Long Term Care Insurance

<div class="Section1">No.<div class="Section1"><br /> <br /> The Affordable Care Act (ACA) enacted hundreds of market reforms, including many which affect the individual and group health insurance markets. Title&nbsp;42, Section&nbsp;300gg-91 defines these terms (such as &ldquo;individual health insurance coverage&rdquo;), but it also itemizes a number of &ldquo;benefits&rdquo; which are exempt from the subchapter&rsquo;s requirements.<br /> <br /> Among these are &ldquo;benefits for long-term care, nursing home care, home health care, community-based care, or any combination thereof&rdquo; (if such benefits are offered separately).<a href="#_ftn1" name="_ftnref1">¹</a> Thus, a broad category of coverage is excluded based on its function rather than its identification.<br /> <br /> Furthermore, in the explicit definition of &ldquo;individual health insurance&rdquo;, there is a carve-out: it &ldquo;does not include short-term limited duration insurance&rdquo;<a href="#_ftn2" name="_ftnref2">²</a> although this is more likely a nod to short-term medical (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="483">483</a>).<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Other excepted benefits include &ldquo;hospital indemnity or other fixed indemnity insurance&rdquo; (if offered as independent, non-coordinated benefits), and coverage for a specified disease or illness.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; 300gg-91(b)(5).<br /> <br /> </div></div><br />

<div class="Section1">Yes.</div><br /> <div class="Section1"><br /> <br /> As a result of the Pension Protection Act of 2006 (PPA), which went into effect January 1 2010, tax-qualified (TQ) long-term care insurance (LTCI) is now included in the scope of the Section 1035-exchange rules. This means that life, endowment, annuity and qualified LTCI may all be exchanged for qualified LTCI.<br /> <br /> In addition, the presence of a qualified LTCI rider on a life or annuity contract will not cause it to fail to qualify for the purposes of such an exchange. In other words, a taxpayer can exchange an annuity without a long-term care insurance rider for an annuity with such a rider, and still qualify for non-recognition treatment.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In sum, the IRC provides that the following exchanges are nontaxable:<br /> <blockquote>(1)     the exchange of a life insurance policy for another life insurance policy (with or without a qualified LTC rider), for an endowment or annuity contract (with or without a qualified LTC rider), or for a standalone qualified long-term care insurance contract;<br /> <br /> (2)     the exchange of an endowment contract for an annuity contract (with or without a qualified LTC rider), for an endowment contract under which payments will begin no later than payments would have begun under the contract exchanged, or for a standalone qualified long-term care insurance contract;<br /> <br /> (3)     the exchange of an annuity contract for another annuity contract (with or without a qualified LTC rider); or for a standalone qualified long-term care insurance contract; and<br /> <br /> (4)     the exchange of a long-term care insurance contract for another qualified long-term care insurance contract.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Neither an annuity nor a standalone qualified long-term care insurance contract can be non-taxably exchanged for a life insurance policy (with or without a qualified LTC rider).<br /> <br /> <hr /><br /> <br /> Generally, if an individual surrenders an “old” contract and uses the proceeds to purchase a “new” contract, they are required to recognize any gain over basis as ordinary income for federal tax purposes. But if certain requirements are met, Section 1035 allows them to avoid any recognition of gain. (Among these requirements are that the exchange must take place in a “hands-off” fashion directly between the two insurers. The taxpayer must not receive the proceeds, even if later used to purchase the new contract.)<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Under Section 1035, both the owner and insured under the original contract and the new contract must be identical. For instance, an individually-owned contract cannot be 1035-exchanged into a jointly-owned contract.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Such exchanges may be appropriate when the owner of a life or annuity contract no longer has the need associated with the original contract (wealth accumulation), but <em>does</em> have a long-term care need (wealth protection).<br /> <br /> <hr /><br /> <br /> 1035-exchanges can be either “full” or “partial.” One might employ a “full” exchange when funding a single-pay product such as a combination product, and a “partial” for a limited payment mode such as a 10-pay. As a practical matter where LTCI is concerned, very few carriers are comfortable accepting partial exchanges on this basis from neighboring carriers. Logistically, it is preferable to move all the products under one financial “roof.”