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How pension and retirement income is treated depends on the type of pension or retirement income. This section describes most pension and retirement income, as well as special types like Federal, Military and Railroad Retirement.
NOTE Military retirement is not the same as VA benefits based on disability or need. See MA606RRR for VA benefits.
The table below describes how pension and retirement income is counted:
If the payment is... |
And the program is... |
Then... |
Railroad Retirement |
ALTCS SSI-MAO MSP |
Counted as unearned income. NOTE Any part of the pension paid to an ex-spouse as community property under a divorce decree is not counted to the retiree. |
Adult Caretaker Relative Pregnant Woman Child KidsCare |
· The Tier I - Social Security Equivalent Benefit is counted in full as unearned income. · The taxable amount of any Tier 1 - Non-Social Security Equivalent Benefit, Tier II benefit, vested dual benefit and supplemental annuity is counted. Non-taxable amounts are excluded. |
|
All other pension and retirement payments |
ALTCS SSI-MAO MSP |
Counted as unearned income. NOTE Any part of the pension paid to an ex-spouse as community property under a divorce decree is not counted to the retiree. |
Adult Caretaker Relative Pregnant Woman Child KidsCare |
The taxable amount of the payment is counted as unearned income. Any part that is not taxable is excluded. NOTE Most employment-based pensions are fully taxable. |
|
Cash surrender |
ALTCS SSI-MAO MSP |
Not income. It is the conversion of a resource (MA701.3). |
Adult Caretaker Relative Pregnant Woman Child KidsCare |
Pre-tax contributions, employer contributions, and interest and dividend parts of the payment are counted. |
If a person gets more than one retirement payment and a payment is reduced to account for other retirement income, only the reduced amount is counted.
NOTE The Railroad Retirement Board (RRB) also offers Unemployment Insurance (UI) and Sickness Insurance (SI) benefits. RRB UI is treated as Unemployment Insurance (MA606OOO). RRB SI is treated as Disability Insurance Payments (MA606S).
A pension may be increased to pay health insurance premiums. The increased amount is not counted in the total gross income when it is less than or equal to the premium paid. See Arizona State Retirement System with Health Insurance Supplement Examples for more information.
Term |
Definition |
Pension and Retirement Income |
Payments based on a person’s past employment including age, years of service or disability. |
Federal Pension |
A civil service benefit (also called an annuity) paid to a retired federal government employee. |
Military Retirement |
Periodic payments to a former military service member based on age, length of service or disability. For persons who served in the United States military, these payments will generally be issued by the Defense Finance and Accounting service (DFAS). |
Railroad Retirement Benefits |
Payments made by the Railroad Retirement Board to retired and disabled railroad employees and their spouses. The payments can include any more of the following RRB types: · Tier 1 - Social Security Equivalent Benefit (SSEB); · Tier 1 - Non-Social Security Equivalent Benefit (NSSEB); · Tier II benefit; · Vested dual benefit; and · Supplemental annuity. |
Taxable amount of pension or retirement payment |
Generally includes: · Employer contributions; · Pre-tax contributions; and · Interest or dividends. |
Proof of income:
Income is first obtained through the Federal and State Data Services Hubs. If needed, other proof includes:
· Letter from the payor;
· Pay stub;
· Collateral contact with the source of the payment;
· Letter from the service branch of DFAS (for military retirement);
· Award letter; or
· Written statement from the Office of Personnel Management (OPM) for federal pensions.
Proof of taxable amount:
Proof must be provided for any non-taxable part of the payment to be excluded. In addition to the sources listed above, proof of the non-taxable amount includes:
· Most current 1099-R form or other income reporting form;
· Most current tax return;
· Letter from the payor;
· Pay stub; or
· Collateral contact with the source of the payment.
This requirement applies to the following programs:
Program |
Legal Authorities |
ALTCS SSI-MAO Medicare Savings Program |
42 USC 1382a(a)(2)(B) 20 CFR 416.1121(a)
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Adult Caretaker Relative Pregnant Woman Child KidsCare |
42 CFR 435.603 42 CFR 457.10, 300, 301 and 315 |