Comparing Qualified and Non-Qualified Plans

 

 

HIPAA

At one time there was little said about needing institutional care. It was assumed that family and friends would do whatever was necessary for ailing members of their family and community. Today even the federal government has recognized the need for funding long-term medical care. Funding the cost of institutionalization can be achieved through other means besides long-term care insurance, but for most individuals that is the most sensible avenue. In 1996, the U.S. Congress enacted the Health Insurance Portability and Accountability Act, generally referred to as HIPAA. It may also be known as the Kennedy-Kassebaum Bill. President Bill Clinton signed this act into law in August of 1996.

 

There is still some question as to whether or not benefits from long-term care policies are taxable. An earlier House Resolution 3101 declared long-term care insurance the same as health and accident insurance with respect to its tax status. Until then, long-term care insurance was in a sort of tax limbo. No one was quite sure if the premiums and benefits were tax-favored like those of regular health and accident policies. Although HIPAA answered that question to some extent, there are still many disagreements regarding the taxation of premiums and benefits.

 

 

Existing LTC Policies

Tax-qualified long-term care contracts will not see their benefits taxed regardless of how the debates end. HIPAA legislation created the tax qualified plans. If a long-term care insurance contract meets the Act's requirements it will receive specific tax advantages. All other policies are considered to be non-tax qualified. There was an exception made for all long-term care policies issued before HIPAA had been state approved. These policies were "grandfathered" in. Therefore, they are considered to be tax-qualified even though they did not meet the requirements that were spelled out in the legislation. This was done to prevent mass replacement of policies for those who had favorable health, leaving only the sick on existing policies. That would, of course, created an adverse situation for the companies that had issued those policies. If, however, the existing policies are altered, then the grandfathered tax-qualified status is lost.

 

 

Benefits Triggers

One might assume that all insureds would want to purchase only tax-qualified policies if they are to receive favorable tax treatment. In fact, this is not necessarily true. When the Act was passed, it set specific terms regarding tax-qualified benefits, benefit triggers, provisions and so forth. Perhaps the most dramatic difference between the qualified and non-qualified plans are the benefit triggers. A benefit trigger is the circumstance (typically medical in nature) that "triggers" the start of insurance benefits. For most types of insurance, the circumstance triggering benefit payment from the insurance company is fairly easy to understand. For example, in life insurance, when the insured dies, benefits are paid. While there may be variations that allow cash to be withdrawn, as a benefit trigger, this is pretty easy to understand. In health insurance, if the insured breaks a leg, benefits are paid by the insurance company after a deductible is met. When it comes to nursing home policies, however, benefit payments are not necessarily so easily understood.

 

The non-qualified plans and the pre-qualified plans paid benefits when it was determined that it was medically necessary for the insured to receive a type of care that was covered under their policy. If the insured's doctor felt that it was necessary for his patient to be in a nursing home, his written statement was all that was required to trigger benefit payments. Some policies might also require an inability to perform some type of activity (called activity of daily living or ADL) such as bathing oneself without assistance. Another formal benefit trigger was cognitive impairment, the inability to reason or a loss of mental capacity due to some organic disorder such as Alzheimer's disease.

 

 

Activities of Daily Living (ADL)

Before anyone had ever heard of tax-qualified long-term care plans, insurance policies could require the inability to perform a certain number of activities of daily living (ADLs), which were spelled out in the policy. The actual number of ADLs sometimes varied since not all companies included the same amount. Typically, there were between five and seven listed. The number of ADLs, which could no longer be performed by the insured, could vary. Some policies required only one, while others required more than one. If a policy listed 7 ADLs and only required an inadequacy in performance of one, benefits were easier to obtain than one which listed 5 ADLs with an inadequacy in performance of one (1 out of 7 are better odds than 1 out of 5). Few consumers recognized the importance of this. In fact, agents often did not recognize it either.

 

Today, most non-tax qualified plans list seven activities of daily living, while tax-qualified plans list six. It is possible for some plans to have a different number of ADLs, unless the state has regulated them (and many have). This alone gives benefit triggers a better chance with the non-qualified plans since they include an additional ADL. The benefit trigger that has been eliminated in the qualified plans is ambulating. Ambulating is the ability to get around adequately without assistance.

 

Definitions for the activities of daily living are important since they affect how benefits will be paid. The non-qualified plans will typically list seven. These include:

 

1.      Eating, which means adequately reaching for, picking up and grasping a utensil or cup and getting the food or drink to the mouth. Some definitions also include the ability to clean one's face and hands afterwards.

