Tax Treatment of

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Tax Treatment of Qualified Long Term Care
Insurance A Continuing Education Course for
Agents Brokers
Long Term Care Insurance products underwritten
and issued by Berkshire Life Insurance Company
of America, Pittsfield, MA, a wholly owned stock
subsidiary of The Guardian Life Insurance
Company of America, New York, NY.
8509-01-08
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Todays Agenda

• Overview of Long Term Care
• HIPAA 1996 Long Term Care Insurance
• Defining tax qualified LTCI
• Tax treatment of LTCI for individuals
• Tax treatment of LTCI for business owners
• Health Savings Accounts LTCI
• State tax treatment of LTCI

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What Is Long Term Care?

• Skilled, custodial or maintenance care
• assistance with activities of daily living (ADLs)
• Wide range of services for those with
• Chronic illness
• Permanent disability
• Cognitive impairment

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Where is LTC Provided?
82 Home Health Care Adult Day Care Assisted
Living
18 Nursing Home
Source The Wide Circle of Caregiving. Kaiser
Family Foundation. et al, June, 2002
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Who Needs Long Term Care?

• 35 million people in the U. S. areover age 65
• 6 million need long term care
• 77 million Baby Boomers will begin turning 65 in
  2011

Long Term Care Planning A Dollar and Sense
Guide. United Seniors Health Council,January
2002 "Study Baby boomers could 'strengthen
community life,'" Janet Kornblum, USA Today, June
14, 2004
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Who Needs Long Term Care?

• Longer life expectancy greater probability of
  need for care
• People over age 85
• the fastest growing segment of our population
• 50 will need nursing care

Source A Profile of Older Americans,
Administration on Aging, 2002
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Long Term Care is a Family Issue

• Care-giving difficult decisions economic
  consequences
• Geographically dispersed families
• Baby Boomers
• The sandwich generation
• Two income families (the caregiver works)

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Formal Adjustments to Work Schedule Due to
Caregiving
Use Sick Days/ Vacation Time Decreased Hours Lea
ve of Absence Full- to Part-Time Quit
Job Retired Early
Source The MetLife Juggling Act Study Balancing
Caregiving with Work and the Cost Involved.
November 1999
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Annual Average Cost of Care

• Home care - 24,700
• Based on hourly rate of 19.00 at 5 hrs/visitand
  5 visits/wk
• Nursing home - 77,745
• Based on private room rate of 213.00

Metlife Mature Market Institute Market Survey of
Nursing Home and Home Care Costs, September 2007
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The Cost of Care

• Annual Nursing Home costs increasing faster than
  overall inflation.
• Based on the previous example

Source Health Spending Projections Through 2013,
Office of the Actuary, Centersfor Medicare and
Medicaid Services, February 2004
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Who Pays for Long Term Care?
Total Long-Term Care Expenditures
Nursing Home Expenditures
3
2
4
4
10
8
40
46
25
28
18
12
150.8 billion
110.8 billion
Medicaid Medicare Out of Pocket
Private Insurance Other Private Other Public
Source CMS, National health Accounts, 2005
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Medicare and Private Health Insurance are Not the
Answer

• Medicare only pays for skilled care
• designed to get you better
• most long term care is non-skilled care
• Examples of non-skilled care
• oxygen therapy or respiratory therapy for
  emphysema patients
• catheter maintenance
• colostomy drain
• help with bathing, dressing or other ADLs

Source Shelton Marketing Services, Inc. 2003
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Medicaid Should be the Last Option Considered

• Medicaid pays for what you do not want nursing
  home care
• Medicaid is welfare stringent income and asset
  requirements to qualify
• Limits your choices

Refer to your states Medicaid rules
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Medicaid Limitations

• Generally below 2,500 in assets
• Spousal monthly income allowance 1603
• Look Back Period
• 5 years
• Unlimited penalty period

Refer to your states Medicaid rules
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Is Medicaid Planningthe Solution?

• Converts countable assets into inaccessible
  assets by giving themaway or placing them in
  trust.
• Its a guessing game
• impossible to judge the correct timing
• who do you plan for?
• If not done right, assets are still subject to
  mandated estate recovery upon death

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LTC Growing Consumer Awareness

• 71 of Americans claim to be aware of the
  problem
• 50 of Americans age 45 or older have discussed
  the possible need for long term care with their
  adult children
• American workers rank the importance for LTCI
  equal to that of group life insurance

American Council of Life Insurers, 2003
Insurance Employee Benefit Survey. Prudential
Financial, 2003
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• Tax Treatment ofQualified Long TermCare
  Insurance

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National Association ofInsurance Commissioners

• NAIC Model Regulations, 1993
• Must provide at least 12 months of coverage
• Must be reimbursement or indemnity contracts
• Must cover treatment provided in settings other
  than hospitals

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Health Insurance Portability and Accountability
Act of 1996 (HIPAA)

• Federal law that defined tax qualified LTCI
• Qualified LTCI policies receive favorable tax
  treatment
• Any LTCI policy issued prior to January 1, 1997
  is grandfathered

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Tax Qualified LTCIPolicy Definitions

• May only provide coverage for qualified long-term
  care services
• Qualified long-term care services are necessary
  diagnostic, preventive, therapeutic, curing,
  treating, mitigating and rehabilitative services
  and maintenance, or personal care services
  required by a Chronically ill individual.
• Qualified services must be provided following a
  Plan of Care prescribed by a licensed health care
  practitioner

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Tax Qualified LTCIPolicy Definitions

• Chronically Ill
• Requires substantial assistance with at least two
  of six activities of daily living (ADLs)
• ADLs dressing, eating, bathing, toileting,
  transferring and continence
• Expected to require assistance for more than 90
  days
• or,
• Substantial Supervision due to a Severe Cognitive
  Impairment
• Severe Cognitive Impairment is a deterioration or
  loss in intellectual capacity
• Substantial Supervision means you require
  continual supervision by another person
• May include cueing by verbal prompting, gesture,
  or other demonstrations

