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8509-3-05

Tax Treatment of Qualified Long Term Care Insurance A Continuing Education Course for Agents & Brokers.

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8509-3-05

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  1. Tax Treatment of QualifiedLong Term Care InsuranceA Continuing Education Course for Agents & Brokers Long Term Care Insurance products underwritten and issued byBerkshire 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

  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? Nursing Home Home Health Care Adult Day Care Assisted Living 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: National Study by the National Alliance for Care giving and the National Center on Women and Aging, Brandeis University

  9. Annual Average Cost of Care* • Home care - $23,556 • Based on hourly rate of $18.12 at 5 hrs/visitand 5 visits/wk • Nursing home - $70,080 • 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

  10. The Cost of Care • Annual Nursing Home Costs are projected to increase at 5.8% per year. 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? Nursing Home Home Care Source: www.ltcfeds.com, 2000

  12. 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

  13. 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

  14. 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

  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: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

  21. 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

  22. 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

  23. 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

  24. 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)

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

  26. Tax Qualified LTCI Benefits • With indemnity policies the first $240 or actual cost of care is tax free

  27. 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)

  28. Eligible LTCI Premium 2005 Eligible Premium Amounts

  29. 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

  30. 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 Married Couple (ages 62 & 58)

  31. Employer-Paid LTCI • Employer may deduct 100% of premiums paid on behalf of W-2 employees & spouses1 • Age based eligible premium limits do not apply • C-Corp. may deduct 100% ofpremiums for: • Owner-employees,spouses, tax dependents, & retirees 1 PL 104-491, IRC Sec. 7702B(a)(3)

  32. 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)

  33. Employer-Paid LTCI • Employer designates or “carves-out” specific classes of employees that will be covered with LTCI.1 1 IRC Sec. 1.105-5, 1.106-1

  34. 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)

  35. 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

  36. Self-employed 55 year old owner. Sole ProprietorshipEligible Premium Deduction

  37. Sole ProprietorshipTotal Premium 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. 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 arethe insureds.

  39. 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)

  40. 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

  41. 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

  42. 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

  43. 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

  44. 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 respectto income. • See the handout - Quick Reference Guide to State Tax Treatment of Long Term Care Insurance

  45. 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

  46. Tax Treatment of QualifiedLong Term Care InsuranceA Continuing Education Course for Agents & Brokers Long Term Care Insurance products underwritten and issued byBerkshire 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

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