<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The annuities covered by Section 1035 must be non-qualified, and cannot be owned by a trust or corporation. If the annuity is still within its surrender charge period, or the amount to be exchanged exceeds any free withdrawal limit, such amounts will be subject to a surrender charge. If a deferred annuity does not have any gain (as could be the case with a variable annuity in a down market), then there may be little tax benefit to exchanging the annuity for TQ LTCI.<br /> <br /> <hr /><br /> <br /> Having said that, the ability to “wash” gain on non-qualified annuities through either QLTCI or combination products with QLTCI riders is a remarkable tax advantage, and a loophole which may not last forever.<br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td style="text-align: center;" colspan="3" width="399"><strong>Permitted Section 1035 Exchanges</strong></td><br /> </tr><br /> <tr><br /> <td rowspan="4" width="107">Life Insurance</td><br /> <td rowspan="4" width="158"></td><br /> <td width="134">Life Insurance</td><br /> </tr><br /> <tr><br /> <td width="134">Annuity</td><br /> </tr><br /> <tr><br /> <td width="134">Endowment</td><br /> </tr><br /> <tr><br /> <td width="134">Qualified LTCI</td><br /> </tr><br /> <tr><br /> <td rowspan="2" width="107">Annuity</td><br /> <td rowspan="2" width="158"></td><br /> <td width="134">Annuity</td><br /> </tr><br /> <tr><br /> <td width="134">Qualified LTCI</td><br /> </tr><br /> <tr><br /> <td rowspan="3" width="107">Endowment</td><br /> <td rowspan="3" width="158"></td><br /> <td width="134">Endowment</td><br /> </tr><br /> <tr><br /> <td width="134">Annuity</td><br /> </tr><br /> <tr><br /> <td width="134">Qualified LTCI</td><br /> </tr><br /> <tr><br /> <td width="107">Qualified LTCI</td><br /> <td width="158"></td><br /> <td width="134">Qualified LTCI</td><br /> </tr><br /> </tbody><br /> </table><br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 1035(b)(2), IRC § 105(b)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 1035(a).<br /> <br /> </div>

<div class="Section1">Short-term care insurance is often a type of critical care insurance that functions much like long-term care insurance. Unlike long-term care insurance, however, short-term care insurance coverage remains in effect only for a relatively short period of time (12 months or less). Taxpayers become eligible for short-term care insurance benefits when they need assistance performing two or more activities of daily living (ADLs). ADLs include the following activities: (1) eating, (2) toileting, (3) transferring in and out of bed, (4) bathing, (5) dressing and (6) continence.<a href="#_ftn1" name="_ftnref1">¹</a>   Short-term care insurance can also function much like a typical health insurance policy, although coverage will usually be limited to certain specified benefits.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Note that there are many different types of short-term insurance. New rules released under the Trump administration would have allowed short-term <em><em>health</em></em> insurance plans that are valid for up to 12 months, rather than the 90-day maximum imposed under the Obama administration. The Trump-era rules also added a provision that allowed these short-term plans to be renewed for up to three years. Short-term limited-duration health insurance (STLDI) plans are generally less expensive, but often provide limited coverage. Further, these plans do not have to satisfy the Affordable Care Act market reform provisions, which means that the plans can set annual and lifetime caps on benefits, exclude certain services (such as maternity care, preventive care and mental health coverage) and reject individuals with preexisting conditions.<br /> <br /> A federal district court in Washington, D.C. upheld the rule that expands STLDI insurance so that short-term plans can be sold for up to 12 months, and can also be extended or renewed for up to 36 months. Because of this ruling, short-term health insurance plans can continue to be sold in states that permit such plans. The D.C. Circuit Court of Appeals upheld the lower court ruling.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> One of President Biden’s first acts in office, however, was to issue an executive order that explicitly repealed the Trump-era executive order that sparked the formal agency rule permitting STLDI. On March 28, 2024, the Department of Labor, Treasury department and Department of Health and Human Services issued joint regulations that once again limit the duration of STLDI policies to three months. The maximum duration of the policy can be no more than four months within the 12-month period starting on the date the policy was originally effective (including any renewal or extension period). In terms of extensions and renewals, the four-month rule applies for policies issued by the same issuer to the same policyholder.  The final rules also contain new notice requirements, so that a clear and concise notice must be placed on the front page of each policy.  