2.      Bathing, which means cleaning oneself using a tub, shower or sponge bath. This would include filling the sink or tub with water, managing faucets, getting in and out safely and raising one's arms to wash and dry their hair.

3.      Continence, which means the ability to control bowel and bladder functions. This can also include the use of ostomy or catheter receptacles and the use of diapers or disposable barrier pads.

4.      Dressing, which means putting on and taking off clothing, which is appropriate for the current season. Some definitions include the use of special devices such as back or leg braces, corsets, elastic stockings or artificial limbs and splints.

5.      Toileting, which means getting on and off a toilet or commode safely. If a commode or bedpan is used, it also means emptying it. Toileting includes the ability to properly clean oneself afterwards.

6.      Transferring, which means moving from one sitting or lying position to another. This would include getting out of bed in the morning and sitting down in a chair or getting up out of a chair. Some definitions include repositioning to promote circulation and prevent skin breakdowns.

7.      Ambulating, which means walking or moving around inside or outside of the home, regardless of the use of a cane, crutches or braces. This is the ADL that has been eliminated from the tax-qualified plans.

 

The elimination of ambulating is a serious change. This is especially true for some medical conditions that drain physical strength and affect the persons ability to move without assistance. The inability to move around means the person may not be able to fix meals, get to the bathroom, or even get up to answer a ringing telephone.

 

The six ADLs that are included under HIPAAs federal guidelines include:

1.      Eating, which means feeding oneself by getting food in the body from a receptacle (such as a plate, cup or table) or by a feeding tube or intravenously.

2.      Bathing, which means washing oneself by sponge bath or in either a tub or shower, including the act of getting into or out of a tub or shower.

3.      Continence, which means the ability to maintain control of bowel and bladder function; or when unable to maintain control of bowel or bladder function, the ability to perform associated personal hygiene (including caring for a catheter or colostomy bag).

4.      Dressing, which means putting on and taking off all items of clothing and any necessary braces, fasteners or artificial limbs.

5.      Toileting, which means getting to and from the toilet, getting on or off the toilet, and performing associated personal hygiene.

6.      Transferring, which means the ability to move into or out of a bed, a chair or wheelchair.

 

The definitions, you'll notice, are somewhat different although the meanings remain very close.

 

The removal of ambulation from the federal tax-qualified guidelines may especially affect benefits for home care. The loss of ambulation is almost always part of the need for care in the home. Even so, the qualified plans do offer consumer protection requirements. As a result, there is a great deal of disagreement about which plan, qualified or non-qualified, should be sold.

 

 

Understanding the Difference in Benefit Triggers

Few policyholders purchased their long-term care policy to receive a tax deduction. They purchased their policy for health care protection. Therefore, if the ability to use the policy is limited when health care is needed, was it really worth having a tax benefit? Agents must be very careful about explaining the benefit trigger difference when presenting policies. Some of the states initially resisted approval of tax-qualified plans because they felt the benefit triggers were more restrictive than their state requirements. Such was the case in California, for example.

 

It is vital that agents fully explain the differences between HIPAAs tax-qualified plans and their states non-tax qualified plans. By fully explaining the difference at the point of sale, the agent is allowing the consumer to do several things:

 

         Decide whether the tax benefit of the premium deduction will benefit them personally;

         Decide whether the loss of the ambulating ADL could affect them personally (especially if home care benefits are important to them); and

         Fully understand the circumstances that will allow benefits to be paid under their policy. Most policyholders want to understand this and it is in the agent's best interest to be sure that they do.

 

 

Federal Criteria

The federally qualified (tax-qualified) plans do provide worthwhile benefits, even though ambulating is not an ADL. Federally qualified plans that provide coverage for long-term care services (nursing facility, home care, and comprehensive) must base payment benefits on the following criteria:

 

1.      A licensed health practitioner independent of the insurance company must prescribe all services under a plan of care. The licensed health care practitioner does not necessarily have to be a doctor. It can also be a registered professional nurse or a licensed social worker.

2.      The insured must be chronically ill by virtue of either: (a) being unable to perform 2 out of the 6 ADLs, or (b) having a severe impairment in cognitive ability.

3.      The licensed health care practitioner must certify that either: (a) the policyholder is unable to perform at least two of the six activities of daily living, without substantial assistance from another person, due to a loss of functional capacity for no less than 90 days or more, or (b) the insured requires substantial supervision to protect themselves from threats to their health or safety due to a severe cognitive impairment, such as Alzheimer's disease.

