Long-Term Care Insurance It’s an Increasingly Popular and Valuable Employee Benefit

Most of us are living longer into our 70s, 80s, and even 90s. With this comes the challenge of assuring ourselves of quality medical care during our retirement years.

Medicare and supplemental insurance policies will, hopefully, meet most of these needs. But what if we are in need of ongoing home care or nursing home care, also referred to as long-term care (LTC)? Long-term care is assistance with activities of daily living (ADLs), such as bathing, dressing, eating, toileting, and moving about and in and out of beds or chairs. Limitations such as incontinence, Alzheimer’s disease, and other forms of dementia also require daily or 24-hour care. Home care services can range from custodial or supportive care services to skilled care.

Custodial or supportive care is typically provided to individuals by paraprofessionals, such as home health aides who assist with ADLs and homemakers or others who provide companionship and assist with activities such as shopping, transportation, light housekeeping, and similar tasks. Skilled home care is provided to individuals who are recovering from an acute illness or event and is typically delivered by nurses, therapists, and certified nursing assistants, who work under the direction of a physician, nurse practitioners, or registered nurses. Nursing homes provide care to residents with chronic conditions requiring permanent care or short-term rehabilitation.

These services are not normally covered by traditional government or private health and medical insurance policies and programs. Based on a 2006 survey funded by the MetLife Mature Market Institute, the national average costs of nursing home care were as follows:

The national average hourly rates for home health care were as follows:

Without LTC insurance, the costs for such care can rapidly deplete a family’s savings and retirement assets. The change in the Medicaid “look back” from three years to 60 months makes it even more difficult to transfer family assets and still qualify for state assistance. Therefore, for those who don’t buy or can’t afford to buy LTC insurance, it will be more difficult to preserve and pass on estate assets to heirs if LTC is needed. For those with moderate-size estates, it can be viewed as an insurance policy to preserve your estate for the benefit of your heirs as well as long-term care insurance.

LTC insurance has been around for years, and most policies have been sold to individuals. Individually purchased LTC premiums are deductible, but only as an itemized deduction and only in an amount not in excess of the lower of actual premiums paid or a statutorily prescribed amount that is indexed and changes annually, referred to as ‘eligible long-term care premiums.’ The eligible LTC premiums for 2007 are:

Today, more employers are offering LTC policies to their employees through either group policies or individual policies, in which either the employer, the employee or both share the cost of the premiums. These policies provide protection not only for the employee but also their spouse and parents. The policies usually have a portability feature that enables employees to continue coverage if their employment is terminated. Employers can also provide LTC coverage as a tax-favored benefit to employees under IRC Sec. 7702B.

Employer-provided coverage for LTC insurance may be particularly attractive to closely held businesses as a tax-deductible employee benefit that is non-taxable to the employees. In the long term, LTC insurance may prove to be one of the most valuable benefits employers can offer.

OK, so one may ask, “why aren’t more employers offering this benefit?” First, LTC insurance is not inexpensive, and employees’ reluctance to share the cost may be prohibitive to many small to medium-size employers. Second, partners, members of limited liability companies (LLCs) electing to be treated as partnerships, sole proprietors, and more-than-2{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} shareholder-employees of S corporations are not eligible for the same tax-favored treatment allowed their employees. There is a tax benefit available to these owners, but it is limited to the lower of the actual premiums paid or the “eligible long-term care premiums” amount, as outlined above. However, this deduction may be taken by these self-employed individuals as an “above-the-line” deduction in calculating adjusted gross income on the individual Form 1040.

For example, a 51-year-old employee of a sole proprietor, LLC partnership, or S corporation, whose LTC premiums paid by their employer are $5,300, can exclude the entire amount from income. The self-employed owner, however, whose own LTC premiums equal the same, can only exclude $1,100. If the LTC policy also covers the spouse, the self-employed income exclusion is increased by the applicable ‘eligible LTC premium’ amount of the spouse. Self-employed owners, excluding S corporation owners, can enjoy the same benefits as their employees if they employ a spouse who qualifies for the LTC insurance coverage, but check with your accountant before doing this.

With the importance that state and federal legislators verbally place on health care coverage for all, it is ironic, and appears to be a major oversight, that the rules disallow the same tax benefit to the above small business owners, knowing that more small business owners are motivated to offer benefits that they too can enjoy. It is also unfortunate that LTC insurance is specifically excluded from the list of qualified benefits a cafeteria plan is allowed to provide, and LTC expenses reimbursed under a flexible spending account (FSA) are not excluded from income.

The good news is owner employees of C corporations and professional service corporations not electing S-corporation status can enjoy the same non-taxable LTC insurance benefits as their employees as long as they set up their program under the same rules and guidelines required for accident and health insurance benefit programs. For example, a medical group operating as a C corporation can set up an LTC insurance benefit for its employees as long as it meets the antidiscrimination rules; does not allow employees to take the money in lieu of the benefit; ensures that the policies are guaranteed renewable, cannot provide coverage other than LTC services, and cannot provide for cash surrender value, among other requirements; and is not provided under a cafeteria plan. Employee contributions to the premiums must be made on an after-tax basis.

LTC insurance premiums may be paid with distributions from a health savings account (HSA), but are includible in gross income to the extent the distribution exceeds the “eligible LTC premiums” as determined annually on an age basis.

Notwithstanding the above, instituting an LTC insurance benefit program could be very beneficial to physician owners if structured properly. LTC policies have various riders, options, and payment arrangements that can be tailored to a medical group’s needs and budget. Premiums can be structured to be lifetime amounts, which are lower but may be subject to future increases or can be set at a higher amount to be paid up in, say, five to 10 years. It is advisable to work with your accountant and an agent experienced and well-versed in LTC insurance policies, as it is a very specialized area with many complex rules.

James B. Calnan, CPA, is partner-in-charge of the Health Care Services Division of Meyers Brothers Kalicka, P.C., Holyoke, certified public accountants and business consultants; (413) 536-8510.