The Federal Government and many state governments have provided tax advantages for those who purchase long-term care insurance. Some of the tax regulations are long, lengthy and almost uncomprehensible. For purposes of this text, this information is kept as short and consise as possible.
This text does not have the capacity to present full tax information (on any subject) and it is not intended to be a taxation authority. Therefore, because there are many rules, exceptions and limitations, there can be occasions where a general rule or example may not apply to the situation at hand. Legal questions should always be fielded by lawyers or other legal authority. The quickest way to see if the Errors and Omissions insurance is worth the premium is for an agent to provide legal opinions based on a minimum of knowledge.
Besides, laws and regulations change frequently and are subject to differing interpretations. This text or the Continuing Education school does not provide any legal, accounting, or tax planning advice, and nothing herein should be construed as such. If expert advice is needed, then in all likelihood the services of a competent, licensed tax attorney or consultant should be obtained.
Delaware regulations state: With regard to life insurance policies which provide an accelerated benefit for long-term care, a disclosure statement is required at the time of application for the policy or rider and at the time the accelerated benefit payment request is submitted that receipt of these accelerated benefits may be taxable, and that assistance should be sought from a personal tax advisor. The disclosure statement shall be prominently displayed on the first page of the policy or rider and any other related documents. This subsection shall not apply to qualified long-term care insurance contracts.126
With regard to qualified long-term care insurance policies a disclosure statement shall appear in bold print on the face of the policy and Outline of Coverage indicating the policy is intended to be a qualified long-term care policy under IRS regulation.127
In 1996 Congress passed the Health Insurance Portability and Accountability Act (HIPAA) which provided, in part, the criteria for establishing tax-qualified long-term care insurance policies. Essentially, HIPAA provided that benefits paid under a long-term care insurance policy would not be taxable if the long-term care insurance policy met minimum eligibility criteria. As a result of HIPAA, it is easy to tell which long-term care insurance policies are intended to be tax-qualified because there will be an identifying paragraph on the front page of the contract.
More detailed tax information follows, but at this point it is good to know the difference between a "(tax) qualified" and a "non-qualified" LTCI policy.
F NOTE: The tax information provided is an interpretation of federal guidelines. Clients should always consult with their financial advisor or a tax consultant regarding tax advantages.
Qualified Long Term Care Insurance contracts, which provide benefits on a per diem basis (or other flat amount per fixed period) are treated somewhat differently for tax purposes than indemnity policies The payment of premium by individuals and the tax treatment of the employer-provided coverage is subject to the same rules outlined with respect to indemnity policies. The tax-free receipt of benefits under a per diem policy is limited so that policyholders will be taxed on the amount of benefits which exceeds the greater of: $260 (2007) per day, or the amount of long-term care expenses incurred by the insured.
Only benefits paid under a policy specifically to reimburse actual expenses are not subject to the cap. Thus, payments made on a daily, monthly, annual, or even a lump‑sum basis will be periodic payments subject to the cap, unless limited by the policy to the actual expenses incurred by the insured.
Periodic payments are excluded from the insured's income up to a maximum of $260 per day ($94,900 per year). These caps will be indexed for inflation. If the periodic payments exceed the cap, the amount of benefits over the cap may be excluded from the income only to the extent the individual has incurred actual expense for long term care services. The excess payments will be included in income without regard to the individual's basis in the contract from the premium paid for coverage.
The Treasury Department has released guidelines (Notice 97‑31) which provide temporary IRS interpretations of what changes can be made to "Grandfathered/Qualified” status. Per the IRS, if a Grandfathered policy is materially changed after December 31,1996, it loses its Grandfathered/Qualified status.
A material change, per the guidelines, could include any change in the terms of the contract altering the amount of coverage or timing of any item payable by the policyholder, the insured, or the insurance company. (A material change could eventually be determined by the IRS to be any client‑requested increase in benefits.)
F NOTE: Tax Laws change frequently, so the client’s tax attorney should always review information of this type furnished to a client.
