IRS Pub 575states that “The distribution must be made directly from the plan to the insurance provider”. The federal Pension Protection Act of 2006 contains a provision permitting eligible, retired public safety officers to exclude up to $3,000 for qualified health insurance premiums paid by them from their gross taxable income each year, as long as the premiums are deducted from their retirement benefit.
Based on the information that you provided, the premium that is withheld from your retirement distribution and forwarded to your ex-employer who pays for your healthcare qualifies as an exclusion up to $3,000.
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