Long Term Care Insurance

<p>No.<br /> <br /> The Affordable Care Act (ACA) enacted hundreds of market reforms, including many which affect the individual and group health insurance markets. Title42, Section300gg-91 defines these terms (such as &ldquo;individual health insurance coverage&rdquo;), but it also itemizes a number of &ldquo;benefits&rdquo; which are exempt from the subchapter&rsquo;s requirements.<br /> <br /> Among these are &ldquo;benefits for long-term care, nursing home care, home health care, community-based care, or any combination thereof&rdquo; (if such benefits are offered separately).<a href="#_ftn1" name="_ftnref1">¹</a> Thus, a broad category of coverage is excluded based on its function rather than its identification.<br /> <br /> Furthermore, in the explicit definition of &ldquo;individual health insurance&rdquo;, there is a carve-out: it &ldquo;does not include short-term limited duration insurance&rdquo;<a href="#_ftn2" name="_ftnref2">²</a> although this is more likely a nod to short-term medical (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="483">483</a>).<br /> <br /> <hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. Other excepted benefits include &ldquo;hospital indemnity or other fixed indemnity insurance&rdquo; (if offered as independent, non-coordinated benefits), and coverage for a specified disease or illness.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. 300gg-91(b)(5).</p></p><br />

<p>Yes.<br /> <br /> As a result of the Pension Protection Act of 2006 (PPA), which went into effect January1 2010, tax-qualified (TQ) long-term care insurance (LTCI) is now included in the scope of the Section1035-exchange rules. This means that life, endowment, annuity and qualified LTCI may all be exchanged for qualified LTCI.<br /> <br /> In addition, the presence of a qualified LTCI rider on a life or annuity contract will not cause it to fail to qualify for the purposes of such an exchange. In other words, a taxpayer can exchange an annuity without a long-term care insurance rider for an annuity with such a rider, and still qualify for non-recognition treatment.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In sum, the IRC provides that the following exchanges are nontaxable:<br /> <p style="padding-left: 40px;">(1) the exchange of a life insurance policy for another life insurance policy (with or without a qualified LTC rider), for an endowment or annuity contract (with or without a qualified LTC rider), or for a standalone qualified long-term care insurance contract;</p><p style="padding-left: 40px;">(2) the exchange of an endowment contract for an annuity contract (with or without a qualified LTC rider), for an endowment contract under which payments will begin no later than payments would have begun under the contract exchanged, or for a standalone qualified long-term care insurance contract;</p><p style="padding-left: 40px;">(3) the exchange of an annuity contract for another annuity contract (with or without a qualified LTC rider); or for a standalone qualified long-term care insurance contract; and</p><p style="padding-left: 40px;">(4) the exchange of a long-term care insurance contract for another qualified long-term care insurance contract.<a href="#_ftn2" name="_ftnref2">²</a></p><hr><strong>Planning Point:</strong><p> Neither an annuity nor a standalone qualified long-term care insurance contract can be non-taxably exchanged for a life insurance policy (with or without a qualified LTC rider).<br /> <br /> </p><hr><p><br /> <br /> Generally, if an individual surrenders an &ldquo;old&rdquo; contract and uses the proceeds to purchase a &ldquo;new&rdquo; contract, they are required to recognize any gain over basis as ordinary income for federal tax purposes. But if certain requirements are met, Section1035 allows them to avoid any recognition of gain. (Among these requirements are that the exchange must take place in a &ldquo;hands-off&rdquo; fashion directly between the two insurers. The taxpayer must not receive the proceeds, even if later used to purchase the new contract.)<br /> <br /> </p><hr><strong>Planning Point:</strong><p> Under Section1035, both the owner and insured under the original contract and the new contract must be identical. For instance, an individually-owned contract cannot be 1035-exchanged into a jointly-owned contract.<br /> <br /> </p><hr><strong>Planning Point:</strong><p> Such exchanges may be appropriate when the owner of a life or annuity contract no longer has the need associated with the original contract (wealth accumulation), but does have a long-term care need (wealth protection).<br /> <br /> </p><hr><p><br /> <br /> 1035-exchanges can be either &ldquo;full&rdquo; or &ldquo;partial.&rdquo; One might employ a &ldquo;full&rdquo; exchange when funding a single-pay product such as a combination product, and a &ldquo;partial&rdquo; for a limited payment mode such as a 10-pay. As a practical matter where LTCI is concerned, very few carriers are comfortable accepting partial exchanges on this basis from neighboring carriers. Logistically, it is preferable to move all the products under one financial &ldquo;roof.