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Taxing Questions About Long-Term Care

Thomas Jefferson said there are two certainties in life: death and taxes. Recent legislation seems to offer the possibility that some types of Long-Term Care insurance may be exempt from Jefferson's law. A closer examination, however, applies a new maxim to the legislation: "there is no such thing as a free lunch." 

As part of the 1996 Health Insurance Portability and Accountability Act (HIPAA) , Long-Term Care plans were divided into two different categories: Non-Tax-Qualified and Qualified. The difference between these two types of plans at face value is simple: Non-Tax-Qualified plans are subject to taxation as income, Qualified plans are not. 

When you sign up for a Qualified plan, a portion of your premiums can be deducted as a healthcare expense (the exact amount depends on your age and employment status). Moreover, if you become eligible for benefits they are not treated as taxable income, subject to certain limitations. Thus, if you have a Qualified plan and receive $40,000 in coverage to stay in a nursing home (including room and board), that $40,000 is not subject to taxation. Conversely, under a Non-Tax-Qualified plan, you might have to declare a portion of the $40,000 as taxable income. 

So why would anyone consider enrolling in a Non-Tax-Qualified plan?

The answer to this question is also simple: access to benefits. Qualified plans must conform to federal guidelines that specifically state the conditions (also called triggers) under which a policyholder receives benefits. The government stipulates that a policyholder must meet one of the following triggers to receive benefits under a Qualified Plan: 

  1. Unable to perform at least two of the five activities of daily living (ADLs) which include eating, dressing, bathing, walking, and transferring or 
  2. Suffering from cognitive impairment. 
Qualified plans require a medical doctor to certify that the policyholder meets conditions 1 and/or 2 for a minimum of 90 days before benefits commence. Furthermore, all Long-Term Care benefits received under a Qualified plan must be itemized on your tax returns, and only those benefits that exceed a fixed percentage of your total income are tax exempt. 

Non-Tax-Qualified plans, on the other hand, can cover a policyholder if they suffer from even one ADL impairment, or if the policyholder's condition falls under the broad category of "medical necessity." Another advantage of Non-Tax-Qualified plans is that they do not have a 90-day waiting period requirement. It is easier, therefore, to become eligible for coverage under a Non-Tax-Qualified plan than one that is Qualified. 

The exact interpretation of the new legislation is still under debate by the U.S. Treasury Department. Many industry experts anticipate that the Department will rule that Long-Term Care benefits, from both Qualified and Non-Tax-Qualified plans, are exempt from declared taxable income. After all, the benefits received under a Long-Term Care insurance plan are reimbursement for incurred expenses due to a chronic illness or condition. Receiving Long-Term Care benefits is not the same as winning the lottery. 

We will be sure to keep you abreast of developments as the U.S. Treasury Department and Congress work through the administrative details of Qualified versus Non-Tax-Qualified plans. Meanwhile, we offer Long-Term Care plans that ensure access to care when you need it; and, like death and taxes, that's something you can count on. 

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