The Health Insurance Portability Act of 1996 created guidelines for tax-qualified long-term care insurance policies. The provisions define what a tax-qualified policy is and the deductibility for individuals and corporations.
Prior to 1997, the self-employed, partners in a partnership or LLC, and 2% or more shareholders in an S corporation could deduct only 30% of their health insurance costs for themselves, spouses and dependents. Currently, health insurance is 100% deductible.
The first year that the self-employed, partners, and 2% or greater shareholders in an S Corporation were on equal footing with all employees regarding the deductibility of health insurance was 2003. If you are one of these people, it may be time to review your health insurance benefits program. If you have been considering long-term care coverage, it may be possible to add it as a company benefit and not have it “cost” much more than your health insurance costs did on an after-tax basis in 2002.
Qualified Long-Term Care Insurance
For an accident and health insurance policy to meet the guidelines to be deductible by the employer (while not included in the gross income of the employee), the policy must be a qualified policy. Many policies issued prior to 1996 were not qualified. It is assumed for this article that most policies issued today should meet these qualifications. However, you should check with your agent.
The IRS’ Requirements Include:
- The contract is guaranteed renewable;
- The contract does not provide for a cash-surrender value or other money that can be paid, assigned or pledged as collateral;
- Refunds and dividends may be used only to reduce future premiums or increase future benefits;
- The contract meets consumer protection provisions, and
- The contract generally does not pay or reimburse expenses reimbursable under Medicare.
A contract does not fail to qualify because it provides for payment on a per diem or other periodic basis without regard to actual expenses incurred during the period. The offering of a long-term care insurance contract that coordinates its benefits with those provided under Medicare or when Medicare is only a secondary payer is not prohibited.
Read our article “Long-Term Care Insurance” to aid in determining if you need this coverage.
Must Benefit Employees
A health or accident plan must be provided for the benefit of employees to receive favorable tax treatment. Favorable tax treatment means that employer provided coverage is not included in the taxable income of the employee, and it is a deductible expense for the employer. It can cover one or more employees, and different plans can be provided for different employees.
You should review the article “Employer Provided Health Benefits” to understand some of the “dos and don’ts” regarding employer plans, if you have different classes of employees to whom you will offer different benefit packages.
Cafeteria Plans and Flexible Spending Arrangements
If you offer long-term care insurance through your company to your employees, they will not receive favorable tax treatment if the premiums are paid through a cafeteria plan or flexible spending arrangement. This is not the case with standard medical insurance policies.
It is our opinion that it cannot be part of a CODA – Cash or Deferred Arrangement (i.e., the employee chooses cash or the policy). This means that in most cases, if you wish to add a tax-advantaged plan to your benefits package, it will be necessary to renegotiate your salary and benefits packages with your employees.
If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