&rdquo;<br /> <br /> </p><hr><strong>Planning Point:</strong><p> The annuities covered by Section1035 must be non-qualified, and cannot be owned by a trust or corporation. If the annuity is still within its surrender charge period, or the amount to be exchanged exceeds any free withdrawal limit, such amounts will be subject to a surrender charge. If a deferred annuity does not have any gain (as could be the case with a variable annuity in a down market), then there may be little tax benefit to exchanging the annuity for TQLTCI.<br /> <br /> Having said that, the ability to &ldquo;wash&rdquo; gain on non-qualified annuities through either QLTCI or combination products with QLTCI riders is a remarkable tax advantage, and a loophole which may not last forever.<br /> </p><table> <tbody> <tr> <td style="text-align: center;" colspan="3" width="397"><strong>Permitted Section 1035 Exchanges</strong></td> </tr> <tr> <td rowspan="4" width="107">Life Insurance</td> <td rowspan="4" width="158">----------------------------&gt;</td> <td width="133">Life Insurance</td> </tr> <tr> <td width="133">Annuity</td> </tr> <tr> <td width="133">Endowment</td> </tr> <tr> <td width="133">Qualified LTCI</td> </tr> <tr> <td rowspan="2" width="107">Annuity</td> <td rowspan="2" width="158">----------------------------&gt;</td> <td width="133">Annuity</td> </tr> <tr> <td width="133">Qualified LTCI</td> </tr> <tr> <td rowspan="3" width="107">Endowment</td> <td rowspan="3" width="158">----------------------------&gt;</td> <td width="133">Endowment</td> </tr> <tr> <td width="133">Annuity</td> </tr> <tr> <td width="133">Qualified LTCI</td> </tr> <tr> <td width="107">Qualified LTCI</td> <td width="158">----------------------------&gt;</td> <td width="133">Qualified LTCI</td> </tr> </tbody> </table><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 1035(b)(2), IRC &sect; 105(b)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 1035(a).</p></p><br />

<p>Editor&rsquo;s Note: Section 344 of the SECURE Act 2.0 will allow taxpayers to withdraw up to $2,500 each year from retirement accounts to cover the costs of long-term care insurance without triggering the 10% early withdrawal penalty (these withdrawals will still be subject to ordinary income taxation). The funds can be used to pay for standalone long-term care insurance or for certain life insurance or annuity contracts that also provide for meaningful financial assistance in the event that the insured person requires long-term care in a nursing home or home-based long-term care. This new provision is effective for tax years beginning after December 31, 2024 (the $2,500 annual limit will also be adjusted for inflation).<br /> <br /> A long-term care insurance policy issued after 1996 is a qualified long-term care insurance contract under IRC Section7702B(b) if:<br /> <p style="padding-left: 40px">(1) The only insurance protection provided under the contract is coverage of qualified long-term care services ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="481">481</a>);</p><hr><strong>Planning Point:</strong><p> Although this is one of the foundational principles of qualified long-term care insurance, there is a notable exception to this rule. Since 1996 there have been scores of policy designs which pay either an indemnity (i.e., the full daily or monthly benefit without regard to costs incurred) or a cash benefit (i.e., some flat amount based solely on the insured&rsquo;s ability to trigger benefits&mdash;without even the prerequisite that services have been received.) Such designs are permitted under 7702B(2)A, which permits &ldquo;per diem&rdquo; payments without otherwise contradicting this principle.<br /> <br /> </p><hr><p style="padding-left: 40px">(2) The contract does not pay or reimburse expenses incurred for services that are reimbursable under Title XVIII of the Social Security Act or that would be reimbursable but for the application of a deductible or coinsurance amount;</p><hr><strong>Planning Point:</strong><p> This paragraph refers to Medicare, which may pay for limited home health care benefits, and&mdash;subject to gatekeepers&mdash;a limited skilled nursing facility benefit as well (no more than 100 days). Prior to HIPAA, long-term care insurance policies were permitted to &ldquo;duplicate&rdquo; Medicare (assuming any were received by the policyholder). After HIPAA, tax-qualified (TQ) plans had to &ldquo;coordinate&rdquo; with Medicare.<br /> <br /> </p><hr><p style="padding-left: 80px">As a result of the relatively confounding manner in which this section of the regulation is written, many producers have wondered: on the chance Medicare does pay for nursing facility care on days 1 &ndash; 100, can the LTCI policy pay anything? The answer is: yes, a TQ plan can reimburse for any charges over and above what Medicare pays. Nevertheless, either believing that it cannot, or that Medicare pays much more frequently than it does, most producers overwhelmingly sell a 90- or 100-day elimination period (in approximately nine out of 10 policies).