The Health Insurance Portability and Accountability Act of 1996 (HIPAA) Long-Term Care Tax Issues LC2439 4/02 FOR PRODUCER USER ONLY

Top Reasons You Need Long-Term Care Insurance 2 Maintain your independence Protect your family Provide you with choices Help to protect your retirement savings and family assets Tax advantages Peace of mind

With the Health Insurance Portability and Accountability Act (HIPAA) of 1996, the Government sent a clear message that it will be your responsibility to take care of your Long-Term Care needs. Who pays for Long-Term Care? 3

Individuals *2002 limits in Health Insurance Portability and Accountability Act 4 The Health Insurance Portability and Accountability Act of 1996 (HIPAA) Qualified LTC premiums and expenses are deductible as a medical expense if they exceed 7.5% of Adjusted Gross Income. Your deduction is subject to attained age.* –Age 40 or younger$240 –41-50$450 –51-60$900 –61-70$2,390 –Over age 70$2,990

Individuals 5 If a qualified policy pays benefits on a 'per diem' basis, you can exclude from taxable income up to $210 per day of those benefits.* LTC premiums may also be eligible for state income tax benefits. Many states offer tax deductions or tax credits for LTC premiums. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) *2002 limits in Health Insurance Portability and Accountability Act

C-Corporations 6 An employer who pays premiums for an employee is entitled to deduct that premium as a business expense, as they do for medical insurance (Section 162 of IRC). Deduction also applies to the cost of coverage paid for the employee’s spouse and dependents. Premiums paid by an employer on behalf of employees will not be treated as income to those employees. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

C-Corporations 7 Can the C-Corporation discriminate in deciding who to provide benefits for? The C-Corp... Can discriminate “reasonably.” Can not design a plan which, by its terms, only covers owners. Can cover select employees, based on a reasonable classification, even if the end result is that only owner employees are currently covered. There should be a reasonable expectation that others may, at some point, be eligible under the classification. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

C-Corporations 8 An example: A classification where the only employees covered are those who have over 10 years of service earn over $100,000/year may be reasonable, even if only the owner- employee and a key employee currently qualify. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

C-Corporations 9 Can a C-Corporation provide benefits for a retiree? As long as the plan is “reasonably discriminatory” in providing benefits for a class of retired former employees, the C-Corporation can provide the benefit, without taxable income to the retiree. It’s much like a Corporation providing ongoing health insurance for select retirees. Check to see if the closely-held family business once employed the current owners’ parents; they may be candidates for deductible LTC coverage as retirees. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

C-Corporations 10 A C-Corporation can provide benefits for an employee’s spouse and dependents. What about an employee’s parents? Parents can be dependents but they must qualify as dependents under IRS rules. If parents are not dependents, a C-Corporation can still provide coverage for them and deduct the premium. However, the employee will have to include the premium as taxable income. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

C-Corporations 11 Can a C-Corporation provide LTC policies for its Board of Directors? The C-Corporation can provide this benefit and deduct the premiums paid. However, Board members must include the premiums as compensation. Board members are not employees and can not be covered solely in their capacity as Board members. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

C-Corporations 12 Can a C-Corporation deduct a 10-pay or single-pay premium? There are no parallels in health insurance for accelerated premiums. It could be argued that the C-Corporation should have to amortize the deduction over a period of time. Direction from the IRS may be coming in either regulations or private letter rulings. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

C-Corporations 13 Can an employee be given a choice between an LTC benefit or receiving additional cash? If an employee has the choice of receiving cash or an LTC benefit, if he selects the LTC benefit, the benefit becomes taxable income. Employees can not be offered a cash alternative, if the LTC benefit is to be a non- includable benefit. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

PC  Professional Corporations 14 PC’s pay taxes in the highest corporate tax rate from dollar one, without the normal tax brackets C-Corporations enjoy. For the most part, PC’s are treated the same as regular C-Corporations. The PC can deduct its premium payment as a business expense, and the employee is not required to include the premium as taxable income. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Self-Employed 15 If the qualified LTC premium is paid by the business, an individual may deduct 70% of the eligible premium as an above-the-line business expense in The remaining 30% of eligible premium is added to other medical expenses, where the individual can deduct the excess over 7.5% of Adjusted Gross Income as an itemized deduction. The eligible deduction rises to 100% in The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

S-Corporations 16 If a participating employee is more than a 2% shareholder, premiums are deductible by the S-Corporation. However, premiums are included in the employee/shareholder’s gross income. The employee/shareholder – may deduct 70% of the eligible premium as an above-the- line business expense in – add the 30% of eligible premium to other medical expenses, deducting the excess over 7.5% as an itemized deduction in The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

S-Corporations 17 The spouse of a 2%+ employee/shareholder, who is also an employee, cannot be covered on a deductible/not includable basis  attribution rules apply. If a participating employee is not a 2%+ shareholder, premiums are deductible by the S-Corporation. Premiums are not included in the employee’s gross income. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Partnerships and LLC’s 18 If a participating employee is a partner or member, premiums are deductible by the business. However, premiums are included in the employee’s gross income. The employee – may deduct 70% of eligible premium as an above-the-line business expense in – add the 30% of eligible premium to other medical expenses, deducting the excess over 7.5% as an itemized deduction in The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Accelerated Premiums 19 The deduction is limited to the eligible premium amount, not the actual premium, for: – partners – members – self-employed persons – 2%+ S-Corporation shareholders The employee’s current deductions will be significantly limited. The employee’s future deductions will be sacrificed when premiums terminate. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Cafeteria Plans / Flexible Spending Plans 20 LTC cannot currently be offered. Congress is considering legislation that may liberalize the rules in the future. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Estate Planning 21 Current gift tax annual exclusion: $11,000 per recipient. A direct gift of an LTC premium, where the check is made out to the insurance carrier, is not subject to the annual exclusion limit. Example: Father can make a gift of $11,000 and directly pay the LTC premium for the son, without the gift tax liability. The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

CNA LONG-TERM CARE … (We Speak From Experience) LC2439 4/02 FOR PRODUCER USER ONLY