1 Long Term Care Insurance products underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary.
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Long Term Care Insurance products underwritten and issued byBerkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of
The Guardian Life Insurance Company of America, New York, NY.
8509-3-05
Tax Treatment of Qualified
Long Term Care Insurance
A Continuing Education Course for Agents & Brokers
For educational & training purposes only. Not for use with the general public.
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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
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What Is Long Term Care?
Skilled, custodial or maintenance careassistance with activities of daily living (ADLs)
Wide range of services for those with… Chronic illnessPermanent disabilityCognitive impairment
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Where is LTC Provided?
Home Health Care
Adult Day Care
Assisted Living
Nursing Home
Source: The Wide Circle of Caregiving. Kaiser Family Foundation. et al, June, 2002
82%
18%
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Who Needs Long Term Care?
35 million people in the U. S. areover age 656 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 14,2004
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Who Needs Long Term Care?
Longer life expectancy = greater probability of need for care
People over age 85… the fastest growing segment of our population50%+ will need nursing care*
Source: A Profile of Older Americans, Administration on Aging, 2002
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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)
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Source: National Study by the National Alliance for Care giving and the National Center on Women and Aging, Brandeis University
Formal Adjustments to Work Schedule Due to Caregiving
13%
16%
20%
22%
33%
64%
0% 25% 50% 75%
Use Sick Days/Vacation Time
DecreasedHours
Leave ofAbsence
Full- toPart-Time
Quit Job
Retired Early
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Annual Average Cost of Care*
Home care - $23,556 Based on hourly rate of $18.12 at 5 hrs/visit
and 5 visits/wk
Nursing home - $70,080 Based on private room rate of $192.00
Nursing home (high cost areas) - $93,947
*Metlife Mature Market Institute Market Survey of Nursing Home and Home Care Costs, September 2004
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The Cost of Care
Annual Nursing Home Costs are projected to increase at 5.8% per year.
Based on the previous example:
Source: Health Spending Projections Through 2013, Office of the Actuary, Centersfor Medicare and Medicaid Services, February 2004
Rate ofInflation
2004 2014 2024 2034
$70,080
5% $114,153 $185,943 $302,882
5.8% $123,155 $216,425 $380,333
6% $125,503 $224,756 $402,504
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Who Pays for Long Term Care?
Medicare8%
Medicaid41%
Private LTC Ins.5%
Out of Pocket46%
Source: www.ltcfeds.com, 2000 Medicare15%
Medicaid17%
Private LTC Ins.5%
Out of Pocket63%
Nursing Home
Home Care
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Medicare & 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. 2003
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Medicaid Is The Wrong Answer
Medicaid pays for what you do not want: nursing home care
Medicaid is welfare: stringent income & asset requirements to qualify
Limits your choices
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Medicaid Limitations*
Generally below $2,000 in assets
Spousal monthly income allowance $1561
Look Back Period 3 years 5 years for transfers into certain trusts
Unlimited penalty period
* Refer to your state’s Medicaid rules
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Is Medicaid “Planning”the Solution?