4.      The licensed health care practitioner must recertify that these requirements have been met every 12 months. The insurance company may not deduct the cost of the recertification from the policy benefit maximums.

 

Although currently the insured must be either chronically ill by virtue of the ADLs or due to cognitive impairment, it is possible that the federal government could expand these requirements at some point. If that were to happen, each state would have to adopt the new triggers as well.

 

Definitions are extremely important in policies and tax-qualified plans are no exception. Because certain phrases were used for specific meanings, IRS Notice 97-31 has established guidance for many of these terms, including:

 

Substantial Assistance in the ADLs means hands on assistance and standby assistance.

 

Hands-On Assistance means the physical assistance of another person without which the individual would be unable to perform the activity of daily living (ADL).

 

Standby Assistance means the presence of another person within arms reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the activity of daily living. The IRS Notice gives the examples of being ready to catch the person if they fall, or seemed to be ready to fall, while getting into or out of the bathtub or shower or being ready to remove food from the person's throat if the individual chokes while eating. Overall, standby assistance is just what it indicates: being near to help when necessary.

 

Severe Cognitive Impairment means a loss or deterioration in intellectual capacity that is comparable to Alzheimer's disease and similar forms of irreversible dementia and measured by clinical evidence and standardized tests that reliably measure such impairment. The impairment may be in either their short-term or long-term memory. It would include the ability to know people, places, or time. It would include their deductive or abstract reasoning, as well.

 

Substantial Supervision is used in reference to cognitive impairment. It means continual supervision, including verbal cueing, by another person that is necessary to protect the severely cognitively impaired person from threats to their health or safety. Such impaired people are prone, for example, to wander away. Substantial supervision is needed to prevent this.

 

It is not possible to use the activities of daily living to measure severe cognitive impairment. Individuals with such impairment are often able to perform all of the ADLs without difficulty. Even so, they are unable to care for themselves due to their cognitive impairment. Therefore, the ADLs are not used when assessing this.

 

State laws are not necessarily the same as federal requirements. In fact, it would be surprising if they were the same. Non-qualified plans will meet the state's requirements while qualified plans will meet the federal requirements. Because states do differ, it is not always easy to state the differences between qualified and non-qualified long-term care policies. Generally speaking, however, it is safe to say that federally qualified plans are harder to receive benefits under than are the state's non-tax qualified plans.

 

 

State Laws May Vary

Of course, any agent selling long-term care policies must know and understand their own state's policy requirements. This is true of any type of policy, not just long-term care contracts. Most insurance companies marketing LTC policies have printed guidelines for their agents. For example, in Washington state, CNA printed the following for their policyholders:

Non-Tax Qualified

Tax-Qualified

1. Medical necessity CAN be a benefit trigger.

1. Medical necessity CANNOT be a benefit trigger.

2. Activities of daily living:

a. 2 of 5 ADL's trigger benefits

b. Defined as needing regular human assistance or supervision.

2. Activities of daily living:

a. 2 of 6 trigger benefits

b. Defined as "unable to perform (without substantial assistance from another individual)"

c. Licensed health care practitioner must certify expected inability to perform ADL's for at least 90 days or more.

3. Cognitive impairment:

a. Not described as "severe"

b. Definition does not apply substantial supervision" test.

3. Cognitive impairment

a. Described as "severe"

b. Definition applies substantial supervision test.

 

* CNA stated: We will continue to process claims based on cognitive impairment as we have for non-tax qualified products once the certification from the Licensed Health Care Practitioner has been received.

 

 

Policy Conversions Were Offered

Most insurers who had previously issued non-tax qualified plans offered their policyholders the option of converting to qualified contracts. While there are differing opinions on this, many professionals felt that switching to a tax-qualified contract was a good idea since:

 

1.      Some industry experts believe that benefits received under the current non-tax qualified policies may be taxed as ordinary income. The tax qualified LTC policies would not be.

2.      If the insured qualifies, their premiums for tax-qualified long-term care insurance can be deducted up to certain limits. To do this, the insured must itemize their deductions.

 

There are two separate tax issues involved in the tax qualified long-term care policies. The first involves the ability to deduct part or all of the premiums paid. This is possible only under specific conditions. The possibility of the deduction began with the 1997 tax year premiums for tax qualified long-term care plans. The premiums can be itemized as deductions for medical expenses the same as one does for other health care premiums. Of course, if the taxpayer does not itemize their returns, this does them little good. Even so, this is an important change in the tax code because it gives recognition to the importance of protecting oneself against the possibility of long-term nursing home confinements.

