The “1262l tax code” is almost always a mistyped reference to Section 402(l) of the Internal Revenue Code, the provision that lets eligible retired public safety officers exclude up to $3,000 per year from their taxable income when pension distributions are used to pay health or long-term care insurance premiums. Congress created the exclusion through the Healthcare Enhancement for Local Public Safety Retirees Act (the HELPS Act), and the SECURE 2.0 Act of 2022 loosened its most restrictive rule. For retirees who qualify, it directly cuts taxable pension income every year they claim it.
Who Qualifies
Two things have to be true. You served as a public safety officer, and you left that job either by reaching normal retirement age under your employer’s plan or by separating due to a qualifying disability.{1Office of the Law Revision Counsel. 26 U.S.C. 402 – Taxability of Beneficiary of Employees’ Trust} Taking an early retirement package with a reduced benefit before your plan’s normal retirement age disqualifies you, even after a full career in public safety.
Section 402(l) borrows its definition of “public safety officer” from the Omnibus Crime Control and Safe Streets Act. The definition covers someone serving a public agency in an official capacity as:
- A law enforcement officer, including police, corrections, probation, parole, and judicial officers
- A firefighter
- A chaplain in a fire or police department
- A rescue squad or ambulance crew member
Because service to a public agency is required, private-sector security guards and paramedics employed by private ambulance companies fall outside the definition.{2U.S. Government Publishing Office. 42 U.S.C. 3796b – Definitions} Corrections officers do qualify under the law enforcement umbrella, though they are often overlooked.
Two more limits: the distribution must come from the retirement plan of the same employer you served as a public safety officer, and the benefit belongs to the officer personally. A surviving spouse receiving pension distributions cannot continue claiming the exclusion after the retiree dies, even if the money still pays the same premiums.
What Premiums the Exclusion Covers
Two categories of insurance qualify: accident or health plans, and qualified long-term care insurance contracts that meet the federal standards in Section 7702B(b) of the tax code.{3Legal Information Institute (LII). 26 USC 402(l)(4) – Definitions} Premiums for your own coverage, your spouse’s, and your dependents’ all count.{4Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income}
The $3,000 Cap
The maximum excludable amount in any tax year is $3,000.{1Office of the Law Revision Counsel. 26 U.S.C. 402 – Taxability of Beneficiary of Employees’ Trust} The figure is fixed in the statute and is not indexed for inflation. It has stayed at $3,000 since the HELPS Act was enacted and remains at that level for 2026. Qualifying premiums above the cap simply stay taxable. If you pay $5,000 in qualifying premiums, $3,000 is excluded and $2,000 is not.
The exclusion only applies to amounts that would otherwise be taxable. If part of your pension distribution is a return of your own after-tax contributions, that portion is already non-taxable and doesn’t count toward the $3,000.{1Office of the Law Revision Counsel. 26 U.S.C. 402 – Taxability of Beneficiary of Employees’ Trust}
Which Retirement Plans Work
The distribution has to come from an eligible governmental plan. That means a qualified trust (the standard state or local government pension), a Section 403(a) qualified annuity, a Section 403(b) tax-sheltered annuity, or a Section 457(b) deferred compensation plan.
Private-sector 401(k)s and traditional IRAs don’t qualify, and this includes an IRA that received a rollover from an otherwise-eligible governmental plan.{4Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income} Once the money leaves the governmental plan, the exclusion goes with it.
How SECURE 2.0 Changed the Payment Rules
The old rule required the retirement plan to send premium payments directly to the insurance company. If the distribution ran through your bank account first, the exclusion was lost. Some pension systems refused to set up direct payment, which shut their retirees out of the benefit entirely.
SECURE 2.0 made direct payment optional. Your plan can still pay the insurer, but the distribution can also come to you, and you pay the premiums yourself while keeping the exclusion.{4Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income} When the money passes through your hands, you have to include a self-certification with your tax return that the excluded amount does not exceed the premiums you actually paid that year. Keep receipts and payment confirmations from your insurer in case the IRS asks.
How to Claim the Exclusion on Your Return
Your plan will send Form 1099-R showing the year’s total distribution. The taxable amount in Box 2a will not reflect the 402(l) exclusion. You do that math yourself.{4Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income}
On Form 1040 or 1040-SR, put the total distribution on line 5a. On line 5b, put the taxable amount after subtracting the excluded premiums (up to $3,000). Then check the “PSO” box on line 5c. That box tells the IRS why line 5b is lower than what appears on the 1099-R.{4Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income} If you took disability retirement and report your pension on line 1h instead, enter the taxable amount there and write “PSO” with the excluded amount on the dotted line.
The exclusion is an annual election. The IRS will not apply it for you, and if you skip the box or forget to reduce the taxable amount, you pay tax on the full distribution.
Interaction with the Medical Expense Deduction
The same dollars cannot be used for both the 402(l) exclusion and the Schedule A medical expense deduction. Section 402(l) states that any amount excluded under it is not taken into account under Section 213.{1Office of the Law Revision Counsel. 26 U.S.C. 402 – Taxability of Beneficiary of Employees’ Trust} Pay $6,000 in premiums, exclude $3,000 under 402(l), and only the remaining $3,000 can even be considered for Schedule A (subject to the 7.5%-of-AGI floor).
For most retirees the exclusion is the stronger benefit, because it reduces gross income directly and lowers AGI in the process. The medical expense deduction only helps if you itemize and your total medical costs clear the 7.5% floor.
Mistakes That Cost Retirees the Benefit
The most common error is assuming any public-sector retiree qualifies. A retired city clerk, public school teacher, or DMV employee with a governmental pension cannot use 402(l). The job has to fit the statutory definition of public safety officer.
Early retirees are the next group that gets caught. Separation before normal retirement age disqualifies you unless it was for a qualifying disability. There is no carve-out for early-out incentive packages.
Rolling a pension into an IRA before claiming the exclusion permanently ends it, because IRAs are not eligible retirement plans for this purpose. If a rollover is on the table, weigh the annual tax benefit over your expected retirement years against whatever the IRA offers.
And finally, not every plan will figure the reduced taxable amount for you on the 1099-R. Do the subtraction on line 5b and check the PSO box each year you claim it.