Tax Advantages of Long-Term Care Insurance for Employers
By Kelby Gelston
As the American population continues to age, planning for the possibility of
needing long-term care has moved into the spotlight. Two of the biggest
proponents of planning for a possible long-term care event are the federal and
state governments and through tax incentives now available, they are encouraging
employers to help.
In 2005, the National Center for Health Statistics announced record life
expectancies for both men and women in their annual mortality report – 77.6
years for men and 80.1 years for women. The report concludes that advances in
modern medicine and declines in death rates from major causes such as heart disease
and cancer mean that people are living much longer today; however, living longer
can mean that later years can be fraught with illness and infirmity.
Awareness of Long-Term Care Needs
Several months ago, Governor Robert Ehrlich sent a letter to all Maryland
residents between the ages of 50 and 70, urging them to “Own Your Own Future”.
The initiative, part of a federal project, was designed to make people aware
that the state government cannot and will not be able to care for the entire
senior population as they incur the costs associated with aging. The federal
government is also well-aware of this issue and therefore provides long-term
care insurance as a voluntary benefit for their employees and family members.
Since Medicare and Medicaid were not designed to cover the expenses of long-term
care for the general population, the federal government is encouraging
individuals to take responsibility for their own futures. One form this
encouragement takes is provision for tax advantages for employers who
incorporate long-term care insurance in their benefit packages. While many more
individuals today have an understanding of the importance of planning for a
long-term care event and the benefits that long-term care insurance can provide,
far fewer business owners fully understand the possible tax advantages available
to them by incorporating long-term care insurance into benefits packages offered
to their employees.
The following is not a complete summary of the tax benefits that offering
long-term care insurance can provide, but will highlight some key components for
various business entities.
Sole Proprietors
Can deduct his/her eligible premium from business income on Form 1040. (IR
Code 162(1),162(1)(2)(c) & 213(d))
Entire premium is still subject to self-employment tax. (IR Code 162(1)(4))
Can deduct the eligible premium paid by the business for their spouse and tax
dependents, such as parents. (IR Code 162(1), 162(1)(2)(c) & 213(d))
Are not subject to antidiscrimination rules and can discriminate by
class. (Treasury Regulations 1.105-5, 1.106-1)
C Corporations
Can deduct the entire premium paid for an employee, regardless of whether
he/she is an owner. (IR Code 162(a))
The premium is excluded from the employee’s income. (IR Code 106(a),
105(b))
Can deduct the entire premium it paid for a shareholder’s spouse and tax
dependents, such as parents. (IR Code 162(1), 162(1)(2)(c) & 213(d))
Subchapter S Corporations
Shareholders of more than 2 percent (IR Code 1372(b)) can deduct only eligible
premiums as follows (Revenue Ruling 91-26):
The company can pay the entire premium and deduct it. (IR Code 162(a))
Shareholders can deduct the eligible premium as self-employed health insurance
premium on Form 1040. (IR Code 162(1), 213(d)(1)(D) & 213(d)(10))
Partnerships
Owners of more than 2 percent of partnerships (IR Code 1372(b)) can deduct only
eligible premiums, as follows (Revenue Ruling 91-26):
Partnership can pay the entire premium and deduct it. (IR Code 162(a))
Partner can deduct the eligible premium as a self employed health insurance
premium on Form 1040. (IR Code 162(1), 213(d)(1)(D) & 213(d)(10))
The partnership can deduct the actual premiums paid for other employees
from business income. (IR Code 162(a))
The premium is excluded from the employee’s income, and benefits are
tax-free. (IR Code 106(a),105(b))
Limited Liability Companies
An LLC with one owner is treated as a sole proprietorship.
An LLC with more than one owner is treated as a partnership.
Kelby Gelston, CLTC, is an associate of FranklinMorris, Coordinating Broker
for the Bar Associations Insurance Agency, Inc. For more information on the
insurance benefits available to MSBA members, visit our website at
www.msba.org/departments/membership/baia/franklinmorris.pdf.
