Information for Business Owners and Businesses
There are a number of benefits for business owners and businesses who provide long term care insurance for themselves or their employees. One of the major benefits is a tax benefit. We'll look at that in more detail below.
Why Even Provide Long Term Care Insurance Coverage?
Many businesses pay for a long term care policy for the business owner, executives or key employees. This is known as an Executive Carve-Out. Because you can discriminate, within a business on whose policy is paid for by the company, it makes it possible to provide a long term care benefit to a select group of employees. Many times a paid up policy is used as a retirement benefit, a "golden handcuff", or a way to keep a key employee from leaving the company. Long term care insurance is one of the hottest benefits being provided today by employers.
Smaller companies often choose to pay for long term care insurance for the owners and top key employees only. More commonly, businesses are offering long term care insurance to the rest of the employees. There are a couple of ways this is typically being done.
- The company pays for a full long term care policy for the employee. This is very rare and would typically be done if almost all employees are family members or have some sort of close relationship.
- The company pays for a small base policy. The employee can then purchase additional coverage at their own expense. Their payments can be done through payroll deduction and the policies are portable (they can take it with them) if they leave.
- The company pays for a set percentage or dollar amount toward a long term care policy for the employee. The employee is then expected to pay the difference in cost.
- The company pays nothing toward a long term care insurance policy, but makes it available for all employees to purchase if they would like. The employer typically allows an agent to conduct education sessions and meet with employees to answer their questions.
- Many company plans, regardless of how they are implemented include spouses and often times other family members.
We at Imagine Insurance Advisors are experts in working with business owners on what type of coverage and which approach would be best for their company. We work first to cover the owners and key employees and then work to implement a plan for the remaining employees. We understand that benefits provided to employees already consume a large part of a company's budget. We can work with you to help design what will work best for you.
Tax Benefits of Long Term Care Insurance
There are two types of long term care policies: Tax Qualified and Non-Tax Qualified. Most long-term care policies are Tax Qualified. This means that they may be eligible for tax deductions. Non-Tax Qualified policies are currently not eligible for any tax deductions and they do not have to meet any of the standards that the Government requires. Benefits received from a Tax Qualified plan are income tax free.
All Tax Qualified policies are required to use the same criteria to qualify when benefits should be paid under a policy. Included in the benefit triggers for a Tax Qualified policy are the following:
Inability to Perform ADLs: The insured is expected to be unable to perform without assistance at least 2 or more activities of daily living (ADLs). The activities of daily living are: bathing, eating, dressing, toileting, transferring, and continence. This includes the expected need that care will be needed for at least 90 days.
Cognitive Impairment: The insured has a severe cognitive impairment where it is determined they are a threat to themselves or others.
The premiums paid for Tax Qualified policies are eligible for both Federal and State tax deductions. While Allison Harris recommends that you consult your accountant for the exact treatment of your premiums, here is a short summary.
Federal Taxes Deductions
Premium payments purchased by an individual are now included as a personal medical expense if you itemize your taxes. Medical expenses in excess of 7 1/2% of your adjusted gross income are tax deductible. Based upon your age, a portion of your premium payment for long term care insurance may actually help you reach the 7 1/2%. The amounts increase each year based on the Medical Consumer Price Index. Consult the annual tax guide or your accountant for the current yearly amount allowed.
Long-term care insurance premiums up to the limits for individuals are also treated like health insurance for the self-employed tax deduction. Self-employed individuals can write off 100% of the individual limit regardless of the 7 1/2 % AGI limit. Self-employed status include those in sole proprietorships, partnerships, and other types of corporations (Limited Liability Corporation (LLC), or an S-Corporation).
Premium payments are fully deductible as a reasonable and necessary business expense; similar to traditional health insurance premiums. This can apply to the owners, their spouses and dependents, and all employees. Employer-paid long-term care insurance is excluded from the employee's gross income and the benefits received are tax-free.
Partnerships, S-Corporations and Limited Liability Corporations (LLC)
Premium payments purchased for a partner or owners are treated like those for a self-employed person. Premium payments for non-partners or non-owners are fully deductible as a reasonable and necessary business expense - similar to traditional health insurance premiums. Employer-paid long-term care insurance is excluded from the employees gross income and the benefits received are tax-free.