</p><p style="padding-left: 40px">(3) The contract is guaranteed renewable;</p><hr><strong>Planning Point:</strong><p> Guaranteed renewability means the insurer must not fail to renew a policy if premiums are timely paid. The insurer may not single out any policyholder for a rate increase solely because they grew older, get sick, or file a claim. Unfortunately, many consumers have interpreted this to mean their rates would never increase. That&rsquo;s not the case.<br /> <br /> </p><hr><p style="padding-left: 80px">&ldquo;Guaranteed Renewable&rdquo; policies do permit the insurer to file a rate increase request, by state, by policy form, and by &ldquo;class&rdquo; (e.g., those with compound inflation protection might be a different class than those without).</p><hr><strong>Planning Point:</strong><p> TQ plans may also be &ldquo;non-cancellable&rdquo;, although many think the re-appearance of such designs highly unlikely.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </p><hr><p style="padding-left: 40px">(4) The contract does not provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral for a loan or borrowed; and</p><p style="padding-left: 40px">(5) All premium refunds and dividends under the contract are to be applied as a reduction in future premiums or to increase future benefits. An exception to this rule is for a refund made on the death of an insured or on a complete surrender or cancellation of a contract that cannot exceed the aggregate premiums paid. Any refund given on cancellation or complete surrender of a policy will be includable in income to the extent that any deduction or exclusion was allowable with respect to the premiums.<a href="#_ftn2" name="_ftnref2">²</a></p><hr><strong>Planning Point:</strong><p> Premium refunds paid on the insured&rsquo;s death are generally not taxable income to the beneficiary or estate.<br /> <br /> </p><hr><p><br /> <br /> In addition, a contract must satisfy certain consumer protection provisions concerning model regulation and model act provisions, disclosure, and nonforfeitability.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A policy will be considered to meet the disclosure requirements if the issuer of the policy discloses in the policy and in the required outline of coverage that the policy is intended to be a qualified long-term care insurance contract under IRC Section7702B(b).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The nonforfeiture requirement is met for any level premium contract if the issuer of the contract offers to the policyholder, including any group policyholder, a non-forfeiture provision that:<br /> </p><p style="padding-left: 40px">(1) Is appropriately captioned;</p><p style="padding-left: 40px">(2) Provides for a benefit available in the event of a default in the payment of any premiums and the amount of the benefit may be adjusted only as necessary to reflect changes in claims, persistency, and interest as reflected in changes in rates for premium paying contracts approved for the same contract form; and</p><p style="padding-left: 40px">(3) Provides for at least one of reduced paid-up insurance, extended term insurance, shortened benefit period, or other similar approved offerings.<a href="#_ftn5" name="_ftnref5">⁵</a></p><hr><strong>Planning Point:</strong><p> The standard non-forfeiture benefit is one of the all-time least popular benefits, almost never elected. It generally provides that&mdash;should a policyholder lapse any time after the first three years due to non-payment&mdash;they will still be entitled to claim against a &ldquo;pool of money&rdquo; the size of their aggregate premiums paid (but not less than 30 times the daily benefit). The hitch is that additional premium is required for this rider, the cost of which never makes sense when compared to the paltry benefit conferred.<br /> <br /> </p><hr><p><br /> <br /> A qualified long-term care insurance contract that is approved must be delivered to a policyholder within 30 days of the approval date.<a href="#_ftn6" name="_ftnref6">⁶</a> If a claim under a qualified long-term care insurance contract is denied, the issuer must provide a written explanation of the reasons for the denial and make available all information relating to the denial within 60 days of a written request from a policyholder.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> </p><hr><strong>Planning Point:</strong><p> This regulation suggests the need for policy delivery receipts. Although not all states require them, and not all carriers employ them, they do provide liability protection by proving one&rsquo;s policy has been timely delivered. (At which point, the clock starts on the 30 day &ldquo;free look&rdquo; period.)<br /> <br /> </p><hr><p><br /> <br /> For the treatment of long-term care insurance contracts issued before 1997, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="482">482</a>.<br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 7702B(g).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 7702B(b)(2)(C).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. See IRC &sect; 7702B(g).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. IRC &sect; 4980C(d).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>. IRC &sect; 7702B(g)(4).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>. IRC &sect; 4980C(c)(2).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>. IRC &sect; 4980C(c)(3).</p></p><br />

