Is long term care insurance tax deductible for self employed

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• November 17th, 2021

These premiums -- what the policyholder pays the insurance company to keep the policy in force -- are deductible for the taxpayer, his or her spouse and other dependents as long as they exceed 7.5 percent of your adjusted gross income. Those who are self-employed can take the amount of the premium as a deduction as long as they made a net profit; their medical expenses do not have to exceed a certain percentage of their income. What is deductible as a medical expense is spelled out in Internal Revenue Service Publication 502.

However, there is a limit on how large a premium can be deducted, depending on the age of the taxpayer at the end of the year. Following are the deductibility limits for the current and past year. Any premium amounts for the year above these limits are not considered to be a medical expense. (The limits are adjusted annually with inflation.)

To be "qualified," policies must adhere to regulations established by the National Association of Insurance Commissioners. Among the requirements are that the policy must offer the consumer the options of "inflation" and "nonforfeiture" protection, although the consumer can choose not to purchase these features.

The policies must also offer both activities of daily living (ADL) and cognitive impairment triggers, but may not offer a medical necessity trigger. "Triggers" are conditions that must be present for a policy to be activated. Under the ADL trigger, benefits may begin only when the beneficiary needs assistance with at least two of six ADLs. The ADLs are: eating, toileting, transferring, bathing, dressing or continence. In addition, a licensed health care practitioner must certify that the need for assistance with the ADLs is reasonably expected to continue for at least 90 days. Under a cognitive impairment trigger, coverage begins when the individual has been certified to require substantial supervision to protect him or her from threats to health and safety due to cognitive impairment.

Policies purchased before January 1, 1997, are grandfathered and treated as "qualified" as long as they have been approved by the insurance commissioner of the state in which they are sold. Most individual policies must receive approval from the insurance commission in the state in which they are sold, while most group policies do not require this approval. To determine whether a particular policy will be grandfathered, policyholders should check with their insurance broker or with their state's insurance commission.

The Taxation of Benefits

Benefits from reimbursement policies, which pay for the actual services a beneficiary receives, are not included in income. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary's total qualified long-term care expenses or $390 per day (in 2022), whichever is greater. 

Last Modified: 11/17/2021

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?

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.

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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.

OR

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.

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Federal Taxes Deductions

Individuals

Self-Employed

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).

C-Corporations

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.

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