Simply put, Reimbursement Model policies repay the insured for qualifying long-term care expenses that he or she incurred, subject to the amount of coverage purchased.
CONSUMER APPLICATION
Joe purchases a Reimbursement Long-Term Care Insurance Policy with coverage of $150 per day. He later needs Home Health Care services and the cost is $80 per day. His Reimbursement insurance coverage would reimburse her for her expenses and as a result she would receive $80 per day of qualifying services. The remaining $70 ($150 per day in coverage minus $80 paid in benefits = $70) remains with the insurance company and is available for Sandy's use down the road.
CONSUMER APPLICATION
Bubba purchases a Reimbursement Long-Term Care Insurance Policy with coverage of $150 per day. Bubba later needs Home Health Care services and the cost is $200 per day. Bubba's Reimbursement insurance coverage would reimburse him for his expenses up to the amount of coverage purchased, and as a result he would receive $150 per day of qualifying services. Bubba would be personally financially responsible for the remaining $50 ($200 per day in expenses minus $150 received in benefits = $50).
For policies that pay benefits under the Reimbursement Model, the benefits received are considered to be a reimbursement for expenses incurred for medical services. This is true regardless of whether the Tax-Qualified Long-Term Care Insurance policy reimburses pays benefits on a daily, weekly, monthly or other periodic basis.128 As a result, benefits under a Reimbursement Model are generally not considered income.
Indemnity Model policies pay the insured person a flat amount regardless of the amount of the insured person's expenses.
CONSUMER APPLICATION
Judy purchases an Indemnity Long-Term Care Insurance Policy with coverage of $150 per day. Judy later needs Home Health Care services and the cost is $80 per day. Judy's Indemnity insurance coverage would pay her $150 per day of service even though her expenses are only $80. Judy can use the extra $70 to pay for additional health coverage or to buy a new hat and shoes—whatever she wants.
CONSUMER APPLICATION
Dan purchases an Indemnity Long-Term Care Insurance Policy with coverage of $150 per day. Dan later needs Home Health Care services and the cost is $200 per day. Dan's Indemnity insurance coverage would pay him $150 per day of service even though his expenses are $200. Dan will have to come up with the additional $50.
For Tax- Qualified Long-Term Care Insurance policies that pay benefits under an Indemnity Model, benefit payments are subject to a daily dollar cap.
2007 Daily Indemnity |
2006 Daily Indemnity |
2005 Daily Indemnity |
$260 |
$250 |
$240 |
If the individual taxpayer receives Tax-Qualified Long-Term Care Insurance benefits in excess of this annual daily limit, those "excess benefits" will be considered income for tax purposes. However, the taxpayer may exclude from income the "excess benefits" to the extent of the individual's actual unreimbursed Tax-Qualified Long-Term Care expenses. Note, however, according to available reports, the IRS has never gone after a person who receives long-term care benefits (from any source) for not reporting income from LTCI benefits. However, they have the legal right to do so.
Deductibility of Premium Payments
Individuals who purchase and pay for Tax-Qualified Long-Term Care Insurance policies for themselves, their spouses, and their tax dependents may claim the premiums paid as deductible personal medical expenses if the Individual itemizes his or her taxes.129 Tax-Qualified Long-Term Care Insurance expenses are deductible by an individual tax payer only to the extent that the individual's total unreimbursed medical care expenses exceed 7.5% of his or her Adjusted Gross Income. Further, the amount of the Tax-Qualified Long-Term Care Insurance premiums that may be deducted is subject to the following dollar limits based on the insured's attained age before the close of the tax year.130
Age |
Eligible Premium 2007 Limit |
/ Eligible Premium 2006 Limit |
< 40 |
$290 |
$280 |
41 - 50 |
$550 |
$530 |
51 - 60 |
$1,110 |
$1,060 |
61 - 70 |
$2,950 |
$2,830 |
> 70 |
$3,680 |
$3,530 |
Deductibility of Employer-Paid Premiums
Sole Proprietors who purchase and pay for Tax-Qualified Long-Term Care Insurance policies for themselves, their spouses and their tax dependents may claim a deduction for the premiums paid as medical care expenses.131
Further, as in the case of individual taxpayers, the amount of the Tax-Qualified Long-Term Care Insurance premiums that a self-employed individual may deduct as Self-Employed Health Insurance is subject to the dollar limits as individuals (above).
