Advanced Underwriting Consultants

Question of the Day – January 31

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Can the owner of a C corporation realize any tax advantages by running the premium for a qualified long term care policy through her business?

Answer: Yes.  Qualified long term care contracts are generally treated as health insurance for the purpose of the rules.

C corporation employers have the greatest number of potential advantages for implementing LTCi plans for their employees.

1. The premium is deductible by the corporation. LTCi premiums payable by a company are deductible as ordinary and necessary business expenses under Code Section 162.

2. There is no practical limit to the amount of premium that can be paid by the employer’s for an employee’s policy. The amount of premium that a business contributes to LTCi on behalf of an employee is virtually unlimited—subject only to the idea that the employee’s overall compensation package is reasonable.

3. The company can pick the employees to be covered by the plan. Health plans provided by an employer through insurance coverage do not need to follow the nondiscrimination rules of Section 105(h) of the Code.  Code Sections 105 and 106 make reference to health plans sponsored by an employer.  Treasury Regulations Section 1.105-5 provides

a plan may cover one or more employees, and there may be different plans for different employees or classes of employees.  An accident or health plan may be insured or noninsured, and it is not necessary that the plan be in writing or that the employee’s rights to benefits under the plan be enforceable.

4. The premium paid by the corporation is not included in the employee’s taxable income. Code Section 106 says that the premiums paid by an employer to a health plan are not included in the employee’s taxable income.

5. The benefits paid to the insured are tax free. Section 105(b), however, provides that an employee does not have to include in taxable income most payments received for medical care, as defined in Code Section 213(d).  Section 213(d) says benefits paid under a tax-qualified LTCi contract are payments for medical care.

6. Spouse and dependent family members of participating employees may also be included under the plan. Section 105(b) of the Code allows employers to include spouses and income-tax dependents of participating employees within the scope of a health plan.  Since LTCi plans are health plans for the purpose of Section 105(b), that means that the spouse or income-tax dependents of a participating employee can also be included in the LTCi plan so long as the employer permits.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – January 30

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Can a self-employed individual realize any tax advantages by running the premium for a qualified long term care policy through her business?

Answer: Yes.  Qualified long term care contracts are generally treated as health insurance for the purpose of the rules.

Those owning more than 2% of self-employed entities are considered to be self-employed for the purpose of health insurance tax rules.  Traditionally, the amount of health insurance premium that could be excluded from the income of a self-employed person was limited.

Since 2003, self-employed individuals can exclude 100% of most business-paid health insurance premiums from taxable income.  The amount of LTCi premium that can be excluded from income for self-employed taxpayers is limited to the age-based LTCi table amount.

Attained Age Before the Close of the Taxable Year 2012
40 or younger $350
Older than 40 but not more than 50 $660
Older than 50 but not more than 60 $1,310
Older than 60 but not more than 70 $3,500
Older than 70 $4,370

The amounts paid for health insurance premiums for the self-employed are also subject to self-employment taxes—unlike the premiums paid for non-owner employees.

How does the calculation of taxable income work for a self-employed individual?

Say that Phil, age 58, is a sole proprietor whose business has potentially taxable earnings in 2012, prior to consideration LTCi premiums, of $100,000.  Phil’s business is paying an annual premium of $1,800 for Phil’s tax-qualified LTCi policy.

According to the age-based LTCi table, the maximum premium Phil can exclude from his business taxable income in 2012 is $1,310.  So the business’s taxable income for federal income tax purposes would be $98,690, and his taxable income for self-employment tax purposes would be $100,000.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – January 26

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: What are the tax advantages to an individual in purchasing a qualified long term care contract?

Answer: There are two main potential advantages of LTCi for the insured policyowner:

  1. The long term care benefit is income tax free when paid.
  2. The premium paid for LTCi is potentially income tax deductible.

The maximum tax-free benefit payable under a tax-qualified LTC policy in 2012 is the greater of

  • $310 per day, or
  • actual amounts paid for qualified long term care services.

Qualified long term care services are the necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services that are:

1. Required by a chronically ill individual, and

2. Provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Not every taxpayer will be able to deduct the premiums for LTCi.  The premiums are considered to be a medical expense, and are only currently deductible by those taxpayers who itemize.  Further, the medical expense deduction is only available to the extent that total medical expenses exceed 7.5% of the taxpayer’s adjusted gross income (AGI) in 2012.

To make deductibility even more problematic, the amount of premium that is potentially deductible is limited to the lesser of the actual amount paid, or the LTCi age-based table amount, shown on the following chart:

Attained Age Before the Close of the Taxable Year 2012
40 or younger $350
Older than 40 but not more than 50 $660
Older than 50 but not more than 60 $1,310
Older than 60 but not more than 70 $3,500
Older than 70 $4,370

Here’s an example with regard to premium deductibility.  Say that Martha, age 64, is a single taxpayer who has $80,000 of adjusted gross income in 2009.  She is paying $4,200 annually for her LTCi policy.  Martha has $4,500 of other medical expenses, and she itemizes on her tax return.

Martha must first calculate the AGI threshold for her medical expense deduction.  Multiplying $80,000 by 7.5% equals $6,000.  Only those medical expenses in excess of $6,000 are deductible.

Martha is paying $4,200 a year for LTCi, but the chart amount for her age is only $3,500.  She must use the smaller chart number.  Adding her other medical expenses of $4,500 to her chart number of $3,500 yields a sum of $8,000.  That exceeds the AGI threshold by $2,000—which is the amount of her medical expense deduction for 2012.

Thinking of it another way from Martha’s perspective—only $2,000 of her $4,200 LTCi premium is deductible.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.