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Tax Qualified LTCIOther Requirements

• Must be guaranteed renewable
• May not, in general, duplicate Medicare
• Must meet NAIC regulations
• Must have no cash surrender value
• Must apply all refunds or dividends as a
  reduction of future premiums or an increase to
  future benefits, except upon death or total
  policy surrender

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Tax Treatment of Qualified LTCI

• Qualified LTCI is treated as accident and health
  insurance1
• Premiums can be deductible2
• Benefits received are not generally taxable
  income3
• Un-reimbursed cost of qualified LTC services are
  deductible as medical expenses

1- IRC Sec. 7702B(a)(3) 2- IRC Sec. 213(d)(1)(D),
213(a) 3- IRC Sec. 105(b), 7702B(a)(2), 7702B(d),
213(d)(1)
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Tax Qualified LTCI Benefits

• 100 of the proceeds on a reimbursement policy
  are tax free

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Tax Qualified LTCI Benefits

• With indemnity policies the greater of the first
  270 or actual cost of care is tax free

The information provided here is not intended as
tax or legal advice.
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Taxation of Premiums Individuals

• For income tax purposes, qualified LTCI premiums
  qualify as a medical care expense.
• Deduction is subject to age-based eligible
  premium limitations, which are adjusted annually.
  
• IRC Sec. 213(d)(1)

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Eligible LTCI Premium

• 2008 Eligible Premium Amounts

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Taxation of Premiums Individuals

• Only eligible premium is deductible
• Must itemize deduction on schedule A line 1
• Added to other unreimbursed medical expenses
• Amount that exceeds 7.5 of Adjusted Gross Income
  (AGI) is deductible

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Married Couple (Ages 62 58)







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Employer-Paid LTCI

• Employer may deduct 100 of premiums paid on
  behalf of W-2 employees and spouses1
• Age based eligible premium limits do not apply
• C-Corp. may deduct 100 of premiums for
• Owner-employees, spouses, tax dependents, and
  retirees

1- PL 104-491, IRC Sec. 7702B(a)(3)
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Employer-Paid LTCI

• Premium excluded from employees income1
• Benefit is generally tax free to employee2

1- IRC Sec. 106(a), 7702B(a)(3) 2- IRC Sec.
105(b), 7702B(a)(2), 7702B(d), 213(d)(1)
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Employer-Paid LTCI

• Employer designates or carves-out specific
  classes of employees that will be covered with
  LTCI.1

1- Treas. Regs. 1.105-5, 1.106-1
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Employer-Paid LTCI

• May not be paid through
• Cafeteria plan1
• Flexible spending account2
• Salary reduction

1- IRC Sec. 125(f) 2- IRC Sec. 106(c)(1)
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Sole Proprietorship

• May deduct 100 of eligible premium for
• Owner
• Spouse
• Tax dependents i.e. parents other relatives
• May deduct 100 of actual premium for
• Non-owner employees
• Their spouses

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Sole ProprietorshipEligible Premium Deduction

• Self-employed 55 year old owner with a49 year
  old spouse

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Sole ProprietorshipTotal Premium Deduction

• 55 year old owner employs his 49 year old wife
• Wife is the owner of the joint policy
• She and her owner/husband are the insureds

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Sole ProprietorshipPaid up (10 Pay) Deduction

• 55 year old owner employs his49 year old wife
• Wife is the owner of the joint policy
• She and her owner/husband are the insureds

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Partnerships S-Corporation Shareholders

• Premiums are deductible by the firm1
• Premiums represent income to these owners2
• These owners may deduct the eligible premium3

1- IRC Sec. 162 (a) 2- IRC Sec. 707(c) 3- IRC
Sec. 162(I), 213(D),213D(10) Greater than 2
shareholder
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Rules of AttributionS-Corporations

• Situation
• Spouse of shareholder is a W-2 employee of the
  corporation
• Corporation pays and deducts premium for both
• Premium must be added to income of both
  shareholder and spouse

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Health Savings Accounts (HSAs)

• Tax exempt account established to pay qualified
  medical expenses
• Individuals, under 65, covered by a high
  deductible health plan (HDHP)
• Contributions are tax deductible
• Distributions for qualified medical expenses are
  tax-free

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Health Savings Accounts (HSAs)

• HSA Contribution Limits (2008)
• the lesser of the annual deductible or 2,900
  single / 5,800 family
• catch-up for 55 is 900 for 2008
• HDHP Limitations
• minimum deductible 1,100 single / 2,200
  family
• maximum out-of-pocket 5,600 single / 11,200
  family

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HSAs Long Term Care Insurance

• Distributions generally cannot be used to pay
  health insurance premiums
• However, long-term care premiums are treated as
  qualified medical expenses
• HSAs offered under a cafeteria plan may be used
  to pay LTCI premiums
• Tax deduction limited to the eligible premium

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State Tax Treatment of LTCI

• More than half of states offer some form of tax
  incentive on an individuals or employers state
  taxes.
• Some states offered some form of above the line
  tax incentive (not subject to exceeding a of
  AGI) without respect to income.
• See the handout - Quick Reference Guide to State
  Tax Treatment of Long Term Care Insurance

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Summary

• Overview of Long Term Care
• HIPAA 1996 Long Term Care Insurance
• Defining tax qualified LTCI
• Tax treatment of LTCI for individuals
• Tax treatment of LTCI for business owners
• Health Savings Accounts LTCI
• State tax treatment of LTCI

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• Tax Treatment of QualifiedLong Term Care
  Insurance
• A Continuing Education Course for Agents
  Brokers