LTCI Tax Incentives for Employer-Sponsored Plans

Employers don’t have to contribute but there are tax incentives that favor the employer who wants to pay part or the entire premium. Here’s a quick summary of the LTCI tax incentives for employers offering long-term care insurance to their employees.

• 100 percent of premiums for employees, spouses and dependents are a tax-deductible business expense to employers of all types just like health insurance.
• Deductibility varies for the owners, however, by type of corporation: self-employed business owners can deduct an age-based amount of premium on themselves, their spouses and dependents as part of their self-employed health insurance deduction and owners of C-Corporations can deduct 100%, including limited pay premium of 10 years or longer and including return of premium. If a return of premium rider is deducted by a corporation, it will likely be taxable income to the beneficiary, but it is money the beneficiary would not have received!
• Employers can select by class (tenure, salary, job title) for an employer contribution or for the offering itself.
• Premium contributions are not taxable income to employees.
• Benefits up to [$310] a day in [2012] ([$9,300] per month) are tax free to employees whether or not the employer contributes to the premium. Greater amounts are tax-free as long as the benefit doesn’t exceed the cost of qualified care.   (This is an advantage LTC insurance has over disability income insurance.)
• Employers can make long-term care insurance more affordable for employees by offering Health Savings Accounts since an age-based amount of long-term care insurance premium can be paid with pre-tax dollars through an HSA.
• LTC insurance cannot be included in a cafeteria plan under Section 125, nor can LTC services be reimbursed by a Flexible Spending Account. The tax code specifically excludes any product which is advertised, marketed, or offered as long-term care insurance from the definition of qualified benefits that can be offered through a Section 125 plan. [IRC § 7702B(a)(1). IRC § 125(f)] (The only exception to this is if LTCI premium is paid out of a health savings account that was funded through a Section 125 plan.)
• The purchase of a qualified long-term care insurance policy cannot be financed through a salary reduction arrangement for the same reason it can’t be funded with pre-tax dollars from a Section 125 cafeteria plan.

Contributing to the premium not only demonstrates the importance the employer attaches to the benefit, but also frees up dollars that employees can use to purchase coverage for spouses and other eligible family members. Many employers are deciding it is more cost effective to contribute to the premium for a worksite LTCI plan rather than incurring costs due to caregiver absences and distractions. The Partnership for Long-Term Care makes this benefit even more appealing to employees as it allows asset protection equal to the benefits paid out by the insurance if the insurance isn’t enough and the policyholder has to apply for Medicaid to help pay for LTC. (See “The Partnership for Long-Term Care” under Laws and Regulations on this site for more information.)