The American Council of Life Insurers wants the Internal Revenue Service to implement a new law that could help clients use some retirement savings to pay for long-term care insurance.
The law — part of the Secure 2.0 Act — permits retirement savers to use up to $2,500 in retirement assets per year to pay LTCI premiums without facing 10% early withdrawal penalties on the distributions.
The savers will have to include the distributions in their taxable income when they file their federal income tax returns.
"These provisions will first be effective for distributions after December 29, 2025, so time is of the essence," according to Regina Rose, Mandana Parsazad and Sarah Lashley, a team of ACLI tax policy specialists.
What it means: Taxpayers could soon have a new incentive to prepare for long-term care costs, but implementation issues could affect when the incentive becomes available.
Secure 2.0: Secure 2.0 created the new LTCI payment incentive by adding section 401(a)(39) to the Internal Revenue Code.
The distributions eligible for the provision could come from individual retirement annuities, ordinary individual retirement accounts, 401(k) plan accounts or other retirement accounts that qualify for special federal income tax treatment.
ACLI request details: The ACLI tax policy specialists talk about the Secure 2.0 LTCI incentive implementation issue in a letter sent to the Internal Revenue Service in May.
The ACLI prepared the letter in response to an IRS request for comments on its priority guidance plan, or official to-do list.
The ACLI reps noted that defined contribution plans can choose whether to offer an LTCI distribution option, and the plan managers are especially hungry for IRS guidance.
"Those plans and long-term care issuers that choose to offer this alternative to participants need administrative instructions on the mechanics for satisfying the long-term care premium statement requirement of section 401(a)(3)(e)," the reps wrote.
Plans also need advice about a related information return requirement, the reps add.
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