On Behalf of a Partner
A Partnership that purchases Tax-Qualified Long-Term Care Insurance on behalf of a Partner may deduct the premiums paid as an ordinary business expense—same for Tax-Qualified Long-Term Care Insurance purchased for the Partner's spouse or other tax dependent.
On Behalf of an Employee
A Partnership that purchases Tax-Qualified Long-Term Care Insurance on behalf of an Employee may deduct the premiums paid as an ordinary business expense—same for Tax-Qualified Long-Term Care Insurance purchased for the Employee's spouse or other tax dependent.
For the Employee
Employer-paid Long-Term Care Insurance premiums would not be included in the Employee's gross income.133
For a Partner
The entire amount of the Tax-Qualified Long-Term Care Insurance premiums paid by the Partnership is includable in the partner's gross income. The same is true for partnership-paid Tax-Qualified Long-Term Care Insurance premiums paid on behalf of the Partner's spouse or other tax dependents.
In this case, the partner is treated as a self-employed individual for tax purposes and the Tax-Qualified Long-Term Care Insurance premiums received would be subject to the same tax rules as apply to Sole Proprietors.
On Behalf of an Employee
A C-Corporation that purchases Tax-Qualified Long-Term Care Insurance on behalf of an Employee may deduct the premiums paid as an ordinary business expense—same for Tax-Qualified Long-Term Care Insurance purchased for the Employee's spouse or other tax dependent.
On Behalf of an Employee Stockholder
A C-Corporation that purchases Tax-Qualified Long-Term Care Insurance on behalf of an Employee Stockholder may deduct the premiums paid as an ordinary business expense—same for Tax-Qualified Long-Term Care Insurance purchased for the Employee Stockholder's spouse or other tax dependent.
On Behalf of a Stockholder (Owner) Who is not an Employee
A C-Corporation that purchases Tax-Qualified Long-Term Care Insurance for a shareholder who is not an employee, does not receive a deduction for the premiums paid.
For an Employee
Employer-paid Long-Term Care Insurance premiums would not be included in the Employee's gross income.134 This would also apply to premiums paid on behalf of the employee's spouse and other tax dependents.
For an Employee Stockholder
Provided that the Stockholder is also a bona fide Employee of the C-Corporation, Tax-Qualified Long-Term Care Insurance premiums paid by the C-Corporation on behalf of the Employee are fully deductible assuming the C-Corporation retains no interest in the policy. This would also apply to premiums paid on behalf of the employee's spouse and other tax dependents.
For a Stockholder who is not an Employee
Tax-Qualified Long-Term Care Insurance premiums paid by a C-Corporation on behalf of a Stockholder who is not an Employee of the C-Corporation would represent dividend income for the Stockholder.
Deductibility of Employer-Paid Premiums
For purposes of determining tax liabilities with regards to S-Corporations, the tax code looks to the individual's ownership rights in the company. An employee who owns 2% or more of the S-Corporation is deemed to be an Employee/Owner, while one who owns less than 2% is treated as only an employee.
On Behalf of an Employee (Less than 2% Shareholder)
Tax-Qualified Long-Term Care Insurance premiums paid by a S-Corporation on behalf of an employee are fully deductible providing the S-Corporation retains no interest in the policy. This would also apply to premiums paid on behalf of the employee's spouse and other tax dependents.
