Tax Treatment of Qualified
Long-Term Care Insurance Policies

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QLTC Treated as Accident and Health Insurance

  • A QLTC contract is treated as an accident and health insurance contract. IRC Sec. 7702B(a)(3).

Deductibility of Premium Payments

  • "C" Corporation can deduct the full premium for QLTC plans, including coverage for the employee's spouse and dependents, as an ordinary and necessary business expense. IRC Sec. 162(a).

Premium Payments Not Included in Employees Income

  • Premium paid by the corporation are not included in an employee's income. IRC SEC. 106(a).

Income Tax Free Receipt of QLTC Benefits

  • QLTC policies which provide benefits on a per diem/indemnity basis are treated differently for income tax purposes than policies that reimburse actual expenses incurred. QLTC per diem/indemnity benefits are income tax free up to $190 per day in 1999 (Ex. If a policy holder receives benefits of $190 per day and long-term care expenses were less than $190 per day, the entire benefit is income tax free). IRC Sec. 7702(d) and IRC. 7702B(a)(2).

Income Taxation of Premium Refunds

  • Premium refund to named beneficiary upon death of insured not subject to income tax. Premium refund on complete surrender or cancellation of the contract included in income to the extent any deduction was allowable with respect to the premiums. IRC Sec. 7702B(a)(2)(c).

The above information is a general interpretation of federal tax law and should be used as a reference only by agents or brokers contracted with the Senior Marketing Institute. Clients  should be advised to rely upon their tax advisor regarding the tax treatment of any long term care insurance policy they purchase.

 

6 Major Benefits

 

The "C" Corporation Owner-Employee
receives when purchasing

Core Plan

Qualified Long Term Care Insurance


Tax Deduct 100% of the Premium
Select Only Yourself To Participate
No Personal Income Tax Owed By Owner-Employee
Owner-Employee Owns The Insurance Contract
Tax Free Insurance Benefits Paid To Owner-Employee
Tax Free Refund Of Premium . . . regardless of claims . . .Paid to Owner-Employee's Beneficiary

 

So . . . What's It All About

 

Qualified
Long-Term Care Plans


A Corporate Tax Savings Solution

The most important phase in the 30-year log evolution of long-term care coverage was launched with the introduction of the Health Insurance Portability and Accountability Act of 1996 . . . also referred to as HIPAA.

The federal government, through HIPAA, essentially declares that private long-term care insurance coverage is a preferred way for U.S. citizens to finance their long-term care needs.

The federal government's acknowledgment of the long-term care problem as addressed by HIPAA's mandated benefits and significant corporate tax incentives make long-term care coverage an important benefit consideration - especially for the owner-employee.

Background

Few types of insurance coverage have seen the rapid, remarkable evolution that epitomizes long-term care coverage. It was unheard of in the '60's; consisted of basic nursing home insurance in the '70's; added home health care in the '80's; and expanded to include community-based adult care and assisted living centers in the '90's.

Tax savings Incentives
Encourage Corporate Sponsorship

HIPAA specifically permits corporate entities to take a full business tax deduction for the premium paid to purchase qualified long-term care insurance coverage. Employers are allowed to arbitrarily select eligible employees to participate in the plan. HIPAA also stipulates that the insured is eligible to receive qualified long-term care benefits payments . . . tax free. Plus additional important tax incentives you need to know aout right now.

Put The New Tax Law to Work For You Today!

 

 

Qualified Long Term Care Insurance (LTC)
2000 Federal Income Tax Information

General Treatment of Qualified LTC

General Rules ~

  1. Benefits are treated like accident and health insurance reimbursement for medical care and are generally excluded from income..

    1. Benefits received on reimbursement basis are excluded from income without limit.
    2. Benefits received on per diem, other periodic basis, or lump sum are excluded from income, subject to a maximum equal to the greater of $190/day or actual expenses incurred. Excess benefits are taxable income.
  2. The maximum on per diem, periodic and lump sum benefits will be adjusted annually based on the medical cost component of the Consumer Price Index.
  3. The rules apply whether premiums are paid by an individual, self-employed individual, or employer paid. If employer paid, the rules apply to employees, partners, S-corporation 2% or more shareholders, and LLC members.
Example 1 - High Benefit Level
Benefits Received: $6,000 / 30 days / Per Diem Basis
Per Diem Maximum: $5,700 ($190 x 30 days)
Actual LTC Expenses: Scenario 1 = $4,500
Scenario 2 = $5,500
Scenario 3 = $6,500
Benefits
Received
Actual
Expenses
Per Diem
Maximum
Benefits Excluded
from Taxable Income
Benefits Included in
Taxable Income
$6,000 $4,500 $5,700 $5,700 $300
$6,000 $5,500 $5,700 $5,700 $300
$6,000 $6,500 $5,700 $6,000 $0