The notice is designed to prevent confusion among taxpayers who may believe they are purchasing comprehensive health coverage.<br /> <br /> <hr /><br /> <br /> Certain types of short-term care insurance, known as recovery insurance, typically provides for a fixed level of daily benefits—around $140 per day is common—for a set period of time. However, the terms of short-term care insurance contracts often provide that if the actual cost of care is less than the stated daily benefit, the remaining funds can be used to pay for care even after the time period for coverage has expired. (For example, if the policy provides a daily benefit of $100 per day for 365 days, but the actual cost of care is $75 per day, the remaining $25 per day can be used to fund care on day 366 and beyond.)<br /> <br /> A short-term care insurance policy’s cost will vary based upon the level of benefits and length of the coverage period selected, as well as upon the age and health status of the taxpayer.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 7702B.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. <em><em>Association for Community Affiliated Plans v. U.S. Treasury</em></em>, No. 18-2133 (July 18, 2019).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Qualified long-term care services are any necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services that are 1) required by a chronically ill individual and 2) provided under a plan of care set forth by a licensed health care practitioner.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <hr /><br /> <br /> <strong>Practice Point:</strong> A licensed healthcare practitioner can be a physician, registered nurse or licensed social worker.<br /> <br /> <hr /><br /> <br /> A chronically ill individual is a person who has been certified by a licensed health care practitioner as 1) being unable to perform, without substantial assistance from another individual, at least two activities of daily living (“ADLs”) for at least 90 days due to a loss of functional capacity, 2) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment, or 3) having a level of disability similar to the level described in (1) above, as determined by the Secretary of Health and Human Services. In all cases, a licensed healthcare practitioner must have certified the need for such requirements within the preceding 12 months.<br /> <br /> <hr /><br /> <br /> <strong>Practice Point:</strong> Prior to 1997, benefit triggers in long-term care insurance policies were not standardized, but this should not be taken to mean that common triggers weren’t widely found, including those described above. The significance of HIPAA in creating tax-qualified (TQ) policies was thjollowing:<br /> <blockquote>1. Eliminating the “medical necessity” trigger, and<br /> <br /> 2. Creating the 90-day certification requirement.</blockquote><br /> <br /> <hr /><br /> <br /> The 90-day requirement for the ADL benefit trigger does not establish a waiting period (i.e., elimination period), but simply a duration over which the individual’s disability is certified to last.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr /><br /> <br /> <strong>Practice Point:</strong> Many commentators (and even some insurance company documents) employ the expression “expected to last” [90 days], but curiously, the source material does not use this phrase. However, the intent is similar: “chronic illness” should be long-lasting, and long-term care policies should pay for care over the long-term. In this way, TQ policies were a break from the past, when these policies had no qualms about paying for short-term claims (i.e., less than 90 days).<br /> <br /> <hr /><br /> <br /> To clarify, one’s elimination period states how soon after qualifying care begins that claim payments start, acting like a deductible. There is no conflict in saying, “As a tax-qualified policy, my plan will only pay for claims that last longer than 90 days, but I still want reimbursement from Day 1.” Nevertheless, since 1997 there’s been an explosion in the choice of 90-day elimination periods, which now make-up nearly 90 percent of the market.<br /> <br /> Having established an ADL trigger, the six activities of daily living are defined as:<br /> <blockquote>(1)     eating;<br /> <br /> (2)     toileting;<br /> <br /> (3)     transferring;<br /> <br /> (4)     bathing;<br /> <br /> (5)     dressing; and<br /> <br /> (6)     continence.</blockquote><br /> In determining an individual’s inability to perform two or more ADL’s, a TQ policy must take into account at least five of these six. Much ink has been spilled debating the merits of “hands-on” assistance versus “stand-by” assistance. The former means the physical assistance of another person without which an individual would not be able to complete an ADL. Stand-by assistance is the presence of another individual necessary to prevent injury while performing an ADL (such as being ready to catch the individual if they fall while getting in the tub while bathing). However, HIPAA uses the umbrella term “substantial assistance”, which the IRS has subsequently clarified is either.<br /> <br /> The IRS also expanded its definition of the cognitive impairment (CI) trigger by advising taxpayers they could rely on a number of “safe harbor” provisions. These included a broadened definition of “severe cognitive impairment” as a loss or deterioration in intellectual capacity that is similar to Alzheimer’s disease and forms of irreversible dementia, and is measured by clinical evidence and standardized tests that reliably measure impairment in short term memory, long-term memory, orientation to people, places or time, and deductive or abstract reasoning.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 7702B(c)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Notice 97-31, 1997-1 CB 417.<br /> <br /> </div>

