Guest Article

(From the June 30, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

Legislation Introduced to Enhance Tax Incentives for Long-Term Care Insurance

Bipartisan legislation introduced in both the House and Senate would authorize employers to offer long-term care insurance as a benefit under their IRC section 125 cafeteria plans, and create other tax incentives for individuals to purchase long-term care insurance. The Long-Term Care and Retirement Security Act is being sponsored by Representatives Nancy Johnson (R-CT) and Earl Pomeroy (D-ND) in the House, and by Senators Charles Grassley (R-IA) and Bob Graham (D-FL) in the Senate.

Effect on Employers

According to the Health Insurance Association of America, more than 4,700 employers were offering a long-term care insurance plan to their employees, retirees, or both, by the end of 2001. And more than 1,500 employer-sponsored plans were introduced in 2000 and 2001. Clearly, employers and their employees are beginning to recognize the advantages to employer-sponsored long-term care insurance, which generally include--

But the additional tax incentives proposed in these bills should make long-term care insurance even more appealing to workers, and thus could contribute to employees putting more pressure on employers that do not offer this benefit.

The bills also could affect employers that currently offer long-term care insurance benefits in a variety of ways. In particular, the proposed tax breaks for employee-paid long-term