Example 2 - Moderate Benefit Level
Benefits Received: $3,000 / 30 days / Per Diem Basis
Per Diem Maximum: $5,700 ($190 x 30 days)
Actual LTC Expenses: Scenario 1 = $2,500
Scenario 2 = $3,500
Scenario 3 = $4,500
Benefits
Received
Actual
Expenses
Per Diem
Maximum
Benefits Excluded
from Taxable Income
Benefits Included in
Taxable Income
$3,000 $2,500 $5,700 $3,000 $0
$3,000 $3,500 $5,700 $3,000 $0
$3,000 $4,500 $5,700 $3,000 $0





Treatment of Qualified LTC - Individual

General Rules ~

  1. LTC is considered accident and health insurance and premiums are treated as un-reimbursed medical expense (UME) for taxpayers that itemize deductions
  2. LTC Premiums itemized as UME included premiums for an individual, their spouse, and their dependents.
  3. LTC premiums itemized as UME are subject to the age-based Limitations below.
    1. Age Based Limitations apply separately to each covered person (individual, spouse, and dependents).
    2. Age Based Limitations will be adjusted annually based on the medical expense component of the Consumer Price Index.
  4. The Individual may deduct the portion of total UME (including age based LTC premiums) exceeding 7.5% if Adjusted Gross Income (AGI).

Table 3
Age 40 or less $220
41-50 $410
51-60 $820
61-70 $2,200
71 or older $2,750

Please note: Limitations may increase annually,
based on the medical care component of the Consumer Price Index.


Example 1 - Joint Coverage

Assumptions

     
Ages: (A) 64/58
LTC Premiums: (B) $2,400/$1,200
Other UME: (C) $5,100
AGI: (D) $72,000
UME Threshold: (E) $5,400 ($72,000 x 7.5%) = (D) x 7.5%
LTC Premium Itemized in UME (F) $3,020 ($2,200 + $820) = See table 3 for (A)
Total Itemized UME: (G) $8,120 ($3,020 + $5,100) = (F) + (C)
Deductible UME: (H) $2,720 ($8,120 - $5,400) = (G) - (E)



Without LTC, there would be no deductible UME because other
UME of $5,100 does not exceed 7.5% AGI of $5,400




 

Treatment of Qualified LTC - Self-employed Individual

General Rules ~

  • Option 1 - Premium is deductible based on the rules for individual purchase.
  • Option 2 - Special Self-employed Rules
    1. Self-employed can deduct, without regard to the 7.5% UME threshold, an amount equal to the age based LT premiums time the self-employed allowable percentage below.
    2. Remaining age bsed LTC premium is deductible based on the rules for individual purchase.

Table 4
Year % Deduction Allowable
1999-2001 60%
2002 70%
2003 100%



Example 1 - Joint Coverage

Assumptions

 
Ages: (A) 64/58
LTC Premiums: (B) $2,400/$1,200
Other UME: (C) $5,100
AGI: (D) $72,000
UME Threshold: (E) $5,400 ($72,000 x 7.5%) - (D) x 7.5%
 

Option 1 (Rules for Individual Purchase)

LTC Premium Itemized in UME (F) $3,020 ($2,200 + $820) = See table 3 above for (A)
Total Itemized UME: (G) $8,120 ($3,020 + $5,100) = (F) + (C)
Deductible UME: (H) $2,720 ($8,120 - $5,400) = (G) - (E)
 
Option 2 (Special Rules for Self-employed)
Deductible LTC Premium: (I) $1,812 ($2,200 + $820) x 60%) = See table 3 and 4
Revised AGI: (J) $70,188 ($72,000 - $1,812) = (D) - (I)
Revised UME Threshold: (K) $5,264 ($70,188 x 7.5%) = (J) x UME Threshold of 7.5%
LTC Premium Itemized in UME: (L) $1,208 ($3,020 - $1,812) = (F) - (I)
Total Itemized UME: (M) $6,308 ($1,208 + $5,100) = (L) + (C)
Deductible UME: (N) $1,044 ($6,308 - $5,264) = (M) - (K)
Total Deduction: (O) $2,856 ($1,812 + $1,044) = (I) + (N)



Without LTC, there would be no deductible UME because other
UME of $5,100 does not exceed 7.5% AGI of $5,264



 

Treatment of Qualified LTC - Self-employed Individual

General Rules ~

  • Employer
    1. LTC is considered accident and health insurance.
    2. The employer paid portion of LTC premiums is deductible as a general business expense:
      1. Including premiums for employees, their spouses and dependents.
      2. Even if the premiums exceeds the age based limitations.
      3. Even if coverage exceeds the per diem/periodic basis/lump sum limitation.
      4. Whether provided under a group plan, or individual policies.
      5. With no requirement to be provided on a non-discriminatory basis.
      6. With no maximum limit on the amount that may be deducted.
    3. The employer paid portion of LTC premiums is not deductible if the coverage is provided though cafeteria plan or flexible spending account.
  • Employee
    1. The employer paid portion of the LTC premium is excluded from the employee's taxable income.
    2. The employee paid portion of the premium is deductible based on the rules for individual purchase.


