Long Term Care Insurance Taxation

1
Long Term Care Insurance Taxation

• Health Insurance Portability and Accountability
  Act of 1996

Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
2
Long Term Care Insurance Taxation

• Health Insurance Portability and Accountability
  Act of 1996 (HIPAA)
• Signed into law by the President on August 21,
  1996
• Defined a qualified long term care contract
  (IRC 7702B(b))
• Provides that a qualified long term care
  contract shall be treated as an accident and
  health insurance contract (IRC 7702B(a)(1))
• QLTC benefits are not considered taxable income
  (IRC 7702B(a)(2))
• QLTC premiums may be deductible by an individual
  subject to certain limitations (IRC 213 (d)(1))
• QLTC premiums may be deductible by a corporation
  subject to certain limitations (IRC 7702B(a)(3))
• All LTC contracts issued prior to January 1, 1997
  will be considered QLTC contracts

Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
3
Should I sell Tax Qualified or Non-Tax Qualified
LTCI?
NTQ vs. TQ

• Non-Qualified LTCI
• Unable to perform without assistance 2 activities
  of daily living
• Require supervision due to a cognitive impairment
• Medical Necessity
• Premiums are not deductible
• Treasury Department did not rule on the
  taxability of benefits

• Qualified LTCI
• Unable to perform without substantial assistance
  2 activities of daily living for a period of at
  least 90 days
• Require substantial supervision due to a severe
  cognitive impairment
• Premiums are deductible
• Benefits are not considered taxable income

Approximately 92 of all new policies sold in
2002 were tax qualified.
Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
4
HIPAA

• Qualified LTC Contract
• Guaranteed Renewable
• Provides coverage for qualified LTC services
  required by a chronically ill individual.
• Chronically ill unable to perform without
  substantial assistance at least 2 activities of
  daily living for a period of at least 90 days or
  requiring substantial supervision to protect from
  threats to health and safety due to severe
  cognitive impairment

Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
5
HIPAA

• Qualified LTC Contract
• Benefits
• Every LTCI benefit recipient will receive a
  1099-LTC from the insurance carrier
• Reimbursement contract benefits are excludable
  from income
• Indemnity (per diem) contract benefits are
  excludable from income to the extent they do not
  exceed the greater of 230 (2004) or the cost
  incurred (IRS Form 8853)
• All taxable payments are listed on IRS Form 1040
  line 21 (Other Income)

Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
6
HIPAA

• Qualified LTC Contract
• Premiums
• Eligible Premiums paid by individuals for QLTC
  contracts are treated as medical care expenses
• A deduction is available to the extent medical
  care expenses exceed 7.5 of adjusted gross
  income (Schedule A of IRS Form 1040)

Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
7
HIPAA
Qualified LTC Contract Eligible
Premiums 2004 Age Limitation 40 or
less 260.00 41-50
490.00 51-60 980.00 61-70
2,600.00 71 or more 3,250.00 These amounts
are adjusted annually tied to the medical care
component of the CPI.
Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
8
HIPAA

• Qualified LTC Contract
• Employer Paid Premiums
• Employer paid QLTC premiums are deductible if the
  covered individual is an employee, spouse, or
  dependent. Benefits are not considered taxable
  income even if employer pays the premium (unlike
  disability insurance)
• Employer paid QLTC premiums are deductible to a
  certain extent if the covered individual is an
  owner
• QLTC contracts can not be used in cafeteria plans
  or flexible spending arrangements
• Distributions from a Medical Savings Account may
  be used to pay premiums for a QLTC contract

Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
9
HIPAA

• Qualified LTC Contract
• Employer Paid Premiums for Owners
• Owner is considered anyone with a 2 or more
  stake in the company
• C-Corp is allowed a 100 deduction for any QLTC
  premiums paid for owners
• All other corporate structures and self employed
  individuals are allowed a deduction subject to
  the Eligible Premium chart (not subject to the
  7.5 AGI rule)

Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
10
T.R.E.A.T

• Tax
• Reducing
• Efficient
• Asset
• Transfer

How to Transfer Assets to your Heirs using
Federally Tax Qualified Long Term Care Insurance
Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation
11
T.R.E.A.T

• Employer Sponsored Long Term Care
• Use corporate dollars to pay for Limited Pay LTCI
  for the owners or key employees
• Write-off the premium as a usual business expense
• Premium is not considered taxable income to
  employee
• Benefits are tax free
• Provide lifetime protection from the devastating
  cost of long term care
• Transfer those dollars to the recipients heirs at
  death income tax free using the Enhanced Return
  of Premium benefit (IRC 7702B (b)(2))

Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance
Taxation Please consult with your accountant
or tax attorney before implementing this
strategy.
12
T.R.E.A.T
Custom Care II, Age 50, 6,000 per Month,
Lifetime benefit, 90 day elimination period,
Waiver of HHC Elim, Enhanced Return of Premium
Rider, 10 Pay, spousal discount, 5 group
discount, Preferred Rate, 35 tax rate. Example
No claims and dies at age 80.
Presented By Timothy Kelly Individual
Commercial Brokerage, Inc.
Long Term Care Insurance Taxation