Transcript Tax advantages to business owners purchasing tax qualified

Tax Qualified Long-Term
Care Insurance 2008
Tax benefits are not going to sell LTC i
 A tax benefit in and of itself doesn’t sell any insurance
product. You must first establish the need for the product.
 Need to act is based not on the risk of an event happening
to the client but the severe consequences to his family if
the event ever did.
 There are three distinct sets of consequences
 To his family’s physical and emotional wellbeing;
 To their retirement portfolio which was never allocated
to pay for care
 Overall business productivity / viability
Consequences to family…
 Taking care of chronically ill people makes
healthy people chronically ill
 Put simply if your client ever needs care, his life
doesn’t end, someone else’s life ends
 Long-term care doesn’t bring families together, it
tears them apart
LTCi…
 Allows your client’s wife to maintain her relationship
with her husband as his spouse supervising care, not
as a spouse providing care
 Allows his children to maintain their relationship with
their dad as children supervising care, not as children
providing care
 If single, allows his friends and siblings to maintain
their relationship with him as friends and siblings
supervising care, not as friends and siblings providing
care
Consequences to lifestyle…
 Lifestyle is everything to your client. It always
includes keeping prior financial commitments
 Expenses are matched by income stream
generated from the income portfolio. Where is the
money going to come from to pay for care?
 A thought about self-insuring…
 $1,000,000 = $50,000
 $2,000,000 = $100,000
 LTCi protects, not assets, but income. By
doing so, it allows the client’s income
portfolio to execute the purpose it was
intended… retirement, not paying for care
 By protecting income it ultimately protects
the investment portfolio and the financial
viability of the surviving spouse
Productivity…
 Enhances employee productivity
 Employees do not have to spend as much
time out of the office providing care.
 Can be used to retain key employees
 The use of 10-pay on a discriminatory basis
helps retain your best employees
 Tremendous good will generator
 Can act as a form of DI for older
shareholders
 Is an excellent executive carve-out
The TQ Basics
Requirements for tax qualified status
A LTCI policy under IRC sec. 7702B(b):
 Cannot have a medical trigger.
 Must be guaranteed renewable.
 Cannot have cash surrender value or money that
can be paid, pledged or borrowed.
 If the policy pays on reimbursement basis, it cannot
pay for benefits if Medicare covers the costs.
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 All refunds or dividends can only be applied to reduce future
premiums or increase benefits.
 Any refund on a complete surrender or cancellation of the
contract shall be includable in gross income to the extent that
any deduction or exclusion was allowable with respect to the
premiums.
IRC § 7702B(b)(2)(C)
 Defines chronically ill as a substantial physical condition,
certified by a health care practitioner, that is likely to last 90
days.
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Treatment of premium…
 Treated as an accident and health insurance premium.
IRC sec. 7702B (a)(1)
 Premium deduction based on age. It is referred to as an eligible
premium
IRC sec.213 (d) (10)
 Eligible premium is considered “medical care."
IRC sec.213 (d) (10)
 Eligible premium deductible from Health Reimbursement Account
or Health Savings Account
 The eligible premium cannot be deducted from a FSA because the
product does not qualify for 125 “Cafeteria” status
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2008 eligible premium amounts
2007
 40 or less
 41-50
 51-60
 61-70
 71 and over
$310
$580
$1,150
$3,080
$3,850
($290)
($550)
($1110)
($2950)
($3680)
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Taxability of benefits...
 100% of proceeds on a reimbursement policy are
tax free.
 If indemnity (or cash) the first $270 or actual cost
of care is tax free:
 Policy benefit:
$300 per day
 Actual cost of nursing home:
$150 per day
 Amount subject to tax:
$ 30 per day
IRC sec. 7702B(a)(2), 7702B(d), 104(a)(3)
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Individual (non self-employed)
 Must file an itemized return (1040 Schedule A).
 Eligible, not actual premium is based on age.
 Eligible premium added with other health insurance
premiums and expenses.
 Total must meet 7.5% of AGI.
 The excess of 7.5% can be deducted from AGI.
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Ed Peters is 61 years old. LTCi premium: $4,000
 Adjusted gross income (AGI)
$75,000
 Eligible premium based on age
 Other health related expenses
 Total health medical
4,280
 7.5% of $75,000
 Excess which can be deducted
$ 3,080
$ 1,200
$
($ 5,625)
0
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End result?
 Deduction worth little because few individuals itemize
and even fewer have uncompensated medical
expenses that exceed 7.5% of AGI.
 If a joint policy is purchased (one owner, two insureds),
each spouse can deduct their own eligible premium
(subject to 7.5% rule) even though the policy has only
one owner.
 Taxability of benefit:
 100% tax free if reimbursement
 The first $270 a day or actual cost of care is nontaxable.
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Tax advantages to business owners
and employees purchasing tax
qualified long-term care insurance
Self-employed / sole proprietorship
 Premium is classified as self-employed health insurance.
IRC sec.162(l)
 Owner deducts 100% of actual premium from business
income, but must report it on line 29, Form 1040 for selfemployment tax.
IRC sec.162(l)(4)
 Owner deducts eligible (not actual) premium from actual
premium reported
 Eligible premium for spouse and tax dependents are also
deductible.
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 Owner deducts 100% of premium for employee.
IRC sec. 162(a)
 Premium is excluded from employee income &
benefit is tax free.
IRC Sec. 106(a) & 105(b)
 Employer not subject to anti-discrimination rule
IRC Section 106
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Some thoughts…
 If spouse is an employee, the company can purchase a
policy for her. The total premium is deductible. A paid
up option(10-pay, for example) becomes attractive.
 If the carrier offers a joint policy, place spouse on
payroll. She and owner / husband are the insureds. The
entire premium is deductible.
 Place one parent on the payroll. He/she buys a joint
policy picking up their spouse.
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Be careful…
Can the IRS challenge the deduction based on
reasonableness?
 Employers can deduct TQ premiums to the extent they
are ordinary and necessary business expenses for
reasonable compensation paid to employees. Since
employers usually pay more for limited pay policies than
annual pay policies, reasonableness can be an issue.
This is particularly true for policies with the fewest pay
periods since they are most expensive.
§ 162; Treas. Reg. § 1.162-10(a)
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Solution:
Reduce owner’s salary and give it to
spouse / employee
Deferred compensation v. health benefit
 Another deductibility issue is whether a full ROP
is a form of deferred compensation, rather than
deferred welfare benefits.
 If characterized as deferred compensation, the
employer’s deduction is subject to the “matching
rule.” This means the employer can’t take the
deduction, until the employee includes the
compensation in income.
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Deductibility of eligible premiums
for greater than
2% partners in partnerships
Partnerships (Rev Rul. 91-26)…

