We have seen several instances where CERL safety members have been advised that if they rely on the heart presumption to obtain a “service‑connected” disability retirement, the retirement system will not report the disability pension as “excludable” income to the IRS. The explanation given is that the IRS does not recognize “presumed” industrial causation as satisfying the conditions for excludable, i.e., tax free, workers' compensation benefits.
Retirement systems have counseled safety members that they can only achieve the favorable tax advantage for a heart disability by waiving reliance on the heart presumption and proving, in an administrative hearing (trial), that their employment made a real and measurable contribution to their disabling heart condition. This, the members are told, will avoid the IRS reluctance to allow the disability pension the excludable from income status.
What the retirement systems do not tell you is that once you agree to waive the presumption, then you will have to contend with the retirement system's reluctance to accept the notion that safety jobs are inherently stressful and that stress contributes to disabling heart conditions. If you fall for this retirement system gambit you will most likely find yourself referred to a retirement system doctor who is committed to defending against stress claims as a matter of principle. Once the retirement system has its own medical consultant's denial in hand, it is a simple matter for the system to hire the hearing officer, appear at its own hearing, hire its own legal counsel to present the case against you, and still retain right to make the final decision even if the hearing officer rules in your favor.
The State adopted the heart presumption to prevent the unfair result of decisions depending on the individual opinion of the medical experts. The legislature noted that some doctors take the position that stress never causes, aggravates or accelerates heart conditions. (Guess how often your retirement system hires these doctors.) Therefore, when the retirement system relies on a doctor who believes that job stress is not a cause of heart trouble, the safety member would be denied his industrial disability retirement. On the other hand, another safety member, with exactly the same type of job stress and heart trouble, might be granted an industrial disability simply because all of the doctors in that case were persuaded that stress can be a legal cause of disabling heart conditions.
In order to resolve this unfair “battle of the experts,” the legislature adopted the position that stress can be a legal cause of disabling heart conditions and that safety employment involves stressful work. The heart presumption then shifts the burden of proof to the retirement system to show that your employment was not a legal cause of your disabling heart condition. The key fact, for the IRS tax treatment is that this legislative presumption must be rebuttable.
The IRS’s position is that where there is an irrebuttable presumption that your heart disability is industrial, then your disability retirement pension is taxable. The reason given is that under no facts could the retirement system prove that your disability is nonindustrial. That's what "irrebuttable" means. If the presumption is rebuttable, then the IRS does not require that the disability be included in gross income. California law unmistakably holds that the heart presumption for safety members is rebuttable.
So what should you do when confronted with your retirement system's assertion that it will not report the member's disability pension as excludable to the IRS if you rely on the heart presumption? The options are:
•Accept the retirement system's invitation to try to prove that their heart condition is industrial without relying on the presumption. We do not recommend this option.
•Accept the presumptive service‑connected disability retirement and instruct the retirement system not to withhold any taxes because the member will deal with the IRS separately. We recommend this option.
Over time we have asked various retirement systems to give us a copy of the legal opinion(s) on which they rely in advising safety members about the taxability of presumptive disability retirements. We invariably are given quotes from materials that have been gathered by their non‑legal staff and which material has not been analyzed by tax specialists.
We have requested tax specialists to review the California heart presumption for disability retirement to advise us whether presumed service‑connected disability pensions for heart trouble are excludable from taxable income. Invariably, those opinions have turned on the “rebuttable” status of the presumption. Where the presumption is rebuttable, the service‑connected disability pension is excludable from gross income.