To amend the Internal Revenue Code of 1986 to allow certain public employees a deduction for distributions from governmental plans for health and long-term care insurance, and for other purposes.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Healthcare Enhancement for Local 
Public Servants Act of 2008''.

SEC. 2. DISTRIBUTIONS FROM GOVERNMENTAL PLANS FOR HEALTH AND LONG-TERM 
              CARE INSURANCE ALLOWED FOR OTHER PUBLIC EMPLOYEES.

    (a) In General.--
            (1) Distributions allowed for other public employees.--
        Paragraph (1) of section 402(l) of the Internal Revenue Code of 
        1986 (relating to distributions from governmental plans for 
        health and long-term care insurance) is amended by striking 
        ``retired public safety officer who makes the election 
        described in paragraph (6)'' and inserting ``retired public 
        employee''.
            (2) Retired public employee.--
                    (A) Paragraph (4) of section 402(l) of such Code is 
                amended--
                            (i) by striking ``(B) eligible retired 
                        public safety officer.--The term `eligible 
                        retired public safety officer' means'' and 
                        inserting the following:
                    ``(B) Eligible retired public employee.--
                            ``(i) In general.--The term `eligible 
                        retired public employee' means'',
                            (ii) by inserting ``, public school 
                        personnel, or other public employee'' after 
                        ``public safety officer'' in subparagraph (B), 
                        and
                            (iii) by redesignating subparagraph (C) as 
                        clause (ii), by moving such clause (as so 
                        redesignated) 2 ems to the right, and by 
                        inserting after such clause (as so 
                        redesignated) the following new clauses:
                            ``(iii) Public school personnel.--The term 
                        `public school personnel' shall have the same 
                        meaning given such term by section 4151(10) of 
                        the elementary and secondary education Act of 
                        1965 (20 U.S.C. 7161(10)) whether employed by 
                        an institution of higher education (as defined 
                        in section 101 of the Higher Education Act of 
                        1965 (20 U.S.C. 1001) or a local educational 
                        agency (as defined in section 9101 of the 
                        Elementary and Secondary Education Act of 1965 
                        (20 U.S.C. 7801(26)).
                            ``(iv) Public employee.--The term `public 
                        employee' means any employee of a State, 
                        political subdivision of a State, or agency or 
                        instrumentality of a State or political 
                        subdivision of a State.''.
            (3) Conforming amendment.--
                    (A) Subsection (l) of section 402 of such Code (as 
                amended by this section) is amended by striking 
                ``retired public safety officer'' in each place it 
                appears and inserting ``retired public employee''.
                    (B) Subparagraph (D) of section 402(l)(4) of such 
                Code is redesignated as subparagraph (C).
    (b) Effective Date.--The amendments made by this section shall 
apply to distributions in taxable years beginning after December 31, 
2008.

SEC. 3. DISTRIBUTION ALLOWED AS DEDUCTION RATHER THAN EXCLUDED FROM 
              GROSS INCOME.

    (a) In General.--
            (1) Deduction allowed.--Paragraph (1) of section 402(l) of 
        the Internal Revenue Code of 1986 is amended by striking 
        ``gross income of such employee for such taxable year does not 
        include'' and all that follows through the period at the end 
        and inserting the following: ``there shall be allowed as a 
        deduction from gross income for the taxable year an amount 
        equal to the aggregate amount of distributions from an eligible 
        retirement plan of the individual in the taxable year to the 
        extent that such amount does not exceed the amount paid by such 
        employee for qualified health premiums for such taxable year.''
            (2) Deduction with respect to surviving spouse.--Subsection 
        (l) of section 402 of such Code is amended by striking 
        paragraph (6) and inserting the following new paragraph:
            ``(6) Special rule for surviving spouse.--In the case of a 
        deceased individual with respect to whom a deduction was 
        allowed under paragraph (1) for the taxable year closed by 
        reason of the individual's death, the surviving spouse of such 
        individual shall be treated as the employee with respect to the 
        plan for purposes of paragraph (1) for all subsequent taxable 
        years.''.
    (b) Deduction Allowed Whether or Not Taxpayer Itemizes.--Subsection 
(a) of section 62 of such Code is amended by inserting after paragraph 
(21) the following new paragraph:
            ``(22) Distributions from governmental retirement plans for 
        health and long-term care insurance for public employees.--The 
        deduction allowed by section 402(l).''.
    (c) Conforming Amendments.--
            (1) Paragraph (1) of section 402(l) of such Code is amended 
        by striking ``of the employee, his spouse, or dependents (as 
        defined in section 152)''.
            (2) Paragraph (2) of section 402(l) of such Code is amended 
        by striking ``The amount which may be excluded from gross 
        income for the taxable year by reason of paragraph (1)'' and 
        inserting ``The amount allowable as a deduction under paragraph 
        (1) for the taxable year''.
            (3) Paragraph (3) of section 402(l) of such Code is amended 
        to read as follows:
            ``(3) Distributions must be included in gross income.--An 
        amount shall be treated as a distribution for purposes of 
        paragraph (1) only to the extent that such amount is included 
        in gross income for the taxable year.''.
            (4) Paragraph (7) and (8) of section 402(l) of such Code 
        are each amended by striking ``The amounts excluded from gross 
        income'' and inserting ``Any amount allowable as a deduction''.
            (5) Subsection (a) of section 403 of such Code is amended 
        by striking paragraph (2).
            (6) Subsection (a) of section 457 of such Code is amended 
        by striking paragraph (3).
    (d) Effective Date.--The amendments made by this section shall 
apply to distributions in taxable years beginning after December 31, 
2008.

