FEDERAL AND STATE LEGISLATION

In this Web site we have addressed the problem that long-term care poses to our country, families, and individuals. The federal government has recognized these challenges and passed legislation standardizing long-term care insurance and offering tax-incentives on tax-qualified policies. This section will help you understand current legislation and how it affects long-term care insurance.

 

Important Note: The information in this section is only intended as a general overview and is not intended to provide tax advice. There may have been changes in the tax law that may affect the information in this section. Please consult a tax-advisor for specific tax advice.

HEALTH INSURANCE PORTABILITY & ACCOUNTABILITY ACT OF 1996

The Health Insurance Portability & Accountability Act (HIPAA) of 1996 (also known as the Kennedy-Kassebaum Bill), successfully addressed three items that affect long-term care insurance. These included the following:

1) Tightening up Medicaid eligibility requirements

2) Setting state standards on long-term care insurance

3) Offering tax incentives for those persons who purchased long-term care insurance

HIPAA designated two types of long-term care insurance policies: tax-qualified (TQ) and non-tax qualified policies (NTQ). The tax-qualified policies are the ones that adhere to HIPAA criteria that standardized long-term care policies and offer tax incentives. The differences of the two are described in detail in the TQ vs. NTQ section.

Long-term care insurance policies that were purchased before January 1, 1997 (when HIPAA was implemented) were grand fathered in and are considered tax-qualified (TQ) for federal purposes. They will remain tax-qualified if there are no material changes made to them.

This section addresses the main differences between the tax qualified (TQ) and the non-tax qualified policies. Which one is right for you? You can only make this decision after you look at both of your options.

Because tax qualified policies are now considered the same as accident and health policies, they may be eligible for tax deductions. They must also adhere to the standards set forth by HIPAA. Non-tax qualified policies are currently not eligible for any tax deductions and they do not have to meet all of the standards that HIPAA requires. Below we will examine the differences in benefit triggers, tax deduction status, and the taxability of benefits.

Tax Qualified Policies:
These policies are required to use the same criteria to qualify when benefits should be paid under a policy. Included in the benefit triggers for a TQ policy are the following:

1. The insured is expected to be unable to perform (without "hands-on or stand-by" assistance) at least 2 of 5 or more activities of daily living (ADLs). The activities of daily living are: bathing, eating, dressing, toileting, transferring, and continence. (California requires all 6 ADLs to be used.)
   
   
2. Cognitive Impairment: The insured is diagnosed with a severe cognitive impairment where it is determined they are a threat to themselves or others.
   
   
3. 90-Day Certification: TQ policies require certification from a health care practitioner of expected need for care of at least 90 days. NTQ policies do not require this certification.
   
   
   • If you do not initially get the 90-day certification and you end up needing care longer than 90 days, your health care practitioner can certify that happened and the insurance company will pay retroactively based on your elimination period.
     
     
   • If you do not get the 90-day certification and only need care for say, twenty days, those days would not count towards your deductible.

Non-Tax Qualified Policies:
These policies have no standardized benefit triggers. Therefore, the carrier can determine how liberal or strict they want their benefit triggers to be. Non-Tax Qualified benefit triggers can include medical necessity as a benefit trigger, and can require that the policyholder only needs help with one activity of daily living.

Tax Qualified Policies:
The premiums paid for these policies are eligible for both Federal and State tax deductions. These are discussed in detail in the Federal and State section.

Non-Tax Qualified Policies:
The premiums paid for these policies currently do not receive any tax deductions.

Form 1099-LTC:
All carriers are required to issue Form 1099-LTC to all beneficiaries when benefits are paid from either a TQ or NTQ policy. Benefits received from a TQ policy are income tax free, but there is no mention or decision relative to the taxation of benefits received from a non-tax qualified policy.

Per diem benefits received on a TQ policy are tax free up to $270 for the year 2008. If you receive per diem benefits above $270, they may be taxed as income, unless your actual long-term care expenses were also above $270.

As noted in the other sections, the tax deductions that are listed in this section only apply to Tax-Qualified policies.

Individual

Premium payments to purchase qualified long-term care insurance by an individual - for yourself, your spouse, and your tax dependents (e.g. your children or dependent parents) are now included as a personal medical expenses if you itemize your taxes [IRC Sec. 213(a)]. Medical expenses in excess of 7 ½% of your adjusted gross income are tax deductible. This means that a portion of your long-term care insurance premium will help you reach the 7 ½% and may even help you to exceed that threshold to receive a tax deduction. Below is a table of the amount of premiums qualifying as medical expenses for the 2008 and 2009 tax years. This is often referred to as the eligible long-term care premium. These increase each year based on the Medical Consumer Price Index.

Self-Employed

Qualified long-term care insurance premiums may also be treated like health insurance for the self-employed tax deduction. Self-employed individuals may deduct 100% of the eligible long-term care premium shown above [IRC Sec. 162(1)]. The definition of self-employed includes sole proprietorships, partnerships, "greater than 2% shareholders" of S-corporations, or Limited Liability Corporations.

Example: Bob, age 61, owns his own consulting firm. His long-term care insurance premium is $1,750 per year. Based on the chart listed under the INDIVIDUAL section, he is eligible to deduct 100% of up to $3,180. Therefore, he can deduct the entire $1,750.

C-Corporations

Premium payments are fully (100%) deductible as a reasonable and necessary business expense- similar to traditional health and accident insurance premiums [IRC Sec. 213(d)1]. This can apply to the owners, their spouses and dependents, and all employees.

Employer-paid long-term care insurance is excludable from the employee's gross income [IRC Sec. 106(2)] and the benefits received are tax-free.

Partnerships, S-Corporations and Limited Liability Corporations (LLC)

Premium payments purchased for a partner or owner (2%+ shareholder) are subject to the same rules mentioned above for self-employed [IRC Sec. 162(1)].

Premium payments for non-partner/non-owner or less than 2% shareholder-employee are 100% deductible as a reasonable and necessary business expense -- similar to traditional health and accident insurance premiums [IRC Sec. 162(2)].

Employer-paid long-term care insurance is excludable from the employee's gross income and the benefits received are tax-free [IRC Sec. 106(2)]. 


COLORADO STATE INCENTIVE 

A credit is allowed in taxable years on or after January 1, 2000 for 25 percent of premiums paid for long-term care insurance or $150.00 per policy. The credit will be available to only individual tax payers with taxable income of less than $50,000 or two individuals filing a joint return with a taxable income of less than $100,000. [C.R.S. 39-22-122 (1999)]