 

For those who do itemize, they can deduct their regular medical expenses (including LTC premiums) if they exceed 7.5 percent of their adjusted gross income (AGI). For long-term care insurance, the maximum deduction a taxpayer can take for their premiums depends upon their age. The amounts that may be deducted are based on specific age brackets: age 40 and below, age 41-50, age 51-60, age 61-70, and age 71 and older. The specific dollar figures that may be deducted change periodically so we have chosen not to list the amounts in this course. Each advancing age bracket may deduct more than the previous one. The deduction is based on an individual, so a married couple would each be able to claim the deduction (if they itemize their year end taxes) applicable to their age.

 

How will this affect those that do itemize their tax returns? It depends upon their tax rate:

 

Issue Age At End of Tax year:

* 2004 Premium

Limitation:

 

 

15%

 

 

28%

 

 

31%

40 and less

$260

$35

$ 64

$ 71

41 - 50

$490

$65

$120

$133

51 - 60

$980

$129

$241

$267

61 - 70

$2,600

$344

$641

$710

70 and over

$3,250

$429

$801

$887

* These figures are based on the premium deductions allowed for the 2004 tax year. Subsequent tax years may vary.

 

Only those who itemize their federal taxes at the end of the year and whose medical expenses exceed 7.5 percent of their AGI will be able to take advantage of this premium deduction. Those who do not itemize or who do not have enough medical expenses (including the LTC premiums) will not benefit even though they bought a qualified LTC policy.

 

 

Who Will Benefit?

Obviously not every senior taxpayer will benefit from the allowed maximum deductions allowed for qualified long-term care premiums. First of all, they are maximum deductions. Some may qualify for only partial deductions rather than the maximum, depending upon their personal situation. To deduct the premiums, several conditions must exist. First of all, the taxpayer must itemize their deductions on their federal tax returns. Because qualified plans are based on federal legislation, deductions also apply only to federal tax returns. Many senior policyholders do not itemize because they do not have enough deductions to allow it. Nationally, less than 30 percent of all federal taxpayers itemize according to "Statistics of Income", Department of Treasury. This 30 percent reflects all taxpayers; even less itemize that are 65 and older.

 

Secondly, the amount of total medical expenses (counting the premium) must exceed 7.5% of the taxpayer's adjusted gross income (AGI). Since many of these taxpayers pay very little of their medical expenses, this is unlikely. Reimbursed expenses will not count towards this percentage amount.

 

In the past, benefits from health care policies have not been reported as income, but it appears that the Internal Revenue Service would like to change this. If it does change, those with qualified long-term care policies will not be taxed on the benefits they receive. Those with non-tax qualified plans may have to declare the payment they received for qualified care as income. Of course, then they would also be able to declare the expenses they paid. Whether or not this will balance out will depend upon multiple individual factors.

 

 

Taxing Medical Benefits Under HIPAA

It is important to examine the Health Insurance Portability and Accountability Act of 1996 (HIPAA) as it relates to taxation of benefits. Starting in the tax year 1997, it offered premium deductions for those who itemized and had enough medical deductions to claim. In addition, out-of-pocket costs for long-term care became eligible itemized medical expense deductions, which may help to meet the amount of medical deductions needed. Benefits received under a long-term care health insurance contract were excluded from income limited to the greater of $175 per day, which was $63,875 annually, or the actual costs incurred for qualified long-term care services during the period, less the amount of reimbursements received. This $175 per day limitation was indexed for inflation in increments of $10 from 1998 on. Obviously, since we are now well past 1997, these figures have changed. Consult current tax legislation figures to see current amounts.

 

Specific benefits are covered under HIPAA. Qualified long-term care services include the necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, maintenance or personal care services that are required by a chronically ill person. These services must be supplied under a plan of care prescribed by a licensed health care practitioner, which includes other people besides a doctor. Long-term care services do not include help for household maintenance, such as cleaning or repair work.

 

 

Defining Chronically Ill

It is necessary to understand the definition of "chronically ill." A chronically ill person is one who has been certified within the previous year by a licensed health care practitioner as unable to perform at least two activities of daily living for a period of no less than 90 days due to a loss of functional capacity, or requiring substantial supervision to protect the person from threats to health and safety due to severe cognitive impairment.