<div class="Section1"><em>Editor’s Note:</em> The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed.</div><br /> <div class="Section1"><br /> <br /> No. According to the IRS, individual health insurance coverage does not include short-term, limited duration insurance.<a href="#_ftn1" name="_ftnref1">¹</a> Because short-term care insurance is, by its nature, short-term and limited in duration, such coverage will not satisfy insurance obligations under the Affordable Care Act (ACA).<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> It’s worth noting the current controversy surrounding short term medical health plans. Because individual health insurance “does not include short-term limited duration insurance,” this particular product has been exempted from many ACA market reforms.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr /><br /> <br /> In June 2016, the Obama administration released a package of proposals designed to strengthen the public risk pool (i.e., those who have coverage through the federally facilitated marketplace, or “exchange”). Their concern was that the risk pool was being damaged by individuals who <em>could</em> enroll during special enrollment periods (triggered by life events) but chose not to.<br /> <br /> This ties back to short term medical care (STMC), which had been sold precisely for such temporary stop-gap situations. The problem was that:<br /> <blockquote>STMC is not subject to many of the ACA’s rules;<br /> <br /> STMC can be medically-underwritten and priced on health;<br /> <br /> STMC can discriminate against those with pre-existing conditions; and<br /> <br /> STMC does not have to cover essential health benefits.</blockquote><br /> The problem (as it has been identified) is that insurers began selling STMC for periods as long as 12 months to serve as primary coverage, cherry-picking the healthiest people and plucking them out of the risk pool, all the while avoiding consumer protections.<br /> <br /> The Obama-era rules changed STMC in the following ways:<br /> <blockquote>STMC would be capped at a maximum of three months;<br /> <br /> STMC policies could not be renewed; and<br /> <br /> Insurers had to disclose to consumers that the STMC does not constitute minimum essential coverage, so that the individual could still owe a penalty (for non-compliance with the ACA mandate) in years prior to its repeal.</blockquote><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The Trump administration made changes to expand the availability of short-term limited-duration health insurance. The Biden administration used executive power to once again limit the availability of short-term health plans. It remains to be seen whether the second Trump administration will again modify the rules.  Taxpayers should pay close attention to these political developments when opting to purchase short-term health insurance.<br /> <br /> <hr /><br /> <br /> Some insurance industry trade groups have opposed these changes, citing the failure of similar attempts to regulate the market.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 1.5000A-2(d); 42 USC § 300gg-91(b)(5).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     300gg-91(b)(5).<br /> <br /> </div>

<div class="Section1">No.</div><br /> <div class="Section1"><br /> <br /> An employer’s plan that provides coverage under a qualified long-term care insurance contract generally is treated as an accident and health plan with respect to that coverage.<a href="#_ftn1" name="_ftnref1">¹</a> Thus, premiums for long-term care insurance coverage paid by an employer are not includable in the gross income of employees.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> If the employer only pays a partial amount of an employee’s premium, the employee is still entitled to deduct the balance paid. Of course, as an individual, the employee would include the portion of the qualified LTCI plan paid (up to the age-based eligible amount) with other itemized medical expenses, and deduct the amount that exceeds 7.5 percent of AGI.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> When a C Corporation, S Corporation, LLC, partnership or sole proprietor purchases qualified LTCI for its employees, such amounts are not includable in the gross income of said employees. A question arises when these employees are <em>also</em> the owners of the relevant company. If that is the case, the analysis below controls.