Tuesday, October 13, 2009

Long Term Care Insurance

Recently the IRS released guidance on the deductibility of Long Term Care Insurance. Long Term Care Insurance, has been around for many years, but compared to other insurance products this type of policy is considered a new type of insurance. These plans are designed to cover the rising costs associated with caring for yourself or your family as you grow older. There are many providers for this insurance, with many different coverage types, I will avoid the discussion of whether a policy makes sense for ‘you’ but rather focus on the concerns of a business owner considering the use of this policy.

Self Employed individuals:
Self employed individuals can generally deduct any LTC premiums paid for themselves, their spouses or dependents. In order to deduct these amounts, business owners must have a employer sponsored plan and deductibility would be limited to details specified in the plan document. Therefore LLC’s, S-Corps, and sole proprietors can deduct premiums for coverage of qualified members, subject to specific limits. Members are not allowed to participate if this coverage is available through their spouse, or through any other employer the owner works for, in addition to his business. In addition, businesses must have earned income to off-set with this payment, otherwise the amounts are non-deductible. Lastly, the amounts may be limited according to IRS rate tables that limit the extent of deductions for these types of contracts based upon age of the recipient (eligible LTC premium amount).

Employer/Employee relationships:
When an employer has employees and offers the employee group LTC coverage as a benefit of employment according to a plan written by the corporation, there are many potential benefits. One of the major benefits is that LTC insurance premiums are fully deductible and are not limited to the same income and personal age limitations that self employed individuals have to deal with (not limited to eligible LTC premium amount). Also benefits received are not included in the employee’s income and the employee can receive the LTC benefits tax-free. In this case, if you were an owner of a C-Corp, whom was also an employee, in theory there is no major difference between you and your other employees. Therefore, as long as your plan covers the employee group without consideration of ownership status, the owner-employee would be eligible for LTC insurance benefits.

Although, I have tried to provide plain-English explanations to this topic, please do not misconstrue this to mean that these plans are simple. If you have LTC planning considerations, please do yourself a favor and find a good insurance provider, and CPA that can go through potential benefits, and avoid costly mistakes associated with Long Term Care Insurance.

If you would like additional information on this topic please consult:
Code Sections: IRC 7702B; IRC 213(d)(1); IRC 162(1); IRC 162(a); IRC 106(a)
Finn, Daniel R., ‘Long Term Care Insurance and Tax Planning’ Journal of Accountancy. PP 44-47. August 2008 Edition.