The National Active and Retired Federal Employees Association (NARFE) has a bit more information on this topic in an article posted on their website.

I have highlighted some of the more important parts.

• Tax Relief Offered Retired Safety Officers
  OPM Reversal Benefits Some Federal Retirees
  By Dan Adcock
  Assistant Legislative Director

  The Office of Personnel Management (OPM) announced June 20 that retired federal public safety officers will be eligible to exclude from their federal taxes up to $3,000 withheld from their retirement annuities for their share of Federal Employees Health Benefits Program (FEHBP) and Federal Long Term Care Insurance Program (FLTCIP) premiums.

  Congress enacted pension reform legislation last year that included a provision to extend such tax relief to retired state and local government public safety officers. However, until June 20, 2007, OPM and others had said that retired federal public safety officers would not be eligible. OPM's reversal means retired federal public safety officers can enjoy the tax benefit beginning with the 2007 tax year. For purposes of this tax provision, the 2006 pension reform law (P.L. 109-280) defines public safety officers as retired law enforcement officers, firefighters, chaplains, or members of a rescue squad or ambulance crew.

  Filing for the Benefit

  Unlike employee "premium conversion" programs, which are handled automatically by employers, eligible individuals who decide to take advantage of this tax relief will be required to identify their own eligibility as retired public safety officers and report the amount of their federal health and/or long-term care insurance premiums to be excluded from gross income to the Internal Revenue Service (IRS) in their federal tax filings. Eligible individuals will pay lower federal income taxes since the new exclusion will lower their taxable income.

  Premium Conversion

  Premium conversion also lowers a worker's taxable income by their share of employer-sponsored health insurance premiums. For example, if your salary is $30,000 a year and your health premiums are $3,000, your employer reports your wages as $27,000 a year instead of $30,000. But because your employer reports this information, the eligibility process is automatic. In premium conversion, there are no special filing requirements since employers subtract the amount workers spend on health insurance from their salary when their total earnings are reported for tax purposes.

  In addition, there is no cap on how much premium conversion can lower income reported by employers to the IRS. In other words, an employee's annual premium share could be $6,000, instead of $3,000, and his taxable income would be lowered by the higher amount. Retired public safety officers will be limited to excluding the first $3,000 withheld from their employer-provided health and/or long-term care insurance premiums per year.

  What Eligible Retirees Should Do

  To receive the tax exclusion, eligible retirees must pay for their FEHBP and FLTCIP premiums through an annuity deduction. While nearly all eligible retirees enrolled in FEHBP have premiums withheld from their annuity checks, the same cannot be said for the long-term care insurance premiums. The FLTCIP offers three payment options to its enrollees: automatic bank withdrawal, payroll/annuity deduction or direct billing. Eligible retirees currently paying their FLTCIP premiums by bank withdrawal or personal check must begin having deductions withheld from their annuity to exclude their premiums from federal tax through the new benefit.

  However, before making such arrangements, eligible retirees should understand that if their annual share of FEHBP premiums exceeds the new benefit's $3,000-a-year cap, they will not be able to add their FLTCIP premiums to the tax exclusion. For instance, since the enrollee share of an FEHBP Blue Cross/Blue Shield standard family option premium is $3,491 a year, only the first $3,000 of this amount could be excluded from gross income, and retired public safety officers could not also add their FLTCIP premiums once the cap is reached. Consequently, eligible retirees do not need to have FLTCIP premiums withheld from their annuity if their FEHBP premiums are $3,000 or more a year. But public safety officers paying lower FEHBP rates could add their FLTCIP premiums to the tax exclusion, up to the $3,000 limit, if they pay by annuity deduction.

  According to FLTCIP administrators, eligible retirees would need to complete a "billing change form" to request annuity deduction. Retirees would be required to sign the form and provide their Civil Service Annuity (CSA) number. A billing change form can be downloaded from the FLTCIP Web site (http://www.ltcfeds.com) or enrollees can contact FLTCIP at 1-800-582-3337 to have a form mailed to them.

  Beyond checking on how FLTCIP premiums are paid, no action is required now. In fact, eligible retirees can wait until they start preparing their federal tax forms for the 2007 tax year. Retired public safety officers and their tax preparers can receive more information on how to file for the exclusion by requesting a copy of IRS Publication 721. At press time, only the 2006 tax year version of this guide was available through the IRS Web site, http://www.irs.gov, or by calling toll-free 1-800-829-3676. The IRS is likely to update Publication 721 for 2007 in the coming months.

  What About Other Feds?

  Although the public safety officer tax exclusion is not premium conversion, it sets a new precedent of providing retirees with tax relief that will make their health costs more affordable. Since Congress and the president created premium conversion in 1978, public and private sector employees have lost the benefit once they retired.

  NARFE started working with key lawmakers in June on draft proposals that would expand the retired public safety officer tax exclusion to all federal civilian and military retirees.

  "Imagine what our country would be like without the devotion of federal workers and the uniformed services. All of us have dedicated our working lives to the common good, and as a matter of equity, the health tax relief should be offered to the entire federal and military family," said NARFE President Margaret L. Baptiste.

  More information on such efforts will appear in NARFE magazine and the Legislative Hotline. The Hotline is available by adding your e-mail address to your membership record or by visiting the NARFE Web site, http://www.narfe.org, or calling toll-free 1-877-217-8234. In the meantime, NARFE members should urge their lawmakers to support the current premium conversion bills, H.R. 1110 and S. 773.