1. 1 Long Term Care Insurance products underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of The Guardian Life Insurance Company of America, New York, NY. 8509-3-05 Tax Treatment of Qualified Long Term Care Insurance A Continuing Education Course for Agents & Brokers For educational & training purposes only. Not for use with the general public.

2. 2 Today’s Agenda  Overview of Long Term Care  HIPAA 1996 & Long Term Care Insurance  Defining tax qualified LTCI  Tax treatment of LTCI for individuals  Tax treatment of LTCI for business owners  Health Savings Accounts & LTCI  State tax treatment of LTCI

3. 3 What Is Long Term Care?  Skilled, custodial or maintenance care assistance with activities of daily living (ADLs)  Wide range of services for those with… Chronic illness Permanent disability Cognitive impairment

4. 4 Where is LTC Provided? Home Health Care Adult Day Care Assisted Living Nursing Home Source: The Wide Circle of Caregiving. Kaiser Family Foundation. et al, June, 2002

5. 5 Who Needs Long Term Care?  35 million people in the U. S. are over age 65 6 million need long term care*  77 million baby boomers will begin turning 65 in 2011 *Long Term Care Planning: A Dollar and Sense Guide. United Seniors Health Council, January 2002 "Study: Baby boomers could 'strengthen community life,'" Janet Kornblum, USA Today, June 14,2004

6. 6 Who Needs Long Term Care?  Longer life expectancy = greater probability of need for care  People over age 85… the fastest growing segment of our population 50%+ will need nursing care* Source: A Profile of Older Americans, Administration on Aging, 2002

7. 7 Long Term Care is a Family Issue  Care-giving: difficult decisions & economic consequences  Geographically dispersed families  Baby Boomers: The “sandwich” generation  Two income families (the caregiver works)

8. 8 Source: National Study by the National Alliance for Care giving and the National Center on Women and Aging, Brandeis University Formal Adjustments to Work Schedule Due to Caregiving Use Sick Days/ Vacation Time Decreased Hours Leave of Absence Full- to Part-Time Quit Job Retired Early

9. 9 Annual Average Cost of Care*  Home care - $23,556 Based on hourly rate of $18.12 at 5 hrs/visit and 5 visits/wk  Nursing home - $70,080 Based on private room rate of $192.00  Nursing home (high cost areas) - $93,947 *Metlife Mature Market Institute Market Survey of Nursing Home and Home Care Costs, September 2004

10. 10 The Cost of Care  Annual Nursing Home Costs are projected to increase at 5.8% per year. Based on the previous example: Source: Health Spending Projections Through 2013, Office of the Actuary, Centers for Medicare and Medicaid Services, February 2004 Rate of Inflation 2004201420242034 $70,080 5%$114,153$185,943$302,882 5.8%$123,155$216,425$380,333 6%$125,503$224,756$402,504

11. 11 Who Pays for Long Term Care? Source: www.ltcfeds.com, 2000 Nursing Home Home Care

12. 12 Medicare & Private Health Insurance Are Not The Answer  Medicare only pays for “skilled” care designed to get you better most long term care is non-skilled care  Examples of non-skilled care: oxygen therapy or respiratory therapy for emphysema patients catheter maintenance colostomy drain help with bathing, dressing or other ADLs Source: Shelton Marketing Services, Inc. 2003

13. 13 Medicaid Is The Wrong Answer  Medicaid pays for what you do not want: nursing home care  Medicaid is welfare: stringent income & asset requirements to qualify  Limits your choices

14. 14 Medicaid Limitations*  Generally below $2,000 in assets  Spousal monthly income allowance $1561  Look Back Period 3 years 5 years for transfers into certain trusts  Unlimited penalty period * Refer to your state’s Medicaid rules

15. 15 Is Medicaid “Planning” the Solution?  Converts countable assets into inaccessible assets by giving them away or placing them in trust.  It’s a guessing game impossible to judge the correct timing who do you plan for?  If not done right, assets are still subject to mandated estate recovery upon death