<p>Qualified long-term care insurance (QLTCI) premiums cannot be reimbursed through a flexible spending arrangement (FSA). Similarly, QLTCI policies cannot be purchased with pre-tax dollars through an employer-provided cafeteria plan (Section125(f)(2)).<br /> <br /> On the other hand, health savings accounts (HSAs) present an excellent opportunity to pay for QLTCI premiums on a tax-advantaged basis. Subject to limitations, contributions to an HSA are not subject to federal income tax. Earnings and distributions from an HSA are tax-free if used to pay for qualified medical expenses.<br /> <br /> Since qualified long-term care premiums are deemed a qualified medical expense, they comprise an allowable withdrawal from an HSA. However, the tax-free amount is limited to &ldquo;qualified LTCI premiums&rdquo;, which are defined as the lesser of actual premiums paid or the &ldquo;age-based&rdquo; limits from the table below.<br /> <table style="height: 215px" width="661"><br /> <tbody><br /> <tr><br /> <td style="text-align: center" colspan="2" width="539"><strong>Age-Based LTCI Premiums (IRC Section 213(d)(10)(A))</strong></td><br /> </tr><br /> <tr><br /> <td style="text-align: center" width="270"><strong>Age at End of Tax Year</strong></td><br /> <td style="text-align: center" width="270"><strong>2024 Premium Limit</strong></td><br /> </tr><br /> <tr><br /> <td style="text-align: center" width="270">40 or Less</td><br /> <td style="text-align: center" width="270">$470</td><br /> </tr><br /> <tr><br /> <td style="text-align: center" width="270">41 &ndash; 50</td><br /> <td style="text-align: center" width="270">$880</td><br /> </tr><br /> <tr><br /> <td style="text-align: center" width="270">51 &ndash; 60</td><br /> <td style="text-align: center" width="270">$1,760</td><br /> </tr><br /> <tr><br /> <td style="text-align: center" width="270">61 &ndash; 70</td><br /> <td style="text-align: center" width="270">$4,710</td><br /> </tr><br /> <tr><br /> <td style="text-align: center" width="270">71 and Older</td><br /> <td style="text-align: center" width="270">$5,880</td><br /> </tr><br /> </tbody><br /> </table><p><br /> If one&rsquo;s premiums were greater than the limits in the table, the balance would have to be paid with non-HSA funds; otherwise, amounts withdrawn from an HSA for ineligible expenses are subject to income tax and a 20percent penalty (those who are disabled, deceased or over age 65 are exempt from the penalty).<br /> <br /> </p><hr><strong>Planning Point:</strong><p> An HSA may be set-up through a cafeteria plan.<br /> <br /> </p><hr></p><br />

<p>Short-term care insurance is often a type of critical care insurance that functions much like long-term care insurance. Unlike long-term care insurance, however, short-term care insurance coverage remains in effect only for a relatively short period of time (12 months or less). Taxpayers become eligible for short-term care insurance benefits when they need assistance performing two or more activities of daily living (ADLs). ADLs include the following activities: (1) eating, (2) toileting, (3) transferring in and out of bed, (4) bathing, (5) dressing and (6) continence.<a href="#_ftn1" name="_ftnref1">¹</a> Short-term care insurance can also function much like a typical health insurance policy, although coverage will usually be limited to certain specified benefits.<br /> <br /> <hr><strong>Planning Point:</strong><p> Note that there are many different types of short-term insurance. New rules released under the Trump administration would have allowed short-term health insurance plans that are valid for up to 12 months, rather than the 90-day maximum imposed under the Obama administration. The Trump-era rules also added a provision that allowed these short-term plans to be renewed for up to three years. Short-term limited-duration health insurance (STLDI) plans are generally less expensive, but often provide limited coverage. Further, these plans do not have to satisfy the Affordable Care Act market reform provisions, which means that the plans can set annual and lifetime caps on benefits, exclude certain services (such as maternity care, preventive care and mental health coverage) and reject individuals with preexisting conditions.<br /> <br /> A federal district court in Washington, D.C. upheld the rule that expands STLDI insurance so that short-term plans can be sold for up to 12 months, and can also be extended or renewed for up to 36 months. Because of this ruling, short-term health insurance plans can continue to be sold in states that permit such plans. The D.C. Circuit Court of Appeals upheld the lower court ruling.