On Behalf of an Employee/Owner (Shareholder of 2% or greater)
Tax-Qualified Long-Term Care Insurance premiums paid by an S-Corporation on behalf of a 2%+ shareholder are deductible by the S-Corporation providing the S-Corporation retains no interest in the policy. This would also apply to premiums paid on behalf of the employee's spouse and other tax dependents.
For an Employee
Employer-paid Long-Term Care Insurance premiums would not be included in the Employee's gross income.135 . This would also apply to premiums paid on behalf of the employee's spouse and other tax dependents.
For an Employee/Owner (Shareholder of 2% or greater)
The entire amount of the Tax-Qualified Long-Term Care Insurance premiums paid by the S-Corporation is includable in the employee/owner's gross income. The same holds true for S-Corporation -paid Tax-Qualified Long-Term Care Insurance premiums paid on behalf of the employee/owner's spouse or other tax dependents.
In this case, the employee/owner is treated as a self-employed individual for tax purposes and the Tax-Qualified Long-Term Care Insurance premiums received would be subject to the same tax rules as apply to Sole Proprietors.
A Limited Liability Company is a statutory business that may be treated as a corporation, a partnership, or a sole proprietorship for tax purposes.
As a result, to determine the tax implications of LLC-purchased Long-Term Care Insurance, one must first determine by which method the LLC is treated for federal income tax purposes.
Therefore:
Generally
Professional Corporations and Associations have the ability to select the method by which the entity will be treated for federal income tax purposes.
Also, generally, Professional Corporations may elect to be treated as either a C-Corporation or an S-Corporation. The status is elected by the entity.
As a result, to determine the tax implications of PC-purchased Long-Term Care Insurance, one must first determine by which method the PC is treated for federal income tax purposes.
Thus it follows:
STUDY QUESTIONS
1. HIPAA provided that benefits paid under a long-term care insurance policy would not be taxable if
A. the premiums were paid annually.
B. the long-term care insurance policy met minimum eligibility criteria.
C. the benefits were paid annually.
D. there was no inflation protection.
2. For policies that pay benefits under the Reimbursement Model, the benefits received
A. are considered to be a reimbursement for expenses incurred for medical services.
B. must be paid quarterly or they will all be taxed at capital gains rates.
C. will be taxed at capital gains rates.
D. must not exceed more than 110% of the daily benefit or the entire amount is taxed as ordinary income.
3. For Tax- Qualified Long-Term Care Insurance policies that pay benefits under an Indemnity Model,
A. there is no cap and no floor.
B. the minimum payment must be based on a minimum of $50 per day.
C. benefit payments are subject to a daily dollar cap.
D. benefits cannot exceed 3 times the required Medicaid daily benefit.
4. Tax-Qualified Long-Term Care Insurance expenses are deductible by an individual tax payer
A. are subject to a daily dollar cap.
B. regardless of amount.
C. as a cost of doing business.
D. not to exceed $500 per month or 6% of the gross annual income, whichever is less.
5. A Partnership that purchases Tax-Qualified Long-Term Care Insurance on behalf of a Partner
A. may claim no deduction.
B. may deduct the percent of premium that equals the percent of ownership of the business.
C. may deduct the premiums paid as an ordinary business expense
D. can only claim a tax deduction equal to any claims paid.
6. For taxation of an LTCI policy, an employee who owns 2% or more of the S-Corporation is deemed to be an Employee/Owner, while one who owns less than 2%
A. is treated as a corporate owner.
B. may be taxed only on the benefits paid.
C. must pay capital gains taxes on the premiums paid by the corporation.
D. is treated as only an employee.
7. Employer-paid -premiums on a LTCI policy would not be included in the Employee's gross income,
A. but would not apply to premiums paid on behalf of the spouse.
B. this would also apply to premiums paid on behalf of the employee's spouse and other tax dependents.
C. unless the employee was an officer in the company.
D. provided the premiums do not exceed $100 per month.
ANSWER TO STUDY QUESTIONS
1B 2A 3C 4A 5C 6D 7B