 

 

Qualifying Contracts for Tax-Favored Status

To benefit from the tax-favored status, the contract must meet certain provisions. It must provide only coverage for qualified long-term care services and meet the following requirements:

 

1.      The contract must be guaranteed renewable;

2.      The contract can not provide for a cash-surrender value or other money that can be paid, assigned or pledged as collateral for a loan or be borrowed;

3.      Refunds and dividends under the contract may be used only to reduce future premiums or to increase future benefits;

4.      The contract must meet consumer protection provisions;

5.      The contract generally does not pay or reimburse expenses reimbursable under Medicare.

 

The deduction and benefit exclusions generally apply to contracts issued after December 31st, 1996. A grandfather rule provided that contracts issued earlier and that met the long-term care insurance requirements of the state where issued, would be treated as a qualified long-term care contract.

 

 

Accelerated Death Benefits

Accelerated death benefits can be available under certain conditions. A taxpayer who is terminally ill, or in some cases chronically ill, may elect to receive accelerated life insurance death benefits tax-free. Accelerated death benefits must be aggregated with long-term care benefits in determining whether the income exclusion limitations have been exceeded.

 

 

Purchasing Contracts for Financial Protection

Whether or not to purchase a long-term care insurance policy should never be made upon the tax implications of the purchase. Such a policy is intended to protect against the catastrophic losses of confinement to a nursing home or for losses due to prolonged illness at home. It would be hard to imagine anyone buying such a policy purely for the tax favorable status that might be available. Unfortunately, some agents have focused more on the tax benefits than on the desired financial protection such policies offer. The primary considerations are always the benefits offered or the overall protection available. Even so, tax status issues will be part of the discussion between the consumer and agent. At no time should an agent attempt to advise on tax issues unless they have specific training in tax issues (such as a CPA would possess).

 

Since insurers are required to issue 1099 forms to

both the recipient of the benefits and the IRS,

questions on taxation will continue.

 

 

Determining Tax Treatment

Many companies have put out bulletins to their agents regarding tax issues. A single statement in a bulletin dated 05/20/97 from an insurer when tax debates first began is typical of most: "It is not known how non-qualified policies will be treated for tax purposes." Of course, we know that non-qualified policies cannot deduct the premiums from their itemized tax forms, but the questions go beyond that. What is not known is how the IRS will handle benefits received. Since insurers are required to issue 1099 forms to both the recipient of the benefits and the IRS, questions on taxation will continue. The 1099 form is specific to long-term care policies and will be labeled 1099-LTC. Both qualified and non-qualified policyholders will receive this form. The form states: "Amounts paid under a qualified long-term care insurance contract are excluded from your income." This statement would suggest that non-tax qualified contracts would have to claim such benefits. Even though the statement suggests this, however, it may not be true. Certified Public Accountants or tax attorneys should answer tax related questions never the agent. Recently these taxation debates seem to be on hold as primarily qualified plans are sold, but it is likely that the IRS will eventually come back to it and make specific determinations.

 

Agents who were worrying about which plan to offer (qualified or non-tax qualified) just a few years ago now seem to be primarily marketing tax qualified plans. As a result, these tax worries seem to be forgotten for now. Apparently many agents felt that the possibility of taxation of benefits was strong enough to move in favor of tax-qualified policies. One insurer called the tax qualified plans a "safe harbor" providing protection if benefit taxation becomes a reality. On the other hand, the elimination of ambulation as an activity of daily living in tax-qualified plans is a definite disadvantage. This is especially true when it comes to home care benefits.

 

It comes down to each person deciding for him or herself. It is probably best for agents to present both qualified and nonqualified options so that the consumer can make the choice. In that way, if the final choice is not satisfactory, the agent will not be at fault. It would probably be wise for each agent to document the products shown.

 

 

Pre-1997 Long-Term Care Policies

Pre-1997 policies were grandfathered in as tax qualified. Even though these pre-1997 policies were granted tax-favorable status, any material changes will revoke this status. It is the definition of "material changes" that has raised questions. Initially, even a premium change could have constituted a material change in the policy. If this were the case, insurance companies could cause a material change simply by raising the premium rate.

 

Consumers had the impression that they were guaranteed tax-favored status when their pre-1997 policies were grandfathered in as tax qualified plans. That was not actually the case since insureds still had to file an itemized statement and meet the 7.5 percent AGI requirement.

 

The Kansas Insurance Department said in comments that if it was possible to lose the tax-favored status by virtually any change implemented it would have a serious impact on the long-term care market in their state. The federal law did not in any way indicate that a change in the contract language would result in a pre-1997 policy becoming non-qualified, the Kansas department said. The IRS stance is contrary to the intent of HIPAA, Kansas felt. This was not the only state to question the taxation status of long-term care policies.

