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Long-Term Care Tax Clarifications and Consumer Protections

(Title III, Subtitle C)

Effective date: January 1, 1997 (unless noted otherwise).

Definition of qualified long-term care services

Qualified long-term care ("LTC") services means necessary diagnosis, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services that are required by a chronically ill individual and that are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Exclusion of long-term care proceeds

  • For tax purposes, treats LTC insurance like accident and health insurance.
  • Treats LTC services and premiums as medical expenses (except if paid to a relative), with additional limits on the premium deduction based on age:
    In the case of an individual with an attained age before the close of the taxable year, the limitation on premiums paid for such taxable year is:
    Not more than 40: $200
    More than 40 but not more than 50: $375
    More than 50 but not more than 60: $750
    More than 60 but not more than 70: $2,000
    More than 70: $2,500

  • Allows self-employed individuals a partial deduction for LTC premiums (see Self-Employed Tax Deduction section).
  • Matches the tax treatment of reserves under IRC §807 with the NAIC minimum reserving requirements, but delays the effective date until 1998.
  • Allows employees to exclude from income the value of employer contributions under IRC §106, but does not allow inclusion of LTC insurance in a cafeteria plan.
  • Allows employer deduction of LTC contributions.
  • Per-diem policies:
    • Qualify but are subject to a $175 daily benefit cap or $63,875 annually (indexed by the medical care cost component of the CPI), integrated with other LTC policies.
    • The benefit cap does not apply to reimbursement-type products.
    • Aggregates per diem contracts and per diem LTC riders -- any excess of aggregate per diem payments is taxed unless actual costs for LTC services in excess of the limit are incurred.
    • Adds an integration rule for per diem policies. The $175 daily limit for per diem policies is reduced by the amount of any reimbursement from non-per diem LTC contracts.
    • Adds a special rule that per diem policies issued on or before 7/31/96 are not required to meet the integration rules.
    • Requests a study of the impact, including marketing and other effects, of the per diem limits.
  • Allows tax-favored treatment for existing policies which complied with state standards at the time of issuance for policies issued before January 1, 1997. Allows tax-free exchange of existing LTC contracts for new qualified LTC contracts until 1998.
  • Does not allow withdrawal from individual retirement accounts for the purchase of LTC insurance or tax-free exchanges of life insurance for LTC insurance.
  • Adds tax qualified treatment for certain state-maintained plans.

Definition of long-term care insurance contract

  • A long-term care insurance contract is defined as any insurance contract that provides only coverage of qualified long-term care services and that meets other requirements.
    • The contract is guaranteed renewable.
    • The contract does not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed.
    • Refunds (other than refunds on the death of the insured or complete surrender or cancellation of the contract) and dividends under the contract may be used only to reduce future premiums or increase future benefits.
    • The contract generally does not pay or reimburse expenses reimbursable under Medicare (except where Medicare is a secondary payor, or the contract makes per diem or other periodic payments without regard to expenses.)
  • Adds a requirement that the policy must include at least five of the six activities of daily living (ADLs) listed (eating, toileting, transferring, bathing, dressing, and continence). The chronically ill benefit trigger is being unable to perform at least two ADLs (out of either five or six ADLs) for at least 90 days due to a loss of functional capacity, having a similar level of disability within the previous 12 months as diagnosed by a licensed health care practitioner as having the same level of disability as determined by the Secretary of HHS. Severe cognitive impairment without dependency in ADLs (for example, Alzheimer's patients) is a separate trigger.
  • Requires coordination with Medicare (see Medicare Duplication section).
  • Allows LTC riders for chronically ill; includes LTC riders in the accelerated death benefit provisions.

Consumer protections

  • Allows states to adopt more stringent consumer protection standards.
  • Includes consumer protection provisions of the January 1993 NAIC Model Act and Regulations; includes mandatory offer of non-forfeiture. Provides that the Secretary of the Treasury determines if the requirements of the NAIC Model Act and Regulation have been met.
  • Establishes a new excise tax for failure to meet certain consumer protections, but applies it to the issuance of qualified LTC contracts rather than to all LTC contracts.
  • Requires carrier to report all LTC benefits, including total payments, taxpayer identification and type of contract.

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