Transcript Document

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.
For educational & training purposes only. Not for use with the general public.
8509-01-08
Today’s 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
2
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
3
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
4
Who Needs Long Term Care?
 35 million people in the U. S. are
over 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
5
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
6
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)
7
Formal Adjustments to Work
Schedule Due to Caregiving
0%
25%
Use Sick Days/
Vacation Time
33%
Leave of
Absence
22%
Full- to
Part-Time
Retired Early
75%
64%
Decreased
Hours
Quit Job
50%
20%
16%
13%
Source: The MetLife Juggling Act Study Balancing Caregiving with Work and the
Cost Involved. November 1999
8
Annual Average Cost of Care*
 Home care - $24,700
 Based on hourly rate of $19.00 at 5 hrs/visit
and 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
9
The Cost of Care
 Annual Nursing Home costs increasing faster
than overall inflation.
Based on the previous example:
Rate of
Inflation
2007
2017
2027
2037
$77,745
4%
$115,082 $170,349 $252,158
5%
$126,638 $206,281 $336,009
6%
$139,229 $249,339 $446,528
Source: Health Spending Projections Through 2013, Office of the Actuary, Centers
for Medicare and Medicaid Services, February 2004
10
Who Pays for Long Term Care?
Total Long-Term Care
Expenditures
4% 3%
10%
Nursing Home
Expenditures
4% 2%
8%
40%
25%
46%
28%
18%
$150.8 billion
12%
$110.8 billion
█ Medicaid █ Medicare █ Out of Pocket █ Private Insurance
█ Other Private █ Other Public
Source: CMS, National health Accounts, 2005
11
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
12
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 state’s Medicaid rules
13
Medicaid Limitations*
 Generally below $2,500 in assets
 Spousal monthly income allowance $1603
 Look Back Period
 5 years
 Unlimited penalty period
* Refer to your state’s Medicaid rules
14
Is Medicaid “Planning”
the Solution?
 Converts countable assets into inaccessible
assets by giving them
away or placing them in trust.
 It’s 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
15
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
16
Tax Treatment of
Qualified Long Term
Care Insurance
17
National Association of
Insurance 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
18
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
19
Tax Qualified LTCI:
Policy 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
20
Tax Qualified LTCI:
Policy 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
21
Tax Qualified LTCI:
Other 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
22
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)
23
Tax Qualified LTCI Benefits
 100% of the proceeds on a reimbursement
policy are tax free
Policy benefit
$300/day
Actual cost of care
$220/day
Reimbursement amount
$220
Total Taxable Benefit
$0
24
Tax Qualified LTCI Benefits
 With indemnity policies the greater of the
first $270 or actual cost of care is tax free
Policy benefit
$300/day
Actual cost of care
$220/day
Total Taxable Benefit
$30/day
The information provided here is not intended as tax or legal advice.
25
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)
26
Eligible LTCI Premium
2008 Eligible Premium Amounts
Age
Limits
40 or younger
$310
41-50
$580
51-60
$1,150
61-70
$3,080
71 or older
$3,850
27
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
28
Married Couple (Ages 62 & 58)
Adjusted Gross Income
$
65,000
Age 62
$
3,080
Age 58
$
1,150
Other medical expenses
$
2,200
Total medical expenses
$
6,430
7.5% of $65,000
$
(4,875)
Excess which can be deducted
$
1,555
Eligible premium
29
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)
30
Employer-Paid LTCI
 Premium excluded from employee’s 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)
31
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
32
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)
33
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
34
Sole Proprietorship
Eligible Premium Deduction
 Self-employed 55 year old owner with a
49 year old spouse
Premium for Owner and Spouse
$
4,264
Owner’s Adjusted Gross Income (AGI) $
100,000
Deduction (owner age 55)
$
(1,150)
Deduction (spouse age 49)
$
(580)
Taxable Income
98,270
35
Sole Proprietorship
Total 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
Premium
$
4,264
Company’s Taxable Income
$
100,000
Deduction for Actual Premium
$
4,264
Taxable Income
$
95,736
36
Sole Proprietorship
Paid up (10 Pay) 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
Premium
$
10,248
Company’s Taxable Income
$
100,000
Deduction for Actual Premium
$
10,248
Taxable Income
$
89,752
37
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
38
Rules of Attribution:
S-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
39
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
40
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
41
HSA’s & 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
 HSA’s offered under a cafeteria plan may be
used to pay LTCI premiums
 Tax deduction limited to the eligible
premium
42
State Tax Treatment of LTCI
 More than half of states offer some form of
tax incentive on an individual’s or employer’s
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
43
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
44
Tax Treatment of Qualified
Long Term Care Insurance
A Continuing Education Course
for Agents & Brokers
45