<br /> <br /> <hr /><br /> <br /> Partners of a partnership, members of an LLC (taxed as a partnership) and greater-than-2 percent shareholders of an S corporation are all treated as self-employed individuals for tax purposes. As such, the qualified LTCI premiums paid on their behalf by their businesses <em>are</em> included in their AGI (i.e. passed-through as income); but, they may also turn around and deduct up to 100 percent of their age-based eligible premium (without having to satisfy the AGI threshold applicable to individual filers).<br /> <br /> Shareholder/employees of a C corporation (who are treated as employees) and shareholder/employees who own 2 percent-or-less of an S corporation may exclude from their gross income the entire amount of qualified LTCI premium paid on their behalf (even if it exceeds the age-based eligible premium amounts).<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Small business owners who have an opportunity to pay for their QLTCI premiums “through the business” can save a lot of money this way. If we imagine an owner (e.g., of a partnership, LLC or S Corp) who pays a premium with after-tax dollars, he has to “gross-up” his paycheck in order to cover the income and payroll taxes necessary to net the proper amount.<br /> <br /> <hr /><br /> <br /> Having then paid the premium, the employee might attempt to take a deduction as an Individual, adding age-based eligible premium to other unreimbursed medical expenses, and deducting the portion that exceeds the relevant AGI threshold.<br /> <br /> The business could also pay premiums on the employee’s behalf. Although this amount is reported as income to our business owner, the company benefits by avoiding payroll taxes on the amount (and even worker’s compensation). Then, the owner benefits from taking the self-employed health insurance deduction for the full amount of the eligible premium—not just amounts that exceed 7.5 percent of AGI.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 7702B(a)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 106(a); <em><em>see</em> </em>House Comm. Report on § 321 of HIPAA ’96, P.L. 104-191.<br /> <br /> </div>

<div class="Section1">Policies that do not meet the definition of a qualified long-term care insurance contract under IRC Section&nbsp;7702B(b) generally are referred to as non-qualified (or non-tax-qualified, NTQ) long-term care policies ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="477">477</a>).<div class="Section1"><br /> <br /> Only premiums paid for qualified LTC policies are eligible for deduction, so if this is a significant benefit to one&rsquo;s client, then a tax-qualified (TQ) policy is recommended. Having said that, TQ&nbsp;plans are virtually the only remaining choice today. NTQ&nbsp;sales represent, on average, less than one-half of one&nbsp;percent of all sales.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Even though HIPAA was enacted in 1996, the IRS has yet to publicly rule on the taxability of benefits paid from NTQ&nbsp;plans. (The agency has issued several private letter rulings indicating that&mdash;if an individual did not take a premium deduction up front&mdash;benefits would be non-taxable on the back end.) Most observers also agree that it would not be Congress&rsquo; or the IRS&rsquo;s intent to tax a benefit which serves only to reimburse the insured. Had they wished, Congress could have very easily addressed NTQ&nbsp;plans on the spot&mdash;instead, HIPAA is silent.<br /> <br /> <hr><br /> <br /> IRS Form&nbsp;8853 (for reporting taxable payments from LTCI, among other things) addresses the topic obliquely. It cautions not to use the form for amounts received from non-qualified LTCI, instead directing taxpayers to use Form&nbsp;1040, line 21 to report any amount &ldquo;not excludable as income&rdquo;. The question remains whether benefits received from NTQ&nbsp;long-term care insurance are includable or excludable from income. On this point, the IRS suggests that amounts paid for &ldquo;personal injuries or sickness through accident or health insurance&rdquo; are excludable.<br /> <br /> For the first few years following 1997, issuers of NTQ&nbsp;policies were so concerned that consumers were being spooked by the prospect of future taxable benefits that they included &ldquo;pledges&rdquo; and &ldquo;promises&rdquo; in their newly-issued contracts. These documents gave policyholders the right to exchange their NTQ&nbsp;policies for identical TQ&nbsp;plans, in the event the IRS ruled unfavorably.<br /> <br /> Any contract issued before January&nbsp;1, 1997 that met the long-term care insurance requirements of the state in which the contract was issued is treated for tax purposes as a qualified long-term care insurance contract, regardless of whether the provisions of the contract would have otherwise been eligible. (These are called &ldquo;grandfathered&rdquo; policies.) Services provided under such a contract or reimbursed by such a contract are treated as qualified long-term care services ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="477">477</a>) and payments are tax-free.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; HIPAA &rsquo;96, &sect; 321(f)(2). <em><em>See also</em></em> Treas. Reg. &sect; 1.7702B-2.<br /> <br /> </div></div><br />

