I have a PSO who retired on Disability and received their accumulated Vacation pay in the following year. Weird but true. 

I believe this incorrect information involves the exclusion of Health and LTC insurance premiums, paid directly by an eligible retirement plan, from the retirement benefits, at the request of the Public Safety Officer. There are other income exclusions for PSO's but, unfortunately, they only apply to officers killed in the line of duty.

https://www.irs.gov/government-entities/federal-state-local-governments/compensation-paid-to-depende...

This one?

Doesnt mention "vacation" pay.

Why would someone get vacation pay, if they retire on disability? Perhaps they mean: "Deferred comp earned and unpaid at the time of separation due to disability."