Tax Treatment of Qualified Long Term Care Insurance

Transcription

1 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. For educational & training purposes only. Not for use with the general public 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 2 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 3 1

2 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, Who Needs Long Term Care? 35 million people in the U. S. are over 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, 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,

3 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) 7 Formal Adjustments to Work Schedule Due to Caregiving 0% 25% 50% 75% Use Sick Days/ Vacation Time 64% Decreased Hours 33% Leave of Absence Full- to Part-Time Quit Job Retired Early 22% 20% 16% 13% Source: National Study by the National Alliance for Care giving and the National Center on Women and Aging, Brandeis University 8 Annual Average Cost of Care* Home care - 24,700 Based on hourly rate of at 5 hrs/visit and 5 visits/wk Nursing home - 74,095 Based on private room rate of *Metlife Mature Market Institute Market Survey of Nursing Home and Home Care Costs, September

4 The Cost of Care Annual Nursing Home Costs are projected to increase at 5.8% per year. Based on the previous example: Rate of Inflation ,095 5% 120, , , % 130, , ,123 6% 132, , ,564 Source: Health Spending Projections Through 2013, Office of the Actuary, Centers for Medicare and Medicaid Services, February Who Pays for Long Term Care? 8% Nursing Home 41% Home Care 15% 17% 5% 5% 46% 63% Medicare Medicaid Private LTC Insurance Out of Pocket Source: 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

5 Medicaid is the Wrong Answer Medicaid pays for what you do not want: nursing home care Medicaid is welfare: stringent income and asset requirements to qualify Limits your choices 13 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 14 Is Medicaid Planning the Solution? Converts countable assets into inaccessible assets by giving them away 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 15 5

6 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, Tax Treatment of Qualified Long Term Care Insurance 17 National Association of Insurance 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 18 6

7 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 19 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 20 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 21 7

8 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 22 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 23 Tax Treatment of Qualified LTCI Qualified LTCI is treated as accident and health insurance 1 Premiums can be deductible 2 Benefits received are not generally taxable income 3 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) 24 8

9 Tax Qualified LTCI Benefits 100% of the proceeds on a reimbursement policy are tax free Policy benefit Actual cost of care Reimbursement amount Total Taxable Benefit 300/day 250/day Tax Qualified LTCI Benefits With indemnity policies the first 250 or actual cost of care is tax free Policy benefit Actual cost of care Total Taxable Benefit 300/day 250/day 50/day 26 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) 27 9

10 Eligible LTCI Premium 2006 Eligible Premium Amounts With indemnity policies that first 250 or actual cost of care is tax free Age 40 or younger or older Limits ,060 2,830 3, 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 29 Married Couple (Ages 62 & 58) Adjusted Gross Income Eligible premium Age 62 Age 58 Other medical expenses Total medical expenses 7.5% of 65,000 Excess which can be deducted 65,000 2,830 1,060 2,200 6,090 (4,875) 1,

11 Employer-Paid LTCI Employer may deduct 100% of premiums paid on behalf of W-2 employees and spouses 1 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 , IRC Sec. 7702B(a)(3) 31 Employer-Paid LTCI Premium excluded from employee s income 1 Benefit is generally tax free to employee 2 1- IRC Sec. 106(a), 7702B(a)(3) 2- IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1) 32 Employer-Paid LTCI Employer designates or carves-out specific classes of employees that will be covered with LTCI IRC Sec ,

12 Employer-Paid LTCI May not be paid through: Cafeteria plan 1 Flexible spending account 2 Salary reduction 1- IRC Sec. 125(f) 2- IRC Sec. 106(c)(1) 34 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 35 Sole Proprietorship Eligible Premium Deduction Self-employed 55 year old owner Premium for Owner Owner s Adjusted Gross Income (AGI) Deduction for Eligible Premium Taxable Income 3, ,000 (1,060) 98,

13 Sole Proprietorship Total 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 Premium Company s Taxable Income Deduction for Actual Premium Taxable Income 4, ,000 4,264 95, Sole Proprietorship Paid up (10 Pay) 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 Premium Company s Taxable Income Deduction for Actual Premium Taxable Income 10, ,000 10,248 89, Partnerships & S-Corporation Shareholders* Premiums are deductible by the firm 1 Premiums represent income to these owners 2 These owners may deduct the eligible premium 3 1- IRC Sec. 162 (a) 2- IRC Sec. 707(c) 3- IRC Sec. 162(I), 213(D),213D(10) * Greater than 2% shareholder 39 13

14 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 40 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 41 Health Savings Accounts (HSAs) HSA Contribution Limits (2006) the lesser of the annual deduction or 2,700 single / 5,450 family catch-up for 55+ starts at 700 in 2006 HDHP Limitations minimum deductible: 1,050 single / 2,100 family maximum out-of-pocket: 5,250 single / 10,500 family 42 14

15 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 43 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 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 44 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 45 15

16 Tax Treatment of Qualified Long Term Care Insurance A Continuing Education Course for Agents & Brokers 46 16