023, it's not too late. You can amend your past returns to get the savings you deserve. If that sounds complicated, don't worry—we’re here to help.
Don’t Leave Money on the Table
At Leading Stone Financial, we specialize in helping retirees like you identify and leverage every available tax benefit. Let’s make sure you're getting every dollar you've earned.
Ready to claim your benefits?
Schedule your FIT CALL today. You served your community—now let us serve you.
