Offering long term care insurance is becoming an even better way for owners of small businesses to reward key people and retain their loyalty.
A good benefit program for key employees at small businesses should meet at least 3 requirements:
1. It should be deductible for the employer.
2. It should not generate additional taxable income for the employee.
3. It should be customizable by the employer.
Some of the usual executive benefits may be less appealing than they used to be. The split-dollar landscape has changed. Corporate-owned life insurance policies have enjoyed the scrutiny of Congress recently, and deferred compensation plans may be the subject of legislative action in the near future. Qualified plans are attractive, but must comply with specific government regulations.
Fortunately, long term care insurance still meets the requirements for a good executive carveout benefit.
Tax-qualified long term care insurance occupies a special place in the tax code. When an employer buys coverage for selected employees, the employer might be able to deduct the premium payments. Employer-paid premium does not generate additional taxable income for the employee even though the employee is the owner of the LTC policy.
Benefits from the tax-qualified LTC policy paid to the employee are likewise tax-free. The same results apply to a tax-qualified LTC policy purchased by the employer for the employees spouse. There are not many products with as many tax advantages as tax-qualified LTC insurance.
A tax-qualified LTC policy can be a limited-pay policy, or it can be continuous pay. A limited-pay policy, which is paid up after a fixed number of years or at age 65, is appealing to an employer because it has a preset cost payable over a determinable period of time.
Usually, the premium is somewhat higher on a limited-pay policy, which generates a larger tax deduction for the employer. When employees retire, they may receive paid-up LTC policies instead of the traditional “gold watch.”