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

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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


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?

  • 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?

Nursing Home

Home Health Care

Adult Day Care

Assisted Living

Source: The Wide Circle of Caregiving. Kaiser Family Foundation. et al, June, 2002


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 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

  • 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

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


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


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


Who Pays for Long Term Care?

Nursing Home

Home Care

Source: www.ltcfeds.com, 2000


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


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


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


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

  • 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 ofQualified Long TermCare Insurance


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)

  • 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: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


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


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


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

  • 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)


Tax Qualified LTCI Benefits

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


Tax Qualified LTCI Benefits

  • With indemnity policies the first $240 or actual cost of care is tax free


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)


Eligible LTCI Premium

2005 Eligible Premium Amounts


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


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)


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)


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 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


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

  • 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


Self-employed 55 year old owner.

Sole ProprietorshipEligible Premium Deduction


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


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.


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)


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


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 (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


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

  • 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


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 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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