IRS Starts to Implement a Long-Term Care Insurance Tax Incentive

The IRS today posted Notice 2026-33, a batch of guidance that tells employers and certified LTCI issuers how to offer the new tax break.

Officials explained how an insurer can show that its products count as certified LTCI coverage and about how an employer can add the LTCI distribution option to its plan and report the distributions to the IRS.

What it means: If many employers adopt the option and a significant percentage of plan participants notice the option, more of advisors' new clients may know what long-term care insurance is.

Some may have at least briefly considered using the new option, and the percentage of new clients who already have some kind of LTC payment incentive option in place may increase.

IRC section 401(a)(39): The definition of "certified long-term care insurance" included in the new LTCI distributions law includes LTC benefits provisions that come with life insurance policies and annuity contracts, as well as stand-alone LTCI coverage.

The $2,500 annual limit is expressed in 2024 dollars and is supposed to be adjusted every year for inflation.

The inflation-adjusted limit for 2026 is $2,600, according to the new IRS guidance.

Private-sector employers with existing 401(k) plans are supposed to notify the IRS by Dec. 31, 2027, if they want to add a "qualified LTC distribution" option.

Non-governmental union plans are supposed to notify the IRS by Dec. 31, 2028, and governmental plans are supposed to notify the IRS by Dec. 31, 2029.

IRS officials emphasized in the new notice that keeping records about how the distributions were used is important.

"No distribution will be treated as a qualified long-term care distribution unless a long-term care premium statement with respect to the employee has been filed with the plan," officials said. "The long-term care premium statement is considered supporting documentation for the employee's request for a qualified long-term care distribution."

Rollover treatment: IRS officials said that they do not believe that use of the qualified LTC distribution option counts as a rollover.

Because a qualified LTC distribution is not a rollover, "a defined contribution plan is not required to offer an individual a direct rollover," and a plan administrator does not have to send a participant who uses the option a rollover notice, officials said.

A plan that offers the option will not have to withhold an amount equal to 20% of the LTCI payment distribution, but it will have to comply with the withholding requirements for payments made to people located outside the United States, officials said.

Perspectives: Jesse Slome, director of the American Association for Long-Term Care Insurance, has questioned whether the new LTC planning tax incentive will have much of an impact on Americans' LTC planning efforts.

"Few individuals who can afford and are healthy enough to qualify for protection will willingly tap their retirement plan savings for the purchase of long-term care insurance," Slome predicted.

Mike Rahn, a benefits specialist who works with Ascensus, a big retirement plan administrator, said in a recent commentary that he was not sure how popular the new option will be.

"Implementing it will clearly add another element of plan administration responsibility," he said.

But IRS efforts to implement the law could make retirement plan sponsors think about LTC planning, and the efforts could show the LTCI issuers that the IRS is listening to them: The American Council of Life Insurers put implementation of the qualified LTC distribution provision in a guidance wish list letter it sent the IRS in May 2025.

The ACLI sent the letter in response to an IRS request for public comments about guidance-writing priorities.