Tax Treatment of
This presentation is the property of its rightful owner.
Sponsored Links
1 / 45

Tax Treatment of Qualified Long Term Care Insurance PowerPoint PPT Presentation


  • 113 Views
  • Uploaded on
  • Presentation posted in: General

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

Download Presentation

Tax Treatment of Qualified Long Term Care Insurance

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Tax treatment of qualified long term care insurance

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


Today s agenda

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


What is long term care

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


Where is ltc provided

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


Who needs long term care

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


Who needs long term care1

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


Long term care is a family issue

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)


Formal adjustments to work schedule due to caregiving

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


Annual average cost of care

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


The cost of care

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


Who pays for long term care

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


Medicare and private health insurance are not the answer

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


Medicaid should be the last option considered

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


Medicaid limitations

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


Is medicaid planning the solution

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


Ltc growing consumer awareness

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


Tax treatment of qualified long term care insurance

Tax Treatment ofQualified Long TermCare Insurance


National association of insurance commissioners

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


Health insurance portability and accountability act of 1996 hipaa

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


Tax qualified ltci policy definitions

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


Tax qualified ltci policy definitions1

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


Tax qualified ltci other requirements

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


Tax treatment of qualified ltci

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)


Tax qualified ltci benefits

Tax Qualified LTCI Benefits

  • 100% of the proceeds on a reimbursement policy are tax free


Tax qualified ltci benefits1

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.


Taxation of premiums individuals

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)


Eligible ltci premium

Eligible LTCI Premium

2008 Eligible Premium Amounts


Taxation of premiums individuals1

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


Married couple ages 62 58

Married Couple (Ages 62 & 58)

$

$

$

$

$

$

$


Employer paid ltci

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)


Employer paid ltci1

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)


Employer paid ltci2

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


Employer paid ltci3

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)


Sole proprietorship

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


Sole proprietorship eligible premium deduction

Sole ProprietorshipEligible Premium Deduction

$

$

$

$

  • Self-employed 55 year old owner with a49 year old spouse


Sole proprietorship total premium deduction

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


Sole proprietorship paid up 10 pay deduction

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


Partnerships s corporation shareholders

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


Rules of attribution s corporations

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


Health savings accounts hsas

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


Health savings accounts hsas1

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


Hsa s long term care insurance

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


State tax treatment of ltci

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


Summary

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


Tax treatment of qualified long term care insurance

Tax Treatment of QualifiedLong Term Care Insurance

A Continuing Education Course for Agents & Brokers


  • Login