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> One of President Biden&rsquo;s first acts in office, however, was to issue an executive order that explicitly repealed the Trump-era executive order that sparked the formal agency rule permitting STLDI. In July of 2023, the Department of Labor, Treasury department and Department of Health and Human Services issued joint regulations that would once again limit the duration of STLDI policies to three months. The rule would also provide that the maximum duration of the policy could be no more than four months within the 12-month period starting on the date the policy was originally effective (including any renewal or extension period). In terms of extensions and renewals, the four-month rule would apply for policies issued by the same issuer to the same policyholder.<br /> <br /> </p><hr><p><br /> <br /> Certain types of short-term care insurance, known as recovery insurance, typically provides for a fixed level of daily benefits&mdash;around $140 per day is common&mdash;for a set period of time. However, the terms of short-term care insurance contracts often provide that if the actual cost of care is less than the stated daily benefit, the remaining funds can be used to pay for care even after the time period for coverage has expired. (For example, if the policy provides a daily benefit of $100 per day for 365 days, but the actual cost of care is $75 per day, the remaining $25 per day can be used to fund care on day366 and beyond.)<br /> <br /> A short-term care insurance policy&rsquo;s cost will vary based upon the level of benefits and length of the coverage period selected, as well as upon the age and health status of the taxpayer.<br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 7702B.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. <em>Association for Community Affiliated Plans v. U.S. Treasury</em>, No.18133 (July18, 2019).</p></p><br />

<p>Qualified long-term care services are any necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services that are 1) required by a chronically ill individual and 2) provided under a plan of care set forth by a licensed health care practitioner.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <hr><strong>Practice Point:</strong><p> A licensed healthcare practitioner can be a physician, registered nurse or licensed social worker.<br /> <br /> </p><hr><p><br /> <br /> A chronically ill individual is a person who has been certified by a licensed health care practitioner as 1) being unable to perform, without substantial assistance from another individual, at least two activities of daily living (&ldquo;ADLs&rdquo;) for at least 90 days due to a loss of functional capacity, 2) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment, or 3) having a level of disability similar to the level described in (1) above, as determined by the Secretary of Health and Human Services. In all cases, a licensed healthcare practitioner must have certified the need for such requirements within the preceding 12 months.<br /> <br /> </p><hr><strong>Practice Point:</strong><p> Prior to 1997, benefit triggers in long-term care insurance policies were not standardized, but this should not be taken to mean that common triggers weren&rsquo;t widely found, including those described above. The significance of HIPAA in creating tax-qualified (TQ) policies was the following:<br /> <br /> 1. Eliminating the &ldquo;medical necessity&rdquo; trigger, and<br /> <br /> 2. Creating the 90-day certification requirement.<br /> <br /> </p><hr><p><br /> <br /> The 90-day requirement for the ADL benefit trigger does not establish a waiting period (i.e., elimination period), but simply a duration over which the individual&rsquo;s disability is certified to last.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </p><hr><strong>Practice Point:</strong><p> Many commentators (and even some insurance company documents) employ the expression &ldquo;expected to last&rdquo; [90 days], but curiously, the source material does not use this phrase. However, the intent is similar: &ldquo;chronic illness&rdquo; should be long-lasting, and long-term care policies should pay for care over the long-term. In this way, TQpolicies were a break from the past, when these policies had no qualms about paying for short-term claims (i.e., less than 90 days).<br /> <br /> </p><hr><p><br /> <br /> To clarify, one&rsquo;s elimination period states how soon after qualifying care begins that claim payments start, acting like a deductible. There is no conflict in saying, &ldquo;As a tax-qualified policy, my plan will only pay for claims that last longer than 90 days, but I still want reimbursement from Day 1.&rdquo; Nevertheless, since 1997 there&rsquo;s been an explosion in the choice of 90-day elimination periods, which now make-up nearly 90percent of the market.<br /> <br /> Having established an ADL trigger, the six activities of daily living are defined as:<br /> </p><p style="padding-left: 40px">(1) eating;</p><p style="padding-left: 40px">(2) toileting;</p><p style="padding-left: 40px">(3) transferring;</p><p style="padding-left: 40px">(4) bathing;</p><p style="padding-left: 40px">(5) dressing; and</p><p style="padding-left: 40px">(6) continence.