Transcript No Slide Title

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.
8509-3-05
1
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?
Nursing Home
18%
82%
Home Health Care
Adult Day Care
Assisted Living
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
64%
Use Sick Days/
Vacation Time
33%
Decreased
Hours
22%
Leave of
Absence
20%
Full- to
Part-Time
Quit Job
Retired Early
0%
16%
13%
25%
50%
75%
Source: National Study by the National Alliance for Care giving and the National Center
on Women and Aging, Brandeis University
8
Annual Average Cost of Care*

Home care - $23,556


Nursing home - $70,080


Based on hourly rate of $18.12 at 5 hrs/visit
and 5 visits/wk
Based on private room rate of $192.00
Nursing home (high cost areas) - $93,947
*Metlife Mature Market Institute Market Survey of Nursing Home and Home Care Costs,
September 2004
9
The Cost of Care

Annual Nursing Home Costs are
projected to increase at 5.8% per year.
Based on the previous example:
Rate of
Inflation
2004
2014
2024
2034
5%
$114,153
$185,943
$302,882
5.8%
$123,155
$216,425
$380,333
6%
$125,503
$224,756
$402,504
$70,080
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?
Medicare
8%
Nursing Home
Private LTC Ins.
5%
Out of Pocket
46%
Medicaid
17%
Source: www.ltcfeds.com, 2000
Medicaid
41%
Medicare
15%
Home Care
Private LTC Ins.
5%
Out of Pocket
63%
11
Medicare & 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 Is The Wrong Answer

Medicaid pays for what you do not want:
nursing home care

Medicaid is welfare: stringent income &
asset requirements to qualify

Limits your choices
13
Medicaid Limitations*

Generally below $2,000 in assets

Spousal monthly income allowance $1561

Look Back Period
3 years
 5 years for transfers into certain trusts


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:
Federal Guidelines

Required Benefit Triggers
Chronically ill-unable to perform 2 ADLs
 Disability must be expected to last at least 90
days
or
 Cognitive impairment must require “substantial
supervision”


Must follow a plan of care prescribed by
a licensed health care provider
20
Benefit Triggers

Chronically Ill
Requires substantial assistance with at least
two of six activities of daily living (ADLs)
 ADLs: dressing, eating, bathing, toileting,
transferring and continence
 Requires assistance for more than 90 days

21
Benefit Triggers

Cognitive Impairment


Deterioration or loss in intellectual capacity
Substantial supervision

Another person must protect you from threats
to your health & safety, such as associated
with Alzheimer’s
– e.g.
supervision of patient
22
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
23
Tax Treatment of Qualified LTCI

Qualified LTCI is treated as accident &
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)
24
Tax Qualified LTCI Benefits

100% of the proceeds on a
reimbursement policy are tax free
Policy benefit
$300/day
Actual cost of care
$250/day
Reimbursement amount
Total Taxable Benefit
$250
$0
25
Tax Qualified LTCI Benefits

With indemnity policies the first $240 or
actual cost of care is tax free
Policy benefit
$300/day
Actual cost of care
$250/day
Taxable benefit
$50/day
26
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)(D)
27
Eligible LTCI Premium
2005 Eligible Premium Amounts
Age*
Limits
40 or younger
$270
41-50
$510
51-60
$1,020
61-70
$2,720
71 or older
$3,400
28
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

29
Married Couple (ages 62 & 58)
Adjusted Gross Income
$65,000
Eligible premium
Age 62
$ 2,720
Age 58
$ 1,020
Other medical expenses
$ 2,200
Total medical expenses
$ 5,940
7.5% of $65,000
$ (4,875)
Excess which can be deducted
$ 1,165
30
Employer-Paid LTCI

Employer may deduct 100% of premiums
paid on behalf of W-2 employees &
spouses1


C-Corp. may deduct 100% of
premiums for:

1
Age based eligible premium limits do not apply
Owner-employees,spouses, tax dependents,
& retirees
PL 104-491, IRC Sec. 7702B(a)(3)
31
Employer-Paid LTCI

Premium excluded from employee’s
income1

Benefit is generally tax free to employee2
1 IRC
2
Sec. 106(a), 7702B(a)(3)
IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1)
32
Employer-Paid LTCI

1
Employer designates or “carves-out”
specific classes of employees that will be
covered with LTCI.1
IRC Sec. 1.105-5, 1.106-1
33
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)
34
Sole Proprietorship

May deduct 100% of eligible premium for:
Owner
 Spouse
 Tax dependents i.e. parents & other relatives


Form 1040 line 30

May deduct 100% of actual premium for:
Non-owner employees
 Their spouses

35
Sole Proprietorship
Eligible Premium Deduction
Self-employed 55 year old owner.
Premium for owner
$
Owner’s adjusted gross
income (AGI)
$ 100,000
Deduction for eligible
premium
$ ( 1,020)
Taxable Income
$ 98,980
3,280
36
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
$
Taxable Income
$ 95,736
4,264
37
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
$
Company’s
Taxable Income
Deduction for actual
premium
Taxable Income
10,248
$100,000
$
10,248
$ 89,752
38
Partnerships & S-Corporation
Shareholders*

Premiums are deductible by the firm1

Premiums represent income to these
owners2

These owners may deduct the eligible
premium3
*Greater than 2% shareholder
1
IRC Sec. 162 (a)
2
IRC Sec. 707(c)
3
IRC Sec. 162(I), 213(D),213D(10)
39
Rules of Attribution:
S-Corporations
Situation:

Spouse of shareholder is a W-2
employee of the corporation

Corporation pays & deducts premium
for both

Premium must be added to income of
both shareholder & spouse
40
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
41
Health Savings Accounts (HSAs)

HSA Contribution Limits (2005)
the lesser of the annual deductible or $2,650
for single / $5,250 family
 “catch-up” for 55+ starts at $600 in 2005


HDHP Limitations
minimum deductible: $1,000 single /
$2,000 family
 maximum out-of-pocket: $5,150 single /
$10,200 family

42
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
43
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 for 2004

17 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
44
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
45
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.
8509-3-05
46