Example 1 - Joint Coverage

Assumptions

 
Ages: (A) 64/58
LTC Premiums: (B) $2,400/$1,200
Other UME: (C) $5,100
AGI: (D) $72,000
UME Threshold: (E) $5,400 ($72,000 x 7.5%) - (D) x 7.5%
Employer Paid Premium (50%) (F) $1,800 - (B) x 50%
 

Employer

Deductible Premium: (G) $1,800 - (F)
 
Employee
LTC Itemized in UME: (H) $1,800 ($1,200 + $600) = (B) x  50%
Total Itemized UME: (I) $6,900 ($1,800 + $5,100) = (H) + (C)
Deductible UME: (J) $1,500 ($6,900 - $5,400) = (I) - (E)



Without LTC, there would be no deductible UME because other
UME of $5,100 does not exceed 7.5% AGI of $5,400





 

Treatment of Qualified LTC -
Partnership, S-Corporation, Limited Liability Corporation (LLC)

General Rules ~

  • Employer
    1. LTC is considered accident and health insurance.
    2. The employer paid portion of LTC premiums is deductible as a general business expense:
      1. Including premiums for partners, S-corporation shareholders of 2% or more, LLC members (owners), and spouses and dependents of the foregoing. Premium payment must be for services rendered and not based on the income of the organization.
      2. Including premiums for employees, their spouses and dependents.
      3. Even if the premiums exceeds the age based limitations.
      4. Even if coverage exceeds the per diem/periodic basis/lump sum limitation.
      5. Whether provided under a group plan, or individual policies.
      6. With no requirement to be provided on a non-discriminatory basis.
      7. With no maximum limit on the amount that may be deducted.
    3. The employer paid portion of LTC premiums is not deductible if the coverage is provided though cafeteria plan or flexible spending account.
  • Employee
    1. The employer paid portion of the LTC premium is excluded from the employee's taxable income.
    2. The employee paid portion of the premium is deductible based on the rules for individual purchase.
  • Partners, S-corporation Shareholders, and LLC Members
    1. Partners, S-corporation shareholders, and LLC members are treated as self-employed and the income exclusion for employer provided LTC does not apply.
    2. Premiums attributable to them and their spouses and dependents are included in their income and reported on their K-1.
    3. The two options for self-employed individuals apply.

 

Example 1 - Joint Coverage

Assumptions

 
Ages: (A) 64/58
LTC Premiums: (B) $2,400/$1,200
Other UME: (C) $5,100
AGI: (D) $72,000
UME Threshold: (E) $5,400 ($72,000 x 7.5%) - (D) x 7.5%
Employer Paid Premium (50%) (F) $1,800 - (B) x 50%
 

Employer

Deductible Premium: (G) $1,800 - (F)
Employee
LTC Premium Itemized in UME: (H) $1,800 ($1,200 + $600) = (B) x  50%
Total Itemized UME: (I) $6,900 ($1,800 + $5,100) = (H) + (C)
Deductible UME: (J) $1,500 ($6,900 - $5,400) = (I) - (E)
 

 

Partner, S-corporation Shareholders, and LLC Members

 

Option 1 (Rules for Individual Purchase applies)
Revised AGI: (K) $73,800 ($72,000 + $1,800) = (D) + (F)
Revised UME Threshold: (L) $5,535 ($73,800 x 7.5%) = (K) x 7.5%
LTC Premium Itemized in UME: (M) $1,800 = (H)
Total Itemized UME: (N) $6,900 ($1,800 + $5,100) = (M) + (C)
Deductible UME: (O) $1,365 ($6,900 - $5,535) = (N) - (L)
   
Option 2 (Special Rules for Self-employed applies)
Deductible LTC Premium: (P) $1,080 ($1,800 x 60%) = (H) x 60% (See table 4)
Revised AGI: (Q) $72,720 ($72,000 + ($1,800 - $1,080)) = (D) + ((H) - (P))
Revised UME Threshold: (R) $5,454 ($72,720 x 7.5%) = (Q) x 7.5%
LTC Premium Itemized in UME: (S) $720 ($1,800 - $1,080) = (H) - (P)
Total Itemized UME: (T) $5,820 ($720 + $5,100) = (S) + (C)
Deductible UME: (U) $366 ($5,820 - $5,454) = (T) - (R)
Total Deduction: (V) $1,446 ($1,080 + $366) = (P) + (U)



Without LTC, there would be no deductible UME because other
UME of $5,100 does not exceed 7.5% AGI of $5,454


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