Tax
Deductions and Long Term Care Insurance
Laws at the federal and
state levels provide tax incentives for individual and businesses
to purchase long term care insurance policies, with the goal
of decreasing the public's reliance upon Medicaid and Medicare as
resources for funding long term care services. Government resources
are limited and the non-indigent is expected to pick up the expenses
of their own long term care.
In 1996, the Health Insurance
Portability and Accountability Act (HIPAA) was signed into law. HIPAA
addressed certain tax incentives for long term care insurance
(LTCi) premiums and benefits. Before HIPAA, it was uncertain whether
long term care insurance would be treated as health insurance for
the purposes of established tax laws-such as Internal Revenue Code
(IRC) Sections 104, 105, 106, and 162. These IRC sections allow employers
to deduct health premiums paid for health and disability insurance
and allow employees to exclude these employer-provided benefits from
their taxable income. HIPAA added IRC Section 7702B, which states
that qualified long term care insurance contracts will be treated,
for tax purposes, as accident and health insurance.
A
Qualified Long Term Care Insurance Policy?
In order to be considered tax qualified, the long term care insurance
policy must contain certain provisions. These provisions pertain to
the manner in which future benefit payments can be triggered. If the
policy contains the required language, it can be considered a qualified
long term care (qualified long term care insurance) insurance contract
for tax purposes.
Here are some provisions.
The long term care
insurance company can only cancel the policy for non-payment of premiums.
The policy must be guaranteed renewable. The long term care insurance
company, however, may increase premiums on a group or class basis.
The long term care insurance policyholder must be certified as a "chronically
ill" person within the prior 12 months and must have a written
plan of care, provided by a licensed healthcare practitioner.
Long term care assistance must be expected to last for at least 90
days.
A chronically ill certification is required to be based on one or
both of the following criteria:
The inability to perform, without substantial assistance, at least
two of six activities of daily living (ADLs). The ADLs are eating,
bathing, dressing, toileting, continence and transferring.
Substantial supervision needed in order to protect the individual
from threats to health and safety due to a severe cognitive impairment.
Benefit increase options (inflation protection) and nonforfeiture
benefits must be offered to the applicant at the time of sale, but
are not required as part of the policy.
Benefits under a qualified long term care insurance policy cannot
duplicate Medicare benefits.
Individuals who have large
medical expenses and low adjusted gross income may find that the premiums
they pay for a qualified long term care insurance insurance policy
are deductible from their federal taxes.
Taxpayers who itemize
may deduct the cost of eligible qualified long term care insurance
premiums as a medical expense on Schedule A. There is an age based
limit on the amount of premiums for purposes of this deduction, which
may be less than the actual policy cost. The age based limits for
2005 are:
(maximum deductible premium)
Insured ages 40 and under $270
Insured ages 41-50 $510
Insured ages 51-60 $1020
Insured ages 61-70 $2720
Insured ages 71 and above $3400
These limits are adjusted
annually for inflation. When allowable medical expenses, including
qualified long term care insurance premiums, exceed 7.5% of the taxpayer's
adjusted gross income, the excess over 7.5% may be deducted. The age
based limits above apply only to the premiums paid for the long term
care insurance policy and do not reflect the maximum total deduction
that may be taken by the taxpayer.
Tax
treatment for Long Term Care Insurance for Businesses
If an employer contributes to the premium cost of qualified long term
care insurance insurance for eligible employees and dependents pursuant
to a plan, the contributions will be excludable from the employee's
income and generally be deductible to the business. The exact rules
vary according to the legal status of the business entity.
Pass-through
entities and Qualified Long Term Care Insurance
There are two sets of parameters that affect the tax deductibility
of qualified long term care insurance insurance premiums for businesses
that are organized as sole proprietorships, partnerships, limited
liability corporations, or sub-S corporations.
Premiums paid by the business
for employees' qualified long term care insurance coverage is 100%
deductible to the business, similar to health insurance premiums.
The owners of businesses that are organized as pass through entities
are more limited in the amount they may deduct for their own qualified
long term care insurance policies. Owner employees may deduct 100%
of their premium subject to the same age based limits as those applied
to individual deductions. Owner employees are not, however, subject
to the 7.5% of AGI itemization requirement.
C-corporations
and Long Term Care Insurance
A C-corporation is considered a stand alone entity for legal and tax
purposes therefore the officers and owners of a C-corporation may
be treated as employees. For this reason, business paid premiums for
officers and owners are 100% deductible, just as they are for non
owner employees. The qualified long term care insurance coverage need
not conform to ERISA standards for non-discrimination as long as the
company can prove the creation of a "plan of insurance"
designed to benefit some or all employees other than just officers
and owners. Employee paid premiums for qualified long term care insurance
coverage, such as those collected through a voluntary payroll deduction
plan, are considered taxable income and may not be included in a Section
1258 plan or a flexible spending account. This means that the employer
may not use salary reduction dollars to pay its premium contribution.
The qualified long term care insurance plan may be offered to retired
employees, eligible dependents of employees and retirees, including
dependent parents, and surviving eligible dependents after an employee's
death.
several states have proposed
and enacted legislation that encourages private insurance as a result
of the recognition of the impact that Medicare and Medicaid service
costs have on state budgets.
Tax
Incentives in various States for Long Term Care Insurance
Currently, 26 states offer tax incentives.
Those states are:
Alabama, Missouri, California, Colorado, New Mexico, New York, Idaho,
North Carolina, Utah, Illinois, North Dakota, Hawaii, Indiana, Ohio,
Iowa, Oregon, Kentucky, Louisiana, Virginia, Maine, Washington D.C.,
Maryland, West Virginia, Minnesota, Wisconsin, Montana.
Specific incentives vary by state. Please contact your state's Department
of Insurance for further information.
Small Print on a Long Term Care Insurance Policy
Benefits are subject to daily as well as lifetime maximum benefits.
Benefit eligibility is contingent on a chronic illness certification
and a definite written plan of care. The provider must be an eligible
provider for qualified long term care. The policy will probably not
cover all expenses for the long term care needs. It is advisable to
review the outline of coverage of the issued long term care policy
for specific details. For complete details and costs of the coverage,
call or write your long term care insurance company or agent.
