©UFS
A Summary of Federal Tax
Laws Pertaining To LTCI
LTC05007(1209)
L0409029493[exp0510]
Metropolitan Life Insurance Company • New York, NY 10166 •
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
• Not a Deposit or Other Obligation of Bank • Not FDIC - Insured • Not Insured by Any Federal Government Agency
• Not Issued, Guaranteed or Underwritten by Bank or FDIC • Not a Condition to the Provision or Term of Any
Banking Service or Activity • Policy is an Obligation of the Issuing Insurance Company
Overview
Today we will focus on:
 the tax deductibility of premium paid for a tax-
qualified (TQ) long-term care insurance (LTCI) policy
 the tax treatment of benefits paid to the insured
 scenarios when an employer purchases TQ LTCI
policies for qualified employees
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Tax Qualified Long-Term Care
Insurance Policies
 Health Insurance Portability and
Accountability Act of 1996
(HIPAA) introduced and
defined tax qualified (TQ) longterm care insurance (LTCI)
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Individually Purchased TQ LTCI Policies
When any premium (full or partial) is paid by an individual:
 The premium paid may be used to qualify
for a medical expenses deduction (subject
to limitations). IRC §7702B(a)(4)
 Individual taxpayer must itemize
deductions.
 Deduction is limited to lesser of
actual premium paid or eligible
LTCI premium. IRC §213(d)(1)(D),
213(d)(10)

Medical expense deduction is
allowable to extent that such
expenses (including payment of
eligible LTCI premium) exceed
7.5% of AGI. IRC §213(a)
Maximum Deduction for Qualified LTCI
Premium Under Code §213(d)(10)
Attained Age
Before Close of
Year
2010 Eligible
Premium
40 or Less
$330
More Than 40 But
No More Than 50
$620
More Than 50 But
No More Than 60
$1,230
More Than 60 But
No More Than 70
$3,290
More Than 70
$4,110
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Example:
Individual Tax Deduction (2010 Tax Year)
John, age 55, has a TQ LTCI Policy:
 Assumptions:
Annual TQ LTCI Premium = $2,600
 Adjusted Gross Income (AGI) = $70,000
 Other un-reimbursed medical expenses = $3,000
 2010 TQ maximum age based “eligible LTCI premium”= $1,230

 Calculations:
$70,000 (AGI) x 7.5% = $5,250
 $3,000 + $1,230* = $4,230 - $5,250 = ($1,020)

*Lesser of premium paid or maximum “eligible LTCI premium” for year.
 Deduction:

$0 = Total Medical Expense Deduction (Medical Expenses do
not exceed the 7.5% limitation)
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Federal Tax Treatment of Benefits
Paid from a TQ LTCI Policy
 In general, benefits paid to an insured by a TQ LTCI
policy, regardless of who paid the premium, are excluded
from income and are generally tax-free.
Exceptions may be when benefits are paid on a per diem or other
periodic basis (cash benefit or indemnity).
IRC §7702B(a)(2), §104(a)(3), §105(b)
Continued next slide
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Federal Tax Treatment of Benefits Paid
from a TQ LTCI Policy
2010 Per Diem Limits:
 LTCI benefits paid on a per diem or other periodic
basis under a TQ LTCI policy are excluded from
income subject to a maximum of the excess of the
greater of A OR B:
A) $290 per diem OR
B) actual TQ LTC expenses per day
MINUS
any reimbursement received for these expenses
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Example of the Taxation of LTCI Benefits
Mary owns a Value Policy with Indemnity Rider:





Daily Benefit Amount (DBA):
$300
Daily home care services cost:
$250
2010 IRC per diem limit:
$290
DBA in excess of cost of services:
$50
DBA in excess of the per diem limit: $10
Greater than the cost of services
Mary’s taxable income* is the DBA minus the per diem limit
$300 - $290 = $10
 $10 of the excess payment would be taxable income to Mary
*Taxable Income equals policy benefit payment minus the greater of the per diem limit or long-term
care expenses incurred (assuming no other reimbursements received under another long-term care
insurance policy or as an accelerated death benefit under a life insurance policy).
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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When Employers Sponsor LTCI Programs
 Business owners can offer LTCI to employees on an
employer-paid or voluntary (employee-paid) basis
 TQ LTCI benefits received by insureds (from either
employer-paid or voluntary policies) are generally
tax free (exception is due to a per diem benefit and
IRC per diem limit – see previous slides)
If an individual leaves a company, his/her LTCI coverage is portable,
regardless of who has been paying the premium. If the employer was
paying the premium, the individual would then assume responsibility
for payment of premium.
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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The Business as Taxpayers
 All business types (including C-Corporations, SCorporations, Sole-Proprietor and Partnerships):

