It is time for us to face the harsh realities of the current Medicaid system. Short of totally impoverishing ourselves, and then somehow surviving for three years, we will never qualify for Medicaid in order to pay for nursing home expenses. The solution to this problem, as with other risks and uncertainties that we face daily in our personal lives or in our business, is to insure for the possibility that we or our spouses may require nursing home care. While statistics show that only one out of 1,200 Americans will be the victim of a fire or theft, we are all insured for that contingency. Yet, estimates are that two in five Americans over the age of 75 will spend some time in a long-term care facility. As we well know, a nursing home stay can be far more financially devastating than a theft or a property or casualty loss. With an average cost of between $5,000-$6,000 a month, a year or two in a nursing home can quickly deplete one's life's savings.
Fortunately, the federal government, in their infinite wisdom, has also come to the realization that the current system is not working. The answer they are propounding is individual insurance, and they are doing so by making long-term care (LTC) insurance more "tax appealing." As part of the Health Insurance Portability and Accountability Act of 1996 (the Act), premiums for LTC insurance are now treated as health insurance premiums. This means that the premiums are deductible for individuals and businesses alike. What's more, the benefit is not taxable when received, provided that the benefit received does not exceed the actual nursing home expense incurred.
Corporate employers may deduct the entire amount of the premium paid on behalf of an employee, even if the premium exceeds the amount allowable for the employee's age. (More on this in the discussion of individually purchased policies.) Furthermore, the employee does not have to report the premiums or the ultimate benefit received as income.
From the employer's standpoint, there is no requirement that LTC insurance benefits be provided in a nondiscriminatory manner. You can provide this benefit to your highly compensated key employees without worrying about having to include the rank and file. Although this type of benefit would normally only appeal to older, highly compensated employees, we all know from our experience with pension plans how burdensome the nondiscrimination rules can be, especially if employees choose not to participate in the plan. With this benefit, the owner/employee can establish a plan which covers only himself or herself, although we do recommend that the plan be in writing and be approved by the company's Board of Directors, as with the old medical reimbursement plans.
For individuals purchasing their own insurance, the deductibility of the premium is subject to some limitations. For instance, as with any other medical deductions, the amount must exceed 7.5% of the taxpayer's adjusted gross income (AGI). In addition, there are restrictions based upon the age of the taxpayer/policyholder. A 40-year-old may only deduct $200 of any premium paid, while someone age 70 and above may deduct up to $2,500.
Self-employed individuals may deduct the cost of the premium without regard to the 7.5% floor; however, the Act phases in the percentage of medical expenses which are now deductible. In 1997, the amount allowable as a deduction is 40%, and gradually rises to 80% in 2006. Note that the self-employed person is still limited to the age-based deduction when calculating the 40% deduction. For example, if a 40-year-old self-employed accountant paid $500 in long-term care premiums, in addition to $6,000 in other medical insurance premiums, her deduction would be $6,000 + $200 (the amount of the deductible LTC premium) x .40.
Depending upon one's medical expenses, a self-employed individual may be better off deducting these expenses under section 213 as a personal medical expense, even after the 7.5% floor.
As with death and taxes, no one wants to think about the possibility of needing long-term care. However, as we spend hundreds of hours and thousands of dollars on our business, financial and estate planning, doesn't it make sense to spend a little more to insure that what we have worked so hard for will not be depleted by the need for long-term care, especially when the government is now making it tax advantageous to purchase LTC insurance?
If you have been considering the possibility of purchasing an LTC policy, there is no better time, especially for a small business owner.