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

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8509 3 05

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

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?

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

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: National Study by the National Alliance for Care giving and the National Center on Women and Aging, Brandeis University


Annual average cost of care

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

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

Who Pays for Long Term Care?

Nursing Home

Home Care

Source: www.ltcfeds.com, 2000


Medicare private health insurance are not the answer

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 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

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

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 federal guidelines

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

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 triggers1

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

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 & 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 first $240 or actual cost of care is tax free


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)(D)


Eligible ltci premium

Eligible LTCI Premium

2005 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

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-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 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 IRC Sec. 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

  • Form 1040 line 30

  • May deduct 100% of actual premium for:

    • Non-owner employees

    • Their spouses


Sole proprietorship eligible premium deduction

Self-employed 55 year old owner.

Sole ProprietorshipEligible Premium Deduction


Sole proprietorship total 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 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 arethe 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

    *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

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

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 (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

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 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

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


8509 3 05

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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