<div class="Section1">Yes.<div class="Section1"><br /> <br /> A life insurance or annuity contract may provide long-term care insurance benefits. Any long-term care insurance coverage, qualified or otherwise, that is provided by a rider or as part of a life insurance or annuity contract will be treated as a separate contract for purposes of the treatment of long-term care benefits paid.<a href="#_ftn1" name="_ftnref1">¹</a> As such, benefits paid for qualified long-term care services are generally tax-free (regardless of the treatment otherwise applicable to a withdrawal from the underlying life or annuity contract) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="491">491</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> By linking two distinctly fundamental needs, such products have earned the moniker &ldquo;combination&rdquo;, &ldquo;hybrid&rdquo;, &ldquo;linked-benefit&rdquo; or &ldquo;asset-based long-term care&rdquo;. There is no legal difference in these terms, which were instead born of marketing. (The IRS employs the term &ldquo;combination contracts&rdquo;.)<br /> <br /> <hr><br /> <br /> There is no premium deduction permitted under IRC Section&nbsp;213(a) for charges made against the cash surrender value of a life contract or cash value of an annuity contract which pay for qualified long-term care insurance (QLTCI).<a href="#_ftn3" name="_ftnref3">³</a> Rather, such charges serve to reduce the investment (i.e., cost basis) in the underlying contract by the amount of the charge&mdash;but not below zero. Since these charges are withdrawn from the policy&rsquo;s cash value to pay for the QLTCI (albeit internally), they are considered &ldquo;distributions&rdquo;. Nevertheless, the amount of these charges is not included in gross income.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> In certain situations, a combination policy may be a modified endowment contract, or MEC. (Generally, most single-premium life combo products are MECs, i.e., they fail the seven-pay test.) When they were first established in 1988, MECs received less favorable income tax treatment than non-MECs:<br /> <ul><br /> <li>Distributions (including withdrawals and loans) are received taxable gain first, tax-free principal last (LIFO), and</li><br /> <li>Any distributions received prior to age 59&frac12; are subject to a 10 percent penalty (unless taken for death, disability or as part of a life annuity).</li><br /> </ul><br /> <br /> <hr><br /> <br /> The above MEC rules (LIFO tax treatment of distributions, and the 10 percent early withdrawal penalty) are the same treatment found in nonqualified deferred annuities. However, the Pension Protection Act (PPA) modified these rules effective January 1, 2010. Specifically, the PPA targeted distributions from life insurance (even MECs) and nonqualified annuities when used to pay for QLTCI: going forward, they would not be subject to immediate taxation or the early withdrawal penalty. Instead, these charges would simply reduce cost basis in the contract (but not below zero). To be clear, the linchpin of this favorable tax treatment is the requirement that the qualified long-term care coverage be made part of (or included as a rider on) the life or annuity contract from which cash value charges are made.<br /> <br /> None of the tax provisions cited above for combination life/long-term care or annuity/long-term care policies apply to any of the following:<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; A tax-exempt (under a Section&nbsp;501(a)) trust described in IRC Section&nbsp;401(a) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3837">3837</a>));<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; A contract purchased by a tax-exempt (under a Section&nbsp;501(a)) trust described in IRC Section&nbsp;401(a));<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; A contract purchased as part of a plan under IRC Section&nbsp;403(a);<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; A contract described in IRC Section&nbsp;403(b) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4027">4027</a>);<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp; A contract provided for employees of a life insurance company under IRC<br /> Section&nbsp;818(a)(3);<br /> <br /> (6)&nbsp;&nbsp;&nbsp;&nbsp; A contract from an IRA or individual retirement annuity ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3641">3641</a>); or<br /> <br /> (7)&nbsp;&nbsp;&nbsp;&nbsp; A contract purchased by an employer for the benefit of an employee or an employee&rsquo;s spouse.</blockquote><br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 7702B(e)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 7702B(e)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 7702B(e)(3).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 72(e)(11).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 7702B(e)(4).<br /> <br /> </div></div><br />

