Long-Term Care Insurance and Tax Deductions

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Tax laws at the federal and state levels provide incentives for individual and businesses to purchase long-term care insurance policies, with the goal of decreasing the public's reliance upon Medicare and Medicaid as resources for funding long-term care services.

In 1996, the Health Insurance Portability and Accountability Act (HIPAA) was signed into law. Besides improving the continuity of group health insurance for individuals moving from one employer to another, HIPAA addressed certain tax incentives for long-term care insurance (LTCi) premiums and benefits. Before HIPAA, it was uncertain whether long-term care insurance would be treated as health insurance for the purposes of established tax laws-such as Internal Revenue Code (IRC) Sections 104, 105, 106, and 162. Generally, these IRC sections allow employers to deduct health premiums paid for health and disability insurance and allow employees to exclude these employer-provided benefits from their taxable income. HIPAA added IRC Section 7702B, which states that qualified long-term care insurance contracts will be treated, for tax purposes, as accident and health insurance, subject to certain additional rules and limits.

What defines a qualified long-term care insurance policy?
In order to be considered tax-qualified, the LTCi policy must contain certain required provisions.¹ Many of these provisions pertain to the manner in which future benefit payments can be triggered. If the policy contains all of the required language, it can generally be considered a qualified long-term care (QLTC) insurance contract for tax purposes.

The policy must be guaranteed renewable. The Company can only cancel the policy for non-payment of premiums. The Company may, however, increase premiums on a group or class basis.
The policyholder must be certified as a "chronically ill" person within the prior 12 months and must have a written plan of care, provided by a licensed healthcare practitioner.
The need for long-term care assistance must be expected to last for at least 90 days.
The chronically ill certification must be based on one or both of the following criteria:
- The inability to perform, without substantial assistance, at least two of six activities of daily living (ADLs). The ADLs are bathing, dressing, eating, toileting, transferring, and continence.
- The need for substantial supervision in order to protect the individual from threats to health and safety due to a severe cognitive impairment.
Nonforfeiture benefits and benefit increase options (inflation protection) must be offered to the applicant at the time of sale, but are not required as part of the policy.
Benefits under a QLTC insurance policy cannot duplicate Medicare benefits.

Individuals who have other large medical expenses and a low adjusted gross income may find that the premiums they pay for a QLTC insurance policy are deductible from their federal taxes.

How the Laws Work Tax treatment for individuals who itemize medical expenses Taxpayers who itemize may deduct the cost of eligible QLTC premiums as a medical expense on Schedule A. There is an age-based limit on the amount of premiums for purposes of this deduction, which may be less than the actual policy cost.² The age-based limits for 2005 are:

(maximum deductible premium)
Insured ages 40 and under	$270
Insured ages 41-50	$510
Insured ages 51-60	$1020
Insured ages 61-70	$2720
Insured ages 71 and above	$3400

These age-based limits are adjusted annually for inflation. When allowable medical expenses, including QLTC premiums, exceed 7.5% of the taxpayer's adjusted gross income, the excess over 7.5% may be deducted. The age-based limits above apply only to the premiums paid for the long-term care insurance policy and do not reflect the maximum total deduction that may be taken by the taxpayer.

Tax treatment for businesses
If an employer contributes to the premium cost of QLTC insurance for eligible employees and dependents pursuant to a plan, the contributions will generally be excludable from the employee's income³ and generally deductible to the business.⁴ The exact rules vary according to the legal status of the business entity.

Pass-through entities
There are two sets of parameters that affect the deductibility of QLTC insurance premiums for businesses that are organized as sole proprietorships, partnerships, limited liability corporations, or sub-S corporations.

Premiums paid by the business for employees' QLTC coverage is 100% deductible to the business, similar to health insurance premiums.⁵
The owners⁶ of businesses that are organized as pass-through entities are more limited in the amount they may deduct for their own QLTC policies. Owner-employees may deduct 100% of their premium subject to the same age-based limits as those applied to individual deductions. Owner-employees are not, however, subject to the 7.5% of AGI itemization requirement.

C-corporations
A C-corporation is considered a stand-alone entity for legal and tax purposes therefore the officers and owners of a C-corporation may be treated as employees. For this reason, business-paid premiums for officers and owners are 100% deductible, just as they are for non-owner employees. The QLTC coverage need not conform to ERISA standards for non-discrimination as long as the company can prove the creation of a "plan of insurance" designed to benefit some or all employees⁷ other than just owners and officers. Employee-paid premiums for QLTC coverage, such as those collected through a voluntary payroll deduction plan, are considered taxable income and may not be included in a Section 125⁸ plan or a flexible spending account.⁹ This means that the employer may not use salary reduction dollars to pay its premium contribution.¹⁰ The QLTC plan may be offered to retired employees, eligible dependents of employees and retirees, including dependent parents, and surviving eligible dependents after an employee's death.¹¹

State legislatures are recognizing the impact that Medicare and Medicaid service costs have on state budgets and in several states have proposed and enacted legislation that encourages private insurance.

State-level Tax Incentives
Currently, 26 states offer tax incentives.¹² Those states are:

Alabama Missouri

California Montana

Colorado New Mexico

Hawaii New York

Idaho North Carolina

Illinois North Dakota

Indiana Ohio

Iowa Oregon

Kentucky Utah

Louisiana Virginia

Maine Washington D.C.

Maryland West Virginia

Minnesota Wisconsin

Specific incentives vary by state. Please contact your state's Department of Health and Human Services for further information.

Policy Form Number Disclosure
New York Life Insurance Company's individual tax qualified Long-Term Care Insurance policies are issued on policy form series ILTC-5000 and INH-5000. The actual policy form numbers vary by state and are identified with the two-letter state identifier and an edition number. Examples: for Idaho ILTC-5000 (ID) (1001) and INH- 5000 (ID) (1001) and for Pennsylvania ILTC-5000 (PA) (1001) and INH-5000 (PA) (1001). INH-5000 series is not available in OR, RI, or VT. The policies contain some benefit eligibility restrictions, other limitations and exclusions, as well as terms under which the policies can be continued in force or discontinued, that are common in the industry. Policy benefits are subject to daily as well as lifetime maximum benefits. Benefit eligibility is contingent on a chronic illness certification and a written plan of care. The provider must be an eligible provider for the qualified long-term care and services being provided. The policy may not cover all expenses for long-term care needs. It is advisable to review the outline of coverage and the issued policy for specific details. For costs and complete details of the coverage, call or write your insurance agent or the company.

This information is intended to be accurate, but neither New York Life nor its agents are in the business of giving tax or legal advice. You should consult with your own tax or legal professionals for advice on these topics relevant to your particular situation.

¹26 IRC Section 7702B(b)

²26 IRC Section 2139d)(10)

³ 26 IRC Section 106(a)

⁴ 26 IRC Section 162(a)

⁵ ASRS, Sec. 67, 720

⁶ An owner (or "owner-employee") is defined as an individual who owns 2% or more of the business. 26 IRC Section 1372

⁷ 26 IRC Section 106

⁸ 26 IRC Section 125(f)

⁹ 26 IRC Section 106(c)

¹⁰ 26 IRC Section 106(a)

¹¹ 26 IRC Section 105(b), 152(a)

¹² http://www.neamb.com/insurance/ltctax.html; site last updated in July 2004.

281601HO (01/05)

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