16. 16 LTC: Growing Consumer Awareness  71% of Americans claim to be aware of the problem*  50% of Americans age 45 or older have discussed the possible need for long term care with their adult children*  American workers rank the importance for LTCI equal to that of group life insurance** *American Council of Life Insurers, 2003 ** Insurance Employee Benefit Survey. Prudential Financial, 2003

17. 17 Tax Treatment of Qualified Long Term Care Insurance

18. 18 National Association of Insurance Commissioners  NAIC Model Regulations, 1993 Must provide at least 12 months of coverage Must be reimbursement or indemnity contracts Must cover treatment provided in settings other than hospitals

19. 19 Health Insurance Portability and Accountability Act of 1996 (HIPAA)  Federal law that defined tax qualified LTCI  Qualified LTCI policies receive favorable tax treatment  Any LTCI policy issued prior to January 1, 1997 is grandfathered

20. 20 Tax Qualified LTCI: Federal Guidelines  Required Benefit Triggers Chronically ill-unable to perform 2 ADLs Disability must be expected to last at least 90 days or Cognitive impairment must require “substantial supervision”  Must follow a plan of care prescribed by a licensed health care provider

21. 21 Benefit Triggers  Chronically Ill Requires substantial assistance with at least two of six activities of daily living (ADLs) ADLs: dressing, eating, bathing, toileting, transferring and continence Requires assistance for more than 90 days

22. 22 Benefit Triggers  Cognitive Impairment Deterioration or loss in intellectual capacity  Substantial supervision Another person must protect you from threats to your health & safety, such as associated with Alzheimer’s – e.g. supervision of patient

23. 23 Tax Qualified LTCI: Other Requirements  Must be guaranteed renewable  May not, in general, duplicate Medicare  Must meet NAIC regulations  Must have no cash surrender value  Must apply all refunds or dividends as a reduction of future premiums or an increase to future benefits, except upon death or total policy surrender

24. 24 Tax Treatment of Qualified LTCI  Qualified LTCI is treated as accident & health insurance 1  Premiums can be deductible 2  Benefits received are not generally taxable income 3  Un-reimbursed cost of qualified LTC services are deductible as medical expenses 1 IRC Sec. 7702B(a)(3) 2 IRC Sec. 213(d)(1)(D), 213(a) 3 IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1)

25. 25 Tax Qualified LTCI Benefits  100% of the proceeds on a reimbursement policy are tax free Policy benefit$300/day Actual cost of care$250/day Reimbursement amount$250 Total Taxable Benefit$0

26. 26 Tax Qualified LTCI Benefits  With indemnity policies the first $240 or actual cost of care is tax free Policy benefit$300/day Actual cost of care$250/day Taxable benefit$50/day

27. 27 Taxation of Premiums: Individuals  For income tax purposes, qualified LTCI premiums qualify as a medical care expense.  Deduction is subject to age-based eligible premium limitations, which are adjusted annually. IRC Sec. 213(d)(1)(D)

28. 28 2005 Eligible Premium Amounts Eligible LTCI Premium Age*Limits 40 or younger$270 41-50$510 51-60$1,020 61-70$2,720 71 or older$3,400

29. 29 Taxation of Premiums: Individuals  Only eligible premium is deductible Must itemize deduction on schedule A line 1 Added to other unreimbursed medical expenses Amount that exceeds 7.5% of Adjusted Gross Income (AGI) is deductible

30. 30 Married Couple (ages 62 & 58) Adjusted Gross Income$65,000 Eligible premium Age 62$ 2,720 Age 58$ 1,020 Other medical expenses$ 2,200 Total medical expenses$ 5,940 7.5% of $65,000$ (4,875) Excess which can be deducted$ 1,165

31. 31 Employer-Paid LTCI  Employer may deduct 100% of premiums paid on behalf of W-2 employees & spouses 1 Age based eligible premium limits do not apply  C-Corp. may deduct 100% of premiums for: Owner-employees,spouses, tax dependents, & retirees 1 PL 104-491, IRC Sec. 7702B(a)(3)

