1099-R Box 5 Insurance Premiums: PSO Exclusion and Basis Recovery

If insurance premiums are showing up in Box 5 of your Form 1099-R, that number represents money that is not taxable to you, but the reason it is not taxable depends on which of two situations you are in. Either the box reflects the cost of life insurance protection inside your employer’s retirement plan that you already paid tax on during your working years, or you are a retired public safety officer and the box reflects pension money used to pay health or long-term care premiums under a special tax exclusion. The two scenarios look similar on the form and behave very differently on your return.

Which of the Two Scenarios Is Yours

Box 5 is labeled “Employee contributions/Designated Roth contributions or insurance premiums,” and that single box does triple duty. When the amount relates to insurance, three quick checks tell you which situation you are in.

Look first at Box 7. A distribution code 9 means the 1099-R is reporting the current cost of life insurance protection inside a retirement plan, so Box 5 is the basis-recovery scenario. There is no special distribution code for the public safety officer exclusion. A PSO’s 1099-R looks like any other pension distribution, and the retiree makes the adjustment on the tax return.¹

Then look at the plan. The PSO exclusion only applies to governmental plans. If your 1099-R comes from a private employer, any insurance-related amount in Box 5 is life insurance basis, not a PSO item.

Finally, consider your working history. The PSO exclusion is limited to retired law enforcement officers, firefighters, chaplains, and members of rescue squads or ambulance crews who separated from service because of disability or after reaching normal retirement age.² If none of those apply, Box 5 is not reporting a PSO exclusion.

One other possibility is worth naming so you do not misread the box. Box 5 also reports regular after-tax employee contributions and designated Roth contributions, with no insurance connection at all. If your plan never held life insurance and you are not a PSO, that is likely what you are looking at.

Life Insurance Protection Inside a Retirement Plan

Some qualified retirement plans hold life insurance policies alongside the usual investments. When a plan uses contributions to buy life insurance coverage on you, the cost of that coverage is treated as taxable income to you in the year the coverage is provided. The statute is explicit: any plan contribution applied to purchase life insurance protection is includible in the participant’s gross income for that year.³

The plan administrator reports each year’s cost on a separate 1099-R using distribution code 9, and the figure is calculated from Table 2001, an IRS rate table of per-$1,000 one-year term costs by age.¹⁴ Because tax was paid on those amounts year by year, they become part of your investment in the contract, which is the IRS term for after-tax basis.

When a distribution eventually happens and the life insurance contract itself is distributed, Box 5 on that 1099-R shows the accumulated total of all those previously taxed costs.¹ The plan administrator subtracts that figure from the gross distribution in Box 1 to produce the taxable amount already shown in Box 2a, so you are not taxed twice on the same dollars. If the distribution comes as periodic annuity payments instead of a lump sum, Box 5 shows only the portion of your basis recovered during that tax year.²

The Public Safety Officer Premium Exclusion

Under IRC Section 402(l), an eligible retired public safety officer can exclude up to $3,000 per year from gross income when pension distributions go toward health or long-term care insurance premiums.⁵ An exclusion reduces gross income directly, which is more valuable than an itemized deduction.

Who Qualifies

You qualify if you are a retired public safety officer who separated from service because of disability or after reaching normal retirement age. “Public safety officer” covers law enforcement officers, firefighters, chaplains, rescue squad members, and ambulance crew members.² The distribution must come from a governmental plan maintained by the employer you retired from. Eligible plan types include qualified trusts, Section 403(a) plans, Section 403(b) annuities, and Section 457(b) plans.⁵ Private-sector retirement plans do not qualify, even if the job itself was in public safety.

What Premiums Count

The exclusion covers premiums for accident and health plans, including medical, dental, and vision coverage, and for qualified long-term care insurance contracts. Premiums can cover you, your spouse, or your dependents.² For distributions made after December 29, 2022, the premium no longer needs to be paid directly from the plan to the insurance provider. You can receive the distribution yourself and then pay the premium.⁶

The $3,000 Cap

The exclusion is capped at the lesser of $3,000 or the actual premiums you paid for the year.⁵ It is a flat statutory amount, not indexed for inflation. If both spouses are eligible retired public safety officers, each can exclude up to $3,000 from their own pension distribution. The exclusion only applies to amounts that would otherwise be taxable, so it cannot be stacked on top of a tax-free return of your own after-tax contributions.

Reporting Box 5 on Your Form 1040

How you report the number depends on which scenario applies.

Life Insurance Basis Recovery

When Box 5 reflects previously taxed life insurance costs, the plan administrator has already done the math. Box 2a shows the taxable portion with your basis subtracted. On Form 1040, enter the gross distribution from Box 1 on line 5a and the taxable amount from Box 2a on line 5b. The difference between the two lines is your non-taxable basis recovery, which includes the Box 5 amount.²

The PSO Exclusion

The PSO adjustment is yours to make. The 1099-R instructions tell plan administrators not to reduce the Box 2a taxable amount by the exclusion, so your 1099-R will show a higher taxable amount than you actually owe tax on.¹

To claim the exclusion, enter the full gross distribution from Box 1 on Form 1040, line 5a. On line 5b, enter the Box 2a amount minus the excluded premium (up to $3,000). Check the “PSO” box on line 5c.² If you are retired on disability and reporting the pension on line 1h instead, enter only the taxable amount on that line and write “PSO” along with the excluded amount on the dotted line next to it.

Keep documentation showing you qualify: separation paperwork, proof of your public safety officer status, and premium statements or receipts. The IRS does not ask for these at filing, but you will need them if the return is questioned.

Do Not Claim the Same Premium Twice

You cannot exclude a premium under the PSO rule and also deduct the same premium as a medical expense on Schedule A. The amount excluded from income cannot be used again to claim a medical expense deduction.² If your total premiums exceed $3,000, you can exclude $3,000 under the PSO provision and treat the excess as a potential medical expense subject to the usual AGI threshold, but no single dollar can count toward both benefits.

Claiming both on the same premium can trigger the accuracy-related penalty, which runs 20% of the resulting underpayment, plus interest on the unpaid balance.⁷ Catching the overlap before filing avoids the problem entirely.

1
Internal Revenue Service. Instructions for Forms 1099-R and 5498
2
Internal Revenue Service. Publication 575 – Pension and Annuity Income
3
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
4
Internal Revenue Service. Notice 2001-10 – Table 2001 Interim Table of One-Year Term Premiums
5
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
6
Internal Revenue Service. Publication 575 – Pension and Annuity Income
7
Internal Revenue Service. Accuracy-Related Penalty