Good News for Indemnity Based LTC Coverage

When the IRS released Rev. Proc. 2018-57 establishing the long-term care (LTC) 2019 Health Insurance Portability and Accountability Act (HIPAA) per diem rate at $370 per day, there was finally an answer as to how the annual calculation of the HIPAA per diem for LTC would move forward.

This year’s particular concern stemmed from the passage of the Tax Cuts and Jobs Act (TCJA), which brought change to how fixed dollar amounts such as the HIPAA per diem could be indexed for inflation. While TCJA brought tax relief to many, there were also some potential tax consequences — believed by many to be unintended —that might have had an effect on indemnity LTC and chronic illness benefits should the HIPAA per diem be lowered based solely on the new formula.

(Related: 12 New 2019 Tax Numbers for Agents to Know)

The importance of this decision centers around the fact that the HIPAA per diem rate is applied to calculate the tax-free benefit amount that can be received from traditional long-term care policies, linked benefit LTC policies, LTC riders on life insurance and annuities, and chronic illness riders.

Panic was spread prematurely before the challenge of the new C-CPI formula (often referred to as “chained CPI” or “chained inflation”) could be addressed, leaving some advisors to wonder if indemnity policies would be able to maintain their previous advantages.

Fortunately, regulations also allowed for the Treasury secretary, in consultation with the secretary of Health and Human Services, to adjust the HIPAA per diem rate from the formula calculation if deemed appropriate.

Caution

Of course, a tax professional should be consulted to helpdetermine which of the insured’s expenditures would be considered a qualifying long-term care expense for purposes of the IRS formula for tax-free benefits.

The Chart

Looking at the HIPAA per diem chart shown above, you can see that the 2019 rate is consistent with historical HIPAA per diem rate increases, thus the use of benefits from indemnity LTC coverage will continue with the same planned payments, flexibility and choice that existed in the past.

How the HIPAA Per Diem Applies

The HIPAA per diem is part of the formula used to calculate the amount of LTC benefits that may be received tax-free.

The tax-free amount, cumulative of all benefits on policies being paid for the benefit of the insured, and regardless of who owns the policies is the greater of:

• The HIPAA per diem in the year of claim, or
• Actual qualifying LTC expenses incurred.

Thus, any amount of LTC benefits received in the year of claim that are equal to the HIPAA per diem or less will be tax-free with no need to justify expenses. Additionally, any amount received that exceeds the HIPAA per diem but does not exceed actual qualifying expenses, will also be tax-free.

Reimbursement Plans

The HIPAA per diem is not considered in receiving reimbursement LTC benefit payments, but it may apply for tax purposes if more than one policy is being collected from with no coordination of benefits. These plans generally work as follows:

• Only expenses qualifying under the contract are reimbursed, up to the monthly (or daily) LTC benefit amount purchased.
• The insurance company calculates the amount of monthly reimbursement based on the qualifying bills and receipts that are submitted each month to the insurance company.
• While some reimbursement plans may allow for the policy owner to opt for direct billing and reimbursement with the care provider, many care providers are not willing to participate in 3rd party billing.

Indemnity Plans

Contract language and policy provisions of a specific company will dictate any variances from the following:

• Generally, companies offering chronic illness riders (and some companies offering LTC riders) cap their benefits at the HIPAA per diem.
• Some companies will pay monthly LTC benefits up to two times the HIPAA per diem rate. (Insurance companies offering this feature generally will pay the lesser of: the monthly available LTC benefit elected, or, two times the HIPAA per diem times 30 (or days in the month).
  • LTC benefits based on two times the HIPAA per diem paid each month could provide significant benefits in the face of expenses in most communities.
  • The tax formula established by the IRS for collecting LTC benefits still applies when the insurance company is willing to pay a LTC benefit amount exceeding the HIPAA per diem.
  • Basic indemnity policies generally require some licensed care be provided, but any leftover benefits can be used as desired.
  • Cash indemnity policies pay benefits with no restrictions on how LTC benefits are used. This would include being able to pay immediate family members or less expensive unlicensed persons to provide care.
• Receipts will NOT have to be included with the tax return. However, retaining copies of receipts with tax records would be wise should an audit occur, especially if cost of care exceeds the HIPAA per diem.

In summary: Concerns that indemnity policies could be restricted from paying benefits that were previously available or potentially cause unexpected taxation of benefits due to the TCJA have not come to pass. Indemnity benefits remain the same flexible benefits that advisors have been accustomed to presenting to clients; and cash indemnity benefits will continue to offer that extra level of choice and flexibility that clients may find of value.

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Shawn Britt, CLU, CLTC, is director, LTC initiatives, in the Advanced Consulting Group at Nationwide.