SEC. 4. FURTHER MODIFICATIONS RELATING TO 402(L).

    (a) In General.--
            (1) Subsection (l) of section 402 of the Internal Revenue 
        Code of 1986 is amended by adding at the end the following new 
        paragraph:
            ``(9) Cost-of-living adjustment.--In the case of taxable 
        years beginning after December 31, 2009, the Secretary shall 
        adjust the $3,000 amount under paragraph (2) at the same time 
        and in the same manner as under section 415(d), except that the 
        base period shall be the calendar quarter beginning July 1, 
        2008, and any increase under this paragraph which is not a 
        multiple of $100 shall be rounded to the next lowest multiple 
        of $100.''.
            (2) Subparagraph (A) of section 402(l)(4) of such Code 
        (defining eligible retirement plan) is amended to read as 
        follows:
                    ``(A) Eligible retirement plan.--For purposes of 
                paragraph (1), the term `eligible retirement plan' 
                means a plan described in--
                            ``(i) subsection (c)(8)(B)(iii) (and is a 
                        governmental plan within the meaning of section 
                        414(d)),
                            ``(ii) subsection (c)(8)(B)(iv) (and is 
                        maintained by an employer which is a State, a 
                        political subdivision of a State, or an agency 
                        or instrumentality of a State or political 
                        subdivision of a State),
                            ``(iii) subsection (c)(8)(B)(v), or
                            ``(iv) subsection (c)(8)(B)(vi) (and is 
                        maintained by an employer which is a State, a 
                        political subdivision of a State, or an agency 
                        or instrumentality of a State or political 
                        subdivision of a State).''.
            (3) Subparagraph (C) of section 402(l)(4) of such Code (as 
        redesignated by this Act) is amended--
                    (A) by inserting ``(as defined in section 152, 
                determined without regard to subsections (b)(1), 
                (b)(2), and (d)(1)(B) thereof)'' after ``dependents'', 
                and
                    (B) by striking ``insurance''.
            (4)(A) Subparagraph (B) of section 402(l)(4) of such Code 
        is amended by striking ``normal retirement age'' and inserting 
        ``normal retirement date''.
            (B) Paragraph (4) of section 402(l) of such Code is amended 
        by adding at the end the following new subparagraph:
                    ``(D) Normal retirement date.--The term `normal 
                retirement date' means the earliest date on which the 
                individual may retire and receive a retirement benefit 
                from the governmental plan which is not reduced by 
                reason of the individual's age or years of service.''.
            (5) Paragraph (5) of section 402(l) of such Code is amended 
        to read as follows:
            ``(5) Related plans treated as 1 plan.--For purposes of 
        this subsection, all eligible retirement plans of an employer 
        shall be treated as a single plan.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to distributions in taxable years beginning after December 31, 
2008.

Summary: Healthcare Enhancement for Local Public Servants Act of 2008 - Amends the Internal Revenue Code to: (1) extend eligibility for tax-free distributions from governmental employee benefit plans for health and long-term care insurance to any retired state or local public employee. (2) provide for a tax deduction of such distributions rather than an exclusion from gross income, (3) allow nonitemizing taxpayers to claim such tax deduction. And (4) allow an annual inflation adjustment to the $3,000 distribution limit beginning after 2009.