Committee considers bill to temporarily make line-of-duty disability benefits federally nontaxable

Senator Daniel Zolnikauv (Senate District 22) introduced Senate Bill 316, saying the bill would place a line-of-duty disability provision into state code so benefits could be reported to the Internal Revenue Service as nontaxable for 2026, effectively providing an extra year of federal tax relief before Secure Act 2 takes effect in 2027.

The bill’s backers told the House State Administration committee the change is a statutory cleanup rather than a benefit increase. William Hollahan, executive director of the Montana Public Employee Retirement Administration, said the bill would create separate line-of-duty disability statutes for the municipal police officers and firefighters retirement systems, mirror current benefit formulas and have no fiscal impact to the funds. He explained the agency transmits 1099‑R data to the IRS and that, with the statutory change, the IRS has said it will allow reporting the box 2A amount as nontaxable.

Shelby Demars of the Montana Police Protective Association testified the revision ‘‘is not an increase in benefits’’ but would prevent injured officers from facing large unexpected tax bills. Several family members of injured officers described personal hardship. Rhonda Wiggers, testifying as a parent of a line-of-duty shooting victim, described repeated surgeries and a household pushed into a higher tax bracket because her son’s medical retirement payments were taxed. Heidi Paulson, whose husband was injured in an earlier year, told the committee the problem dates back to a 2013 IRS audit that changed how 1099‑R amounts were reported.

Committee members asked how a state statute alters federal tax treatment. Hollahan said the IRS looks to the retirement plan’s statutory language and the agency’s 1099‑R reporting; if state statute expressly provides a separate line-of-duty benefit and the agency follows IRS guidance, the payments can be reported as nontaxable in box 2A. Representative Byrne asked about making the bill retroactive to Jan. 1; Hollahan said the retirement administration is amenable to retroactivity but cautioned that the IRS might require issuing multiple 1099‑Rs for a single year, creating administrative work.

Senator Zolnikauv closed by asking committee members to work with agency staff on technical language. Representative Lee agreed to carry the Senate bill to the House. The committee closed the hearing; no amendment or vote was recorded at the hearing.