</p><p><br /> In determining an individual&rsquo;s inability to perform two or more ADL&rsquo;s, a TQpolicy must take into account at least five of these six. Much ink has been spilled debating the merits of &ldquo;hands-on&rdquo; assistance versus &ldquo;stand-by&rdquo; assistance. The former means the physical assistance of another person without which an individual would not be able to complete an ADL. Stand-by assistance is the presence of another individual necessary to prevent injury while performing an ADL (such as being ready to catch the individual if they fall while getting in the tub while bathing). However, HIPAA uses the umbrella term &ldquo;substantial assistance&rdquo;, which the IRS has subsequently clarified is either.<br /> <br /> The IRS also expanded its definition of the cognitive impairment (CI) trigger by advising taxpayers they could rely on a number of &ldquo;safe harbor&rdquo; provisions. These included a broadened definition of &ldquo;severe cognitive impairment&rdquo; as a loss or deterioration in intellectual capacity that is similar to Alzheimer&rsquo;s disease and forms of irreversible dementia, and is measured by clinical evidence and standardized tests that reliably measure impairment in short term memory, long-term memory, orientation to people, places or time, and deductive or abstract reasoning.<br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 7702B(c)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Notice 97-31, 1997-1 CB 417.</p></p><br />

<em>Editor&rsquo;s Note:<p> The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December31, 2018. The employer mandate and reporting requirements were not repealed.<br /> <br /> No. According to the IRS, individual health insurance coverage does not include short-term, limited duration insurance.<a href="#_ftn1" name="_ftnref1">¹</a> Because short-term care insurance is, by its nature, short-term and limited in duration, such coverage will not satisfy insurance obligations under the Affordable Care Act (ACA).<br /> <br /> </p><hr><strong>Planning Point:</strong><p> It&rsquo;s worth noting the current controversy surrounding short term medical health plans. Because individual health insurance &ldquo;does not include short-term limited duration insurance,&rdquo; this particular product has been exempted from many ACA market reforms.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </p><hr><p><br /> <br /> In June2016, the Obama administration released a package of proposals designed to strengthen the public risk pool (i.e., those who have coverage through the federally facilitated marketplace, or &ldquo;exchange&rdquo;). Their concern was that the risk pool was being damaged by individuals who could enroll during special enrollment periods (triggered by life events) but chose not to.<br /> <br /> This ties back to short term medical care (STMC), which had been sold precisely for such temporary stop-gap situations. The problem was that:<br /> </p><ul><br /> <li>STMC is not subject to many of the ACA&rsquo;s rules;</li><br /> <li>STMC can be medically-underwritten and priced on health;</li><br /> <li>STMC can discriminate against those with pre-existing conditions; and</li><br /> <li>STMC does not have to cover essential health benefits.</li><br /> </ul><p><br /> The problem (as it has been identified) is that insurers began selling STMC for periods as long as 12 months to serve as primary coverage, cherry-picking the healthiest people and plucking them out of the risk pool, all the while avoiding consumer protections.<br /> <br /> The Obama-era rules changed STMC in the following ways:<br /> </p><ul><br /> <li>STMC would be capped at a maximum of three months;</li><br /> <li>STMC policies could not be renewed; and</li><br /> <li>Insurers had to disclose to consumers that the STMC does not constitute minimum essential coverage, so that the individual could still owe a penalty (for non-compliance with the ACA mandate) in years prior to its repeal.</li><br /> </ul><hr><strong>Planning Point:</strong><p> The Trump administration made changes to expand the availability of short-term limited-duration health insurance. The Biden administration used executive power to once again limit the availability of short-term health plans. Taxpayers should pay close attention to these political developments when opting to purchase short-term health insurance.<br /> <br /> </p><hr><p><br /> <br /> Some insurance industry trade groups have opposed these changes, citing the failure of similar attempts to regulate the market.<br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. Treas. Reg. &sect; 1.5000A(d); 42 USC &sect; 300gg-91(b)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. 300gg-91(b)(5).</p></em><br />