Premium classified as self-employed health insurance.
IRC sec.162(l)

Premium for partner can be deducted by company.
IRC sec.162(a)

Premium is considered a guaranteed payment to partner and
reported on Form 1065 & K-I .
IRC sec.707(c)

Partner can deduct eligible premium.
IRC sec.162(l), 213(D), 213(D(10)

Eligible premium for spouse and tax dependents are also
deductible.
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 Premium subject to self-employment tax.
IRC sec.162(l)(4)
 Owner deducts 100% of premium for employee.
IRC sec. 162(a)
 Premium is excluded from employee income & benefit is tax
free.
IRC Sec. 106(a) & 105(b)
 Employer not subject to anti-discrimination rule.
IRC sec. 106
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Some thoughts…
 If spouse is an employee, the company can purchase a
policy for her. The total premium is deductible. Paid up
options (10-pay, for example) becomes attractive.
 If the carrier offers a joint policy, place spouse on
payroll. She and owner / husband are the insureds. The
entire premium is deductible.
 Put one parent on the payroll. He/she purchases a joint
policy, with their spouse as the secondary insured.
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Greater than 2% shareholders in
S-Corporations (Rev Rul. 91-26)…
 Premium classified as self-employed health insurance.
IRC sec.162(l)
 Premium for shareholder can be deducted by company.
IRC sec.162(a)
 Premium is considered a guaranteed payment to
shareholder and reported on Form 1120S & Form W-2.
IRC sec.707(c)
 Shareholder can deduct eligible premium.
IRC sec.162(l), 213(D), 213(D(10)
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 Premium subject to self-employment tax.
IRC sec.162(l)(4)
 Owner deducts 100% of premium for employee.
IRC sec. 162(a)
 Premium is excluded from employee income & benefit is tax
free.
IRC Sec. 106(a) & 105(b)
 Employer not subject to anti-discrimination rule.
IRC sec. 106
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The problem…
Due to rule of attribution, placing a spouse or
parents on payroll yields no added tax
benefit. They are capped at their eligible
premium.
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Shareholders in a C-corporation
 Corporation can deduct premium for any shareholder*
regardless of % ownership.
 Premium is not income to shareholder / employee.
 Shareholder spouse’s premium is fully deductible to
company and is not income to her.
 Premiums of parents of shareholder is fully deductible if
they are claimed as tax dependents.
* Shareholder must be an employee. Company must have resolution in place.
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Split premium: Employer / employee
 Employer pays 50% and employee pays 50%.
 Assuming employee is not a >2% shareholder, the
company can deduct the total of its share of the premium.
 Employee pays with after-tax dollars. Premium does not
qualify for 125 status.
 If employee purchases full non-forfeiture, only one-half of
the premium is tax free.
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LLC & PC
LLC for tax purposes*:
 A LLC defaults to self-employed individual if only one person.
 A LLC defaults to a partnership if more than one person.
Professional corporation (PC) for tax purposes:
 Taxed either as C corporation or S corporation.
* A LLC can choose any filing status (S-corp. / C-corp. etc).
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The Right Fastener Company
 Three equal shareholders all in their mid to
late 50’s. Each draws $100,000 ($300.00
per day). They are exploring a disability
buy-out funded by DI
 They determine that…
 It is very expensive
 Tied to income which fluctuates
 Ends at 65
 The fact finder determines that the shareholders are
concerned about long-term, not short-term, disability because
of their age and prior experience.
 The agent recommends a cash payment LTCi for $200 per
day, paid by the company if the shareholder agrees to reduce
their draw by $200 per day.
 The shareholders are informed that
 The policy is not based on income and doesn’t end at age
65
 That they can discriminate by class
 Can be fully deducted because the company files as a CCorporation
Q&A