32. 32 Employer-Paid LTCI  Premium excluded from employee’s income 1  Benefit is generally tax free to employee 2 1 IRC Sec. 106(a), 7702B(a)(3) 2 IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1)

33. 33 Employer-Paid LTCI  Employer designates or “carves-out” specific classes of employees that will be covered with LTCI. 1 1 IRC Sec. 1.105-5, 1.106-1

34. 34 Employer-Paid LTCI  May not be paid through: Cafeteria plan 1 Flexible spending account 2 Salary reduction 1 IRC Sec. 125(f) 2 IRC Sec. 106(c)(1)

35. 35 Sole Proprietorship  May deduct 100% of eligible premium for: Owner Spouse Tax dependents i.e. parents & other relatives  Form 1040 line 30  May deduct 100% of actual premium for: Non-owner employees Their spouses

36. 36 Sole Proprietorship Eligible Premium Deduction Self-employed 55 year old owner. Premium for owner $ 3,280 Owner’s adjusted gross income (AGI) $ 100,000 Deduction for eligible premium $ ( 1,020) Taxable Income $ 98,980

37. 37 Sole Proprietorship Total Premium Deduction  55 year old owner employs his 49 year old wife  Wife is the owner of the joint policy  She and her owner/husband are the insureds Premium $ 4,264 Company’s Taxable Income $100,000 Deduction for actual premium $ 4,264 Taxable Income $ 95,736

38. 38 Sole Proprietorship Paid up (10 Pay) Deduction  55 year old owner employs his 49 year old wife  Wife is the owner of the joint policy  She and her owner/husband are the insureds. Premium $ 10,248 Company’s Taxable Income $100,000 Deduction for actual premium $ 10,248 Taxable Income $ 89,752

39. 39 Partnerships & S-Corporation Shareholders*  Premiums are deductible by the firm 1  Premiums represent income to these owners 2  These owners may deduct the eligible premium 3 *Greater than 2% shareholder 1 IRC Sec. 162 (a) 2 IRC Sec. 707(c) 3 IRC Sec. 162(I), 213(D),213D(10)

40. 40 Rules of Attribution: S-Corporations Situation:  Spouse of shareholder is a W-2 employee of the corporation  Corporation pays & deducts premium for both  Premium must be added to income of both shareholder & spouse

41. 41 Health Savings Accounts (HSAs)  Tax exempt account established to pay qualified medical expenses  Individuals, under 65, covered by a high deductible health plan (HDHP)  Contributions are tax deductible  Distributions for qualified medical expenses are tax-free

42. 42 Health Savings Accounts (HSAs)  HSA Contribution Limits (2005) the lesser of the annual deductible or $2,650 for single / $5,250 family “catch-up” for 55+ starts at $600 in 2005  HDHP Limitations minimum deductible: $1,000 single / $2,000 family maximum out-of-pocket: $5,150 single / $10,200 family

43. 43 HSA’s & Long Term Care Insurance  Distributions generally cannot be used to pay health insurance premiums  However, long-term care premiums are treated as qualified medical expenses  HSA’s offered under a cafeteria plan may be used to pay LTCI premiums  Tax deduction limited to the eligible premium

44. 44 State Tax Treatment of LTCI  More than half of states offer some form of tax incentive on an individual’s or employer’s state taxes for 2004  17 states offered some form of above the line tax incentive (not subject to exceeding a % of AGI) without respect to income.  See the handout - Quick Reference Guide to State Tax Treatment of Long Term Care Insurance

45. 45 Summary  Overview of Long Term Care  HIPAA 1996 & Long Term Care Insurance  Defining tax qualified LTCI  Tax treatment of LTCI for individuals  Tax treatment of LTCI for business owners  Health Savings Accounts & LTCI  State tax treatment of LTCI

46. 46 Long Term Care Insurance products underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of The Guardian Life Insurance Company of America, New York, NY. 8509-3-05 Tax Treatment of Qualified Long Term Care Insurance A Continuing Education Course for Agents & Brokers For educational & training purposes only. Not for use with the general public.