<div class="Section1">No, they do not.<div class="Section1"><br /> <br /> The COBRA continuation coverage requirements applicable to group health plans do not apply to plans under which substantially all of the coverage is for long-term care services.<a href="#_ftn1" name="_ftnref1">¹</a> This provision is effective for contracts issued after 1996.<a href="#_ftn2" name="_ftnref2">²</a> A plan may use any reasonable method to determine whether substantially all of the coverage under the plan is for qualified long-term care services ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="356">356</a>).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> After a qualifying event at work (e.g. the employer&rsquo;s failure to pay premiums), group health plans generally require that each qualified plan beneficiary be given the election to continue identical coverage. This is not the case with qualified long-term care insurance (QLTCI).<br /> <br /> <hr><br /> <br /> As a practical matter, most QLTCI sold through the worksite, or sponsored by an employer, are individual policies. They are the exact same contracts sold on the retail market. However, by meeting certain participation thresholds, the insurer may extend premium discounts and underwriting concessions. But since they are individual policies, they are completely &ldquo;portable&rdquo; and not tied to employment in any meaningful way.<br /> <br /> There are some &ldquo;true group&rdquo; QLTCI plans&mdash;many of which have existed for some time, and some that are newly sold. These policies do operate under group regulations, where employees receive &ldquo;certificates&rdquo; (not policies), and an employee who works in Oregon, for example, might be covered by an Idaho policy form if that is where his employer&rsquo;s &ldquo;situs&rdquo; is located. Although COBRA does not apply, one will find conversion privileges in group long-term care which, for instance, give certificate holders the right to continue making premium payments (and keep coverage in-force) in the event their employer discontinues the plan.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 4980B(g)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; HIPAA &rsquo;96, &sect; 321(f)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 54.4980B-2, A-1(e).<br /> <br /> </div></div><br />

<div class="Section1">Taxpayers who apply for short-term care insurance (STC) are generally not required to complete the comprehensive applications and medical history screening that is required to qualify for long-term care (LTC) insurance. In general, STC provides an attractive option for those who cannot afford, or are unable to qualify for, traditional long-term care insurance (LTCI). Current statistics show that over 40 percent of LTC claims last less than one-year: the most common reason for these claims are short, recoverable illnesses, sudden terminal illnesses, and the single use of non-caregiving benefits (such as equipment and training). For this reason, some clients may find STC a more suitable option.</div><br /> <div class="Section1"><br /> <br /> STC can also be employed as a “gap” to fill the elimination period of someone’s existing LTC policy. They may have elected a longer elimination period at a time when circumstances were different, or when they didn’t have another choice.<br /> <br /> To summarize, STC solves some of the ingrained challenges inherent in traditional long-term care (i.e., more rigorous underwriting and perceived high cost), and is ideal:<br /> <ol><br /> <li>for those who have waited too long to apply for coverage;</li><br /> <li>when cost is a barrier;</li><br /> <li>when age or health are barriers;</li><br /> <li>for rehab or accident claims;</li><br /> <li>for filling existing elimination periods;</li><br /> <li>for protecting against Medicare’s “observation status” penalty;<a href="#_ftn1" name="_ftnref1">¹</a></li><br /> <li>when existing LTCI has not kept pace with inflation; and</li><br /> <li>for those who object to tax-qualified (TQ) triggers and/or the 90-day certification.</li><br /> </ol><br /> <br /> <hr /><br /> <br /> <strong>Planning Points:</strong> Although STC insurance has been offered since the mid-90’s, it remains some of the most rate-stable coverage available in the LTC market. Part of the reason it is not more widely promoted is that it has historically—although not exclusively—been offered by carriers with a “less-than-A” rating. If the day comes that “first tier” name brand insurers begin marketing STC, it has many things going for it to penetrate the middle market.<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Although new legislation looks to be closing this loophole, for years many patients discharged from the hospital to a nursing facility believed they had satisfied Medicare’s onerous “three-day prior hospitalization” gatekeeper, only to find they had never been admitted as an inpatient to the hospital, and were instead kept under “observation status.”<br /> <br /> </div>