<p>Yes, subject to limitation.<br /> <br /> IRC Section213(a) allows a deduction for the unreimbursed medical expenses paid during the tax year of the taxpayer (plus his or her spouse and dependents) which exceed 7.5percent of the taxpayer&rsquo;s adjusted gross income (AGI). The 7.5 percent threshold was made permanent in 2020.<br /> <br /> For the purposes of this section, the following are considered medical expenses:<br /> <ul><br /> <li>Amounts paid for qualified long-term care services (per 7702B(c)); subject to the exceptions below.</li><br /> <li>Amounts paid for any qualified long-term care insurance contract (defined by 7702B(b)); subject to the limits described as &ldquo;Eligible Premiums&rdquo; below.</li><br /> </ul><table style="height: 236px" width="635"><br /> <tbody><br /> <tr><br /> <td style="text-align: center" colspan="2" width="539"><strong>&ldquo;Eligible LTC Premiums&rdquo;</strong></td><br /> </tr><br /> <tr><br /> <td width="381"><strong>Attained age of individual before close of the 2024 tax year</strong></td><br /> <td style="text-align: center" width="159"><strong>Limitation</strong></td><br /> </tr><br /> <tr><br /> <td width="381">40 or less</td><br /> <td style="text-align: center" width="159">$470</td><br /> </tr><br /> <tr><br /> <td width="381">More than 40 but less than 50</td><br /> <td style="text-align: center" width="159">$880</td><br /> </tr><br /> <tr><br /> <td width="381">More than 50 but less than 60</td><br /> <td style="text-align: center" width="159">$1,760</td><br /> </tr><br /> <tr><br /> <td width="381">More than 60 but less than 70</td><br /> <td style="text-align: center" width="159">$4,710</td><br /> </tr><br /> <tr><br /> <td width="381">More than 70</td><br /> <td style="text-align: center" width="159">$5,880</td><br /> </tr><br /> </tbody><br /> </table><hr><strong>Planning Point:</strong><p> The table above was established in 1997 and is indexed for inflation. The limits rise by a medical care cost adjustment, rounded to the nearest $10, based on changes in the medical care component of the CPI (C-CPI-U for tax years beginning after 2017) each August. Although the limits are fairly modest in relation to an average premium, producers should remember that1) the limits rise each year, and 2) the limits effectively rise every 10 years as a policyholder ages through the bands. Thus, the tax advantage grows over time.<br /> <br /> </p><hr><p><br /> <br /> An amount paid for qualified long-term care services as defined in IRC Section 7702B(c) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="477">477</a>) will not be treated as paid for medical care if a service is provided by an individual&rsquo;s spouse or a relative (directly or through a partnership, corporation or other entity) unless the service is provided by a licensed professional. A relative generally is any individual who can be considered a dependent under the IRC.<a href="#_ftn1" name="_ftnref1">¹</a> In addition, a service may not be provided by a corporation or partnership that is related to an individual within the meaning of IRC Sections 267(b) or 707(b).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> When the qualified LTCI contract is part of a life or annuity contract (or a rider attached to one), the rules around premium deductibility are different ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="477">477</a>):<br /> </p><ul><br /> <li>No deduction is allowed under Section213(a) for any premium payment made for coverage under a qualified LTCI contract if such payment is made as a charge against the cash surrender value of the life contract or cash value of the annuity contract.<a href="#_ftn3" name="_ftnref3">³</a></li><br /> <li>But, not all combination products are structured this way. There is at least one (and perhaps only one) suite of combination products available where the qualified LTCI riders are paid separately by the policyholder (and not via internal charge from the cash value). The premiums for these riders are deductible under normal rules above.</li><br /> </ul><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect;&sect; 152(a)(1) through (8).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 213(d)(11).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC &sect; 7702B(e)(2).</p></p><br />

<p>No.<br /> <br /> An employer&rsquo;s plan that provides coverage under a qualified long-term care insurance contract generally is treated as an accident and health plan with respect to that coverage.<a href="#_ftn1" name="_ftnref1">¹</a> Thus, premiums for long-term care insurance coverage paid by an employer are not includable in the gross income of employees.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><strong>Planning Point:</strong><p> If the employer only pays a partial amount of an employee&rsquo;s premium, the employee is still entitled to deduct the balance paid. Of course, as an individual, the employee would include the portion of the qualified LTCI plan paid (up to the age-based eligible amount) with other itemized medical expenses, and deduct the amount that exceeds 7.5percent of AGI.<br /> <br /> </p><hr><strong>Planning Point:</strong><p> When a C Corporation, S Corporation, LLC, partnership or sole proprietor purchases qualified LTCI for its employees, such amounts are not includable in the gross income of said employees. A question arises when these employees are also the owners of the relevant company. If that is the case, the analysis below controls.