Converts countable assets into inaccessible assets by giving themaway 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
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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, 2003
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National Association ofInsurance Commissioners
NAIC Model Regulations, 1993Must provide at least 12 months of coverageMust be reimbursement or indemnity contractsMust cover treatment provided in settings
other than hospitals
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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
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Tax Qualified LTCI:Federal Guidelines
Required Benefit TriggersChronically ill-unable to perform 2 ADLsDisability must be expected to last at least 90
daysor
Cognitive impairment must require “substantial supervision”
Must follow a plan of care prescribed by a licensed health care provider
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Benefit Triggers
Chronically IllRequires substantial assistance with at least
two of six activities of daily living (ADLs)ADLs: dressing, eating, bathing, toileting,
transferring and continenceRequires assistance for more than 90 days
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Benefit Triggers
Cognitive ImpairmentDeterioration or loss in intellectual capacity
Substantial supervisionAnother person must protect you from threats
to your health & safety, such as associated with Alzheimer’s
– e.g. supervision of patient
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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
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Tax Treatment of Qualified LTCI
Qualified LTCI is treated as accident & health insurance1
Premiums can be deductible2
Benefits received are not generally taxable income3
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)
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Tax Qualified LTCI Benefits
100% of the proceeds on a reimbursement policy are tax free
Policy benefit $300/day
Actual cost of care $250/day
Reimbursement amount $250
Total Taxable Benefit $0
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Tax Qualified LTCI Benefits
With indemnity policies the first $240 or actual cost of care is tax free
Policy benefit $300/day
Actual cost of care $250/day
Taxable benefit $50/day
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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)
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2005 Eligible Premium Amounts
Eligible LTCI Premium
Age* Limits
40 or younger $270
41-50 $510
51-60 $1,020
61-70 $2,720
71 or older $3,400
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Taxation of Premiums: Individuals
Only eligible premium is deductibleMust itemize deduction on schedule A line 1Added to other unreimbursed medical
expensesAmount that exceeds 7.5% of Adjusted Gross
Income (AGI) is deductible
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Married Couple (ages 62 & 58)
Adjusted Gross Income $65,000
Eligible premiumAge 62 $ 2,720
Age 58 $ 1,020
Other medical expenses $ 2,200
Total medical expenses $ 5,940
7.5% of $65,000 $ (4,875)
Excess which can be deducted $ 1,165
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Employer-Paid LTCI
Employer may deduct 100% of premiums paid on behalf of W-2 employees & spouses1
Age based eligible premium limits do not apply
C-Corp. may deduct 100% ofpremiums for:Owner-employees,spouses, tax dependents,
& retirees
1 PL 104-491, IRC Sec. 7702B(a)(3)
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Employer-Paid LTCI
Premium excluded from employee’s income1
Benefit is generally tax free to employee2
1 IRC Sec. 106(a), 7702B(a)(3)
2 IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1)
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Employer-Paid LTCI
Employer designates or “carves-out” specific classes of employees that will be covered with LTCI.1
1 IRC Sec. 1.105-5, 1.106-1
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Employer-Paid LTCI
May not be paid through:Cafeteria plan1 Flexible spending account2 Salary reduction
1 IRC Sec. 125(f)
2 IRC Sec. 106(c)(1)
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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 employeesTheir spouses
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Sole ProprietorshipEligible Premium Deduction
Self-employed 55 year old owner.
Premium for owner $ 3,280
Owner’s adjusted gross income (AGI) $ 100,000
Deduction for eligible premium $ ( 1,020)
Taxable Income $ 98,980
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Sole ProprietorshipTotal Premium Deduction
55 year old owner employs his49 year old wife
Wife is the owner of the joint policy
She and her owner/husband are the insureds
Premium $ 4,264
Company’s
Taxable Income $100,000
Deduction for actual premium $ 4,264
Taxable Income $ 95,736
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Sole ProprietorshipPaid up (10 Pay) Deduction
55 year old owner employs his49 year old wife
Wife is the owner of the joint policy
She and her owner/husband arethe insureds.
Premium $ 10,248
Company’sTaxable Income $100,000
Deduction for actual premium $ 10,248
Taxable Income $ 89,752
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Partnerships & S-Corporation Shareholders*
Premiums are deductible by the firm1
Premiums represent income to these owners2
These owners may deduct the eligible premium3
*Greater than 2% shareholder
1 IRC Sec. 162 (a)
2 IRC Sec. 707(c)
3 IRC Sec. 162(I), 213(D),213D(10)
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Rules of Attribution:S-Corporations
Situation:
Spouse of shareholder is a W-2 employee of the corporation
Corporation pays & deducts premium for both
Premium must be added to income of both shareholder & spouse
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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
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Health Savings Accounts (HSAs)
HSA Contribution Limits (2005) the lesser of the annual deductible or $2,650
for single / $5,250 family“catch-up” for 55+ starts at $600 in 2005
HDHP Limitationsminimum deductible: $1,000 single /
$2,000 familymaximum out-of-pocket: $5,150 single /
$10,200 family
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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
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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 2004
17 states offered some form of above the line tax incentive (not subject to exceeding a % of AGI) without respectto income.
See the handout - Quick Reference Guide to State Tax Treatment of Long Term Care Insurance
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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
46
Long Term Care Insurance products underwritten and issued byBerkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of
The Guardian Life Insurance Company of America, New York, NY.
8509-3-05
Tax Treatment of Qualified
Long Term Care Insurance
A Continuing Education Course for Agents & Brokers
For educational & training purposes only. Not for use with the general public.
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