A federal panel has rejected the idea of creating new federal tax incentives for the purchase of long-term care insurance (LTCI), or of creating new ways to let workers pay LTCI premiums using the cash inside 401(k) plans or similar types of retirement plans.
The Federal Interagency Task Force on Long-Term Care Insurance did say Congress could consider supporting private LTCI use with one change: eliminating the early withdrawal tax penalty for use of funds from an IRA, 401(k) plan or 403(b) plan to pay LTCI premiums.
- A link to the Treasury task force report is available here.
- An article about the 2017 Treasury Department report that led to the creation of the LTCI task force is available here.
The task force made the recommendation in a report posted recently by the U.S. Treasury Department.
The Task Force
The Treasury Department set up the task force in response to recommendations made in a 2017 report on ideas for improving federal regulation of the insurance and asset managers.
The task force representatives from the Treasury’s economic policy, tax policy and consumer policy offices; the Federal Insurance Office; the U.S. Department of Health and Human Services (HHS); the Centers for Medicare and Medicaid Services; the U.S. Department of Labor; and the federal Office of Management and Budget.
Michael Faulkender, the Treasury’s assistant secretary for economic policy, has been the task force chair.
The United States leaves most responsibility for regulating insurance as insurance to the states, but the federal government shapes insurance anyway, through Internal Revenue Code tax rules.
The federal LTCI task force has no direct ability to shape legislation, or get legislation passed, but Republicans and Democrats have worked together to pass a number of bipartisan senior health measures in recent years, such as a measure expanding Medicare coverage for telehealth services.
LTCI Tax Break Proposals
Business owners can now deduct LTCI premiums from their taxable income, for federal income tax purposes, and people with high medical expenses, who can deduct their medical expenses from taxable income, can also deduct their LTCI premiums.
Most taxpayers can’t deduct LTCI premiums for their taxable income.
Some advocates for strengthening the private LTCI market have called for creating an LTCI premium tax break that just about every taxpayer could use.
The task force says it does not support LTCI purchase tax incentive proposals.
“The task force concludes that the proposed incentives, in general, would reduce tax revenues and primarily benefit higher-income taxpayers, and may not be fully effective in targeting lower and middle-income individuals who need financial protection against [long-term care (LTC)] risks,” the task force writes in the report. “Finally, the proposals would increase the complexity of the [Internal Revenue] Code and could, in some cases, be difficult to implement, monitor, and enforce.”
Proposals for Adding LTCI Options to 401(k) Plans
Many LTCI market strengthening proposals have called for giving participants in 401(k) plans and similar types of plans the option of using some of the plan assets to pay for LTCI coverage.