<br /> <br /> </p><hr><p><br /> <br /> Partners of a partnership, members of an LLC (taxed as a partnership) and greater-thanpercent shareholders of an S corporation are all treated as self-employed individuals for tax purposes. As such, the qualified LTCI premiums paid on their behalf by their businesses are included in their AGI (i.e. passed-through as income); but, they may also turn around and deduct up to 100percent of their age-based eligible premium (without having to satisfy the AGI threshold applicable to individual filers).<br /> <br /> Shareholder/employees of a C corporation (who are treated as employees) and shareholder/employees who own 2percent-or-less of an S corporation may exclude from their gross income the entire amount of qualified LTCI premium paid on their behalf (even if it exceeds the age-based eligible premium amounts).<br /> <br /> </p><hr><strong>Planning Point:</strong><p> Small business owners who have an opportunity to pay for their QLTCI premiums &ldquo;through the business&rdquo; can save a lot of money this way. If we imagine an owner (e.g., of a partnership, LLC or S Corp) who pays a premium with after-tax dollars, he has to &ldquo;gross-up&rdquo; his paycheck in order to cover the income and payroll taxes necessary to net the proper amount.<br /> <br /> </p><hr><p><br /> <br /> Having then paid the premium, the employee might attempt to take a deduction as an Individual, adding age-based eligible premium to other unreimbursed medical expenses, and deducting the portion that exceeds the relevant AGI threshold.<br /> <br /> The business could also pay premiums on the employee&rsquo;s behalf. Although this amount is reported as income to our business owner, the company benefits by avoiding payroll taxes on the amount (and even worker&rsquo;s compensation). Then, the owner benefits from taking the self-employed health insurance deduction for the full amount of the eligible premium&mdash;not just amounts that exceed 7.5percent of AGI.<br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. IRC &sect; 7702B(a)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 106(a); see House Comm. Report on &sect; 321 of HIPAA &rsquo;96, P.L. 104-191.</p></p><br />

<p>Policies that do not meet the definition of a qualified long-term care insurance contract under IRC Section 7702B(b) generally are referred to as non-qualified (or non-tax-qualified, NTQ) long-term care policies ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="477">477</a>).<br /> <br /> Only premiums paid for qualified LTC policies are eligible for deduction, so if this is a significant benefit to one&rsquo;s client, then a tax-qualified (TQ) policy is recommended. Having said that, TQplans are virtually the only remaining choice today. NTQsales represent, on average, less than one-half of onepercent of all sales.<br /> <br /> <hr><strong>Planning Point:</strong><p> Even though HIPAA was enacted in 1996, the IRS has yet to publicly rule on the taxability of benefits paid from NTQplans. (The agency has issued several private letter rulings indicating that&mdash;if an individual did not take a premium deduction up front&mdash;benefits would be non-taxable on the back end.) Most observers also agree that it would not be Congress&rsquo; or the IRS&rsquo;s intent to tax a benefit which serves only to reimburse the insured. Had they wished, Congress could have very easily addressed NTQplans on the spot&mdash;instead, HIPAA is silent.<br /> <br /> </p><hr><p><br /> <br /> IRS Form8853 (for reporting taxable payments from LTCI, among other things) addresses the topic obliquely. It cautions not to use the form for amounts received from non-qualified LTCI, instead directing taxpayers to use Form1040, line 21 to report any amount &ldquo;not excludable as income&rdquo;. The question remains whether benefits received from NTQlong-term care insurance are includable or excludable from income. On this point, the IRS suggests that amounts paid for &ldquo;personal injuries or sickness through accident or health insurance&rdquo; are excludable.<br /> <br /> For the first few years following 1997, issuers of NTQpolicies were so concerned that consumers were being spooked by the prospect of future taxable benefits that they included &ldquo;pledges&rdquo; and &ldquo;promises&rdquo; in their newly-issued contracts. These documents gave policyholders the right to exchange their NTQpolicies for identical TQplans, in the event the IRS ruled unfavorably.<br /> <br /> Any contract issued before January 1, 1997 that met the long-term care insurance requirements of the state in which the contract was issued is treated for tax purposes as a qualified long-term care insurance contract, regardless of whether the provisions of the contract would have otherwise been eligible. (These are called &ldquo;grandfathered&rdquo; policies.) Services provided under such a contract or reimbursed by such a contract are treated as qualified long-term care services ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="477">477</a>) and payments are tax-free.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </p><hr align="left" size="1" width="33%"><a href="#_ftnref1" name="_ftn1">1</a><p>. HIPAA &rsquo;96, &sect; 321(f)(2). See also Treas. Reg. &sect; 1.7702B.</p></p><br />