 

Actually HIPAA did not specify the circumstances in which changes to a contract would be so significant that they would cause a new policy to be issued. Insurance companies have historically decided which changes indicated a new policy rather than a modification to an existing policy. State law also provided guidelines. The aim is generally to preserve the pre-1997 grandfathered policy.

 

Since consumers are not likely to be aware of these issues, they may make changes that would allow them to lose their tax-favored status. The American Council of Life Insurance, which said its member companies represent 80 percent of the long-term care insurance market, was extremely troubled by the very narrow interpretation of the grandfather rule contained in the IRS Notice 97-31. The group called it inconsistent with statutory changes and would lead to the inappropriate loss of grandfathering of many policy contracts.

 

 

The Treasury Responds With Exceptions

Enough groups were concerned about the material modification issue, that clarifications had to be made by the Treasury. They clarified what a material modification represented by applying "exceptions." This meant that specific changes were not considered grand enough to require a new policy; rather they were considered endorsements to the existing policy. These exceptions included:

1.      premium mode changes;

2.      classwide premium increases or decreases;

3.      after issue application of a spousal discount;

4.      benefit reductions, with corresponding premium reduction, requested by the insured; and

5.      continuation or conversion of coverage following an individual's ineligibility for continued coverage under a group contract.

 

 

It was also necessary to address the issues of alternate plans of care and benefit increases. An addition that does not increase premiums for alternate forms of care selected by the insured is not considered a material change. Therefore, the benefits paid for services included in an Alternate Plan of Care, but not specifically covered under the policy, would not be considered a material change to the policy.

 

It also is not a material change if the insured purchases a rider increasing benefits of the grandfathered policy if the rider alone would be considered a qualified long-term care contract. Such riders would have to meet all of the requirements of HIPAA on its own, including the benefit triggers and any applicable Consumer Protection requirements. Some companies will be looking at the possibility of developing such riders to provide benefit increases for the grandfathered policies. If the policies are quite old, however, it is unlikely that such riders would be offered.

 

All questions have not been addressed. Where specific questions apply, insurance industry professionals will be working with the Treasury for clarifications.

 

Most of the tax questions raised, however, reflect concerns regarding non-qualified plans and how they could potentially be taxed when benefits are received. Some states have considered requiring insurance agents to present both qualified and non-qualified plans. California has passed such legislation. If agents are presenting both plans, they must be able to give some kind of explanation of taxation differences. At this time, that is impossible to do since we simply do not have a tax clarification from the IRS.

 

 

Addressing Consumer Concerns

Although taxation falls outside the realm of insurance regulation, state insurance departments and the senior counseling programs need to know how such policies will be taxed. They are often the agencies that people turn to for advice. The National Association of Insurance Commissioners (NAIC) has requested clarification from the Internal Revenue Service, but they have been no more successful than others who have requested it.

 

Beginning in the tax year 1997, every insurance carrier is required to report to the Internal Revenue Service on Form 1099 any benefit paid under any contract that was sold, marketed or issued as a long-term care insurance contract. The insurer is not required to determine whether the benefits are taxable or not; they must simply report the benefits paid.

 

Ironically, there are no instructions for the taxpayers themselves about their use of these 1099 forms. No one, not Certified Public Accountants, not the insurance legal departments, not the state insurance departments can tell the taxpayers if they need to do something with these issued forms.

 

Basically, the HIPAA specifically addressed tax qualified long-term care contracts but totally ignored non-qualified. Therein lies the problem. Since non-qualified insurance contracts were not addressed, tax status is left up to anyone's guess. There are some possibilities:

 

1.      The Treasury could rule that all health and accident benefits, which would include the non-tax qualified long-term care policies, are taxable as income. In such an event, only the tax-qualified plans would be exempt from benefit taxation.

2.      The Treasury and the Congress can simply continue to ignore the entire issue. In this case, tax treatment would continue to be undetermined. To date, this is the avenue that has been taken.

3.      Congress could clarify which benefits are excluded from income and which ones are included. In such a case, it is likely that the non-qualified plans would find their benefits taxed.

4.      The Treasury could make a compromise ruling that requires some portion of the benefit payments of the non-qualified plans to be taxable, while allowing other portions to be nontaxable.

 

All four suggestions are only conjecture. There is no way to know for sure what will happen. Therefore, it is important to read all industry bulletins that are received from insurance companies. Anything to do with taxation may see changes. It is vital that agents follow the most current information.

 

End of Chapter Six

United Insurance Educators, Inc.