Tax Treatment of Qualified Long Term Care Insurance

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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)

8. Formal Adjustments to Work Schedule Due to Caregiving Use Sick Days/ Vacation Time Decreased Hours Leave 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Is Medicaid “Planning”the Solution? • Converts countable assets into inaccessible assets by giving themaway 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

16. 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

17. Tax Treatment ofQualified Long TermCare Insurance

18. 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

19. 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

20. 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

21. 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

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 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)

24. Tax Qualified LTCI Benefits • 100% of the proceeds on a reimbursement policy are tax free

25. 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.

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)

27. Eligible LTCI Premium 2008 Eligible Premium Amounts

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) $ $ $ $ $ $ $

30. 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)

31. 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)

32. 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

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 • May deduct 100% of actual premium for: • Non-owner employees • Their spouses

35. Sole ProprietorshipEligible Premium Deduction $ $ $ $ • Self-employed 55 year old owner with a49 year old spouse

36. 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

37. 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

38. 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

39. 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

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 (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

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. • 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

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 QualifiedLong Term Care Insurance A Continuing Education Course for Agents & Brokers