Are OP&F disability retirement benefits taxable?

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Ohio Police & Fire Disability Explained

A frequent question we receive is whether disability retirement benefits under the Ohio Police & Fire Pension Fund (OP&F) are taxable. The correct answer is: it depends.

There are three (3) types of disability awards under OP&F, and each type is affected differently.

Permanent and Total Disability Awards

The first type is a "permanent and total" disability award. Ohio Revised Code 742.38(D)(1)(a) defines "total disability" as the inability of a member "*** to perform the duties of any gainful occupation for which the member is reasonably fitted by training, experience, and accomplishments." The law further defines "permanently disabled" as "*** a condition of disability from which there is no present indication of recovery." See R.C. 742.38(D)(1)(b). A police officer or firefighter who is permanently and totally disabled is awarded an annual disability benefit "*** payable in twelve monthly installments, in an amount equal to seventy-two percent of the member's average annual salary." R.C. 742.39(A).

According to the Internal Revenue Service, in Private Letter Ruling 96-18286 (see "Links" on this website), "permanent and total" disability retirement benefits paid pursuant to R.C. 742.39(A) are in the form of workers' compensation benefits, and fall under the exception of 26 U.S.C. 104(a)(1). Therefore, this first type of benefit is not taxable income.

Partial and Service-Connected Disability Retirement

The second type of disability retirement under OP&F is one that is "partial" and "service-connected." A member is partially disabled as the result of the member's official duties as a member of a police or fire department "*** if the disability prevents the member from performing those duties and impairs the member's earning capacity ***." See R.C. 742.38(D)(2). OP&F makes a distinction between those members who have greater than twenty-five (25) years of service, and those who don't. If the member has less than 25 years of service, the maximum disability award is sixty percent (60%). R.C. 742.39(B). If the member has more than 25 years of service, the member receives sixty percent (60%), plus 1.5 percent for each year in excess of 25 years, for a maximum of 72%.

The second type of disability retirement, service-connected partial disability, upon which the police officer or firefighter has less than 25 years of service and may receive up to a 60% finding, does not constitute taxable income. The full amount (a maximum of 60%) is non-taxable because the award falls under the exception of 26 U.S.C. 104(a)(1). However, to the extent the officer or firefighter has greater than 25 years of service, and receives an award higher than 60%, the additional service years which are paid at 1.5% for each additional service year do constitute taxable income. The portion of the award above 60% is taxable because it is based upon "the employees length of service," according to 26 C.F.R. 1.104-1(b).

Partial and Non-Service-Connected

The third type of disability retirement under OP&F is one which is partial and non-service-connected. R.C. 742.38(D)(4) provides that a member "*** who has completed five or more years of active service in a police or fire department and has incurred a disability not caused or induced by the actual performance of the member's official duties ***" may be eligible for a disability retirement. The maximum award is 60%. R.C. 742.39(C).

26 U.S.C. 104(a) provides: "Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include - (1) amounts received under workmen's compensation acts as compensation for personal injuries or sickness; ***." However, 26 C.F.R. 1.104-1(b) provides that 26 U.S.C. 104(a)(1) does not exclude as income "***a retirement pension or annuity to the extent that it is determined by reference to the employee's age or length of service, or the employees prior contributions, even though the employee's retirement is occasioned by an occupational injury or sickness." In addition, the exclusion "*** does not apply to amounts which are received as compensation for a nonoccupational injury or sickness to the extent that they are in excess of the amount provided in the applicable workmen's compensation act or acts. ***."

The third type of disability, non-service-connected partial disability awards, are fully taxable, because they are a form of nonoccupational injury or sickness benefits and are not in the nature of workers' compensation benefits. See 26 C.F.R. 1.104-1(b).

As with any financial, tax, or retirement planning matter, it is always advisable to speak with an attorney or accountant to assess the taxability of your own particular situation. Call us today. 614-221-1300.

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