The employer generally can deduct 100% of the TQ LTCI
premium paid on behalf of employees, their spouses and
their qualified dependents as a reasonable business
expense (not limited to eligible premium), even if the
employee has ownership in the business
Sole-Proprietors, Partners and certain S-Corporation Shareholders
cannot deduct 100% of the TQ LTCI premiums paid on behalf of
themselves, their spouse, or their qualified dependents, but rather are
limited to the eligible premiums (see “Owners As Taxpayer”)
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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The Business as Taxpayers
C-Corporations (in addition to previous slide):

If an employer pays the TQ LTCI premium for a
shareholder, no deduction is available to the
business and the premium represents dividend
income to the shareholder IRC §162, IRC §7702B(a)(3)
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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The Owners as Taxpayers
 C-Corporation:

The owner is treated as an employee when premium is
paid in relation to the owner’s capacity as an employee.
IRC §162, IRC §7702B(a)(3)
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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The Owners as Taxpayers
 Owners of 2% or more of stock in an S-Corporation, a Sole-
Proprietor and Partners in a Partnership:

Owners are eligible for a ‘self-employed’ health insurance
deduction, which is taken “above the line”

Owners/Partners must declare any employer-paid TQ LTCI
premium paid on behalf of themselves, their spouse and
qualified dependents as income

Owners should be able to deduct the lesser of the actual
premium paid or the full “eligible premium” on their personal
income tax forms
Owners cannot take a deduction if they are eligible to participate in any
other employer subsidized TQ LTCI plan (wholly or partially paid) offered
by any employer of the self-employed individual or the individual’s
spouse IRC §162(l)(2)(C), IRC §213(d)(10)
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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The Employees as Taxpayers
 When any premium (full or partial) is paid by the employer on
behalf of employees or a qualified spouse/dependent:

TQ LTCI premium paid by the employer:

Is not deductible to the employee (or spouse/dependent)

Is not considered income to the employee
 When any premium (full or partial) is paid by the employee or
qualified spouse/dependent:

Their portion of the premium paid may be used to qualify for a
medical expense deduction (subject to limitations outlined on
slide four) IRC §7702B(a)(4)
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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LMNO Company Example
The LMNO Company is offering LTCI to all of it’s
employees as part of a Multi-Life Discount Program




Offers to pay $100 a month in premium for each employee
15 employees take advantage of this opportunity
The company pays:
$100 x 15 employees x 12 months = $18,000/year in
premium
Company potential deduction = $18,000
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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LMNO Company Example (continued)
The employees may be able to deduct the portion of
premium they pay for themselves, following the
individual tax deduction rules
 For example:




Dave’s total premium = $200 a month ($2,400 a year)
LMNO Company pays $100 a month ($1,200 a year)
Dave pays $100 a month ($1,200 a year)
Dave is 52 years old, therefore he can add up to his
“Eligible Premium” of $1,230 (or in this case the total
premium he pays: $1,200) to his other un-reimbursed
medical expenses. If his total un-reimbursed medical
expenses exceed 7.5% of his AGI, he will have a tax
deduction
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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ZYX Consulting Firm Example
Bob, age 68, and Sue, age 65, are a married couple
who own a small business (both own more than 2% of
the stock).
The business purchases TQ LTCI for both of them and their
one employee
 TQ LTCI Annual Premium paid by the business for:

Bob
$5,800
Sue
$4,300
Employee $2,200
Total
$12,300
Subchapter S-Corporation Potential Tax Deduction = $12,300
 The premium paid on behalf of Bob and Sue are reported as
income to each owner equal to premium paid by the Sub-SCorporation.

FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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ZYX Consulting Firm Example
(Continued)
S-Corporation Example (continued):
 Owners’ Personal Tax Deduction Example:
 TQ LTCI premium paid on their behalf, declared as




income = $10,100
2010 "Eligible" premium Bob and Sue = $3,290 each
2010 Tax deduction calculation (filing jointly as a
married couple)
Total combined 2010 "eligible" Premium = $6,580
$6,580* x 100% = $6,580 Potential Tax Deduction
*Lesser of premium paid or maximum “eligible long-term care
insurance premium” for year.
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Non-Discrimination Rules and
Executive Carve-Outs
 An employer may wish to pay the TQ LTCI premium
for a select group of employees - a “carve-out” plan.


There are generally no highly compensated
nondiscrimination rules that apply to TQ LTCI policies.
However, there may be other rules or laws that limit how
an employer can select a specific group of employees in
the payment of employees’ TQ LTCI premium (such as Title
VII of the Civil Rights Act of 1964).
Business owner clients should review all federal and state laws, as well as
ERISA requirements before deciding upon an employer-paid
carve-out plan.
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Additional Information
 TQ LTCI may not be purchased by an employee through
a cafeteria plan. IRC 125(f)
 TQ LTCI premium may not be paid for using a Flexible
Spending Account (FSA). IRC §106(c)
 TQ LTCI premium may be paid for using a Health
Spending Account (HSA). IRC §223(d)(2)(C)
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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LTCI Business Tax Benefit Summary
C-Corp.
S-Corp.
Partnerships
Sole Prop.
Business Tax
Deduction
100% of premiums
paid by ER for EEs, EEs’
spouses & qualified
dependents are
deductible
100% of premiums
paid by ER for EEs, EEs’
spouses & qualified
dependents are
deductible
100% of premiums
paid by ER for EEs, EEs’
spouses & qualified
dependents are
deductible
100% of total premium
paid by ER for EEs, EEs’
spouses & qualified
dependents are
deductible
Personal Tax
Deduction
for Owners
None
Owners can deduct
100% of “eligible”
premium paid for
themselves, their
spouses & qualified
dependents on their
personal tax return
Partners can deduct
100% of “eligible”
premium paid for
themselves, their
spouses & qualified
dependents on their
personal tax return
Owners can deduct
100% of “eligible”
premium paid for
themselves, their
spouse & qualified
dependents on their
personal tax return
Income Tax
to EEs for
Premium
Paid on Their
Behalf
Generally None
Generally None
Generally None
Generally None
Income Tax
to Owners
for Premium
Paid on Their
Behalf
Generally None
Owners must declare
premiums paid on
behalf of themselves,
their spouses and
qualified dependents
as income
Partners must declare
premiums paid on
behalf of themselves,
their spouses and
qualified dependents
as income
Owners must declare
premiums paid on
behalf of themselves,
their spouses and
qualified dependents
as income
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Additional Potential Limitations
Employer’s Tax Deductibility
 It is possible that provisions of the IRC other than
section 7702(B) may, under certain
circumstances, limit the employer’s deduction for
accident and health insurance premium.
For example, the employer is limited to only
deducting reasonable compensation costs.
 To the extent that the payment of premium would be
considered unreasonable compensation, the
employer would not generally be able to take the
deduction.
 Although not entirely clear, it appears unlikely that an
employer could take a current deduction for the
entire premium paid each year on a limited pay
policy, such as a 10-pay plan.

FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Pursuant to IRS Circular 230, MetLife is
providing you with the following notification:
The information contained in this presentation is
not intended to, and cannot be used by anyone
to avoid IRS penalties. This presentation
supports the promotion and marketing of this
long-term care insurance product. The taxpayer
should seek advice based on the taxpayer’s
particular circumstances from an independent
tax advisor.
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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Neither MetLife or its representatives or agents are
permitted to give legal, ERISA or tax advice. Any
discussion of taxes, ERISA or accounting rules included in
or related to this presentation is for your general
informational purposes only. Such discussion does not
purport to be complete or to cover every situation.
Current tax law is subject to interpretation and legislative
change. Tax results and appropriateness of any product for
any specific taxpayer may vary depending on the particular
set of facts and circumstances. Clients should be advised to
consult with and rely on their own legal, accounting, ERISA
and tax advisor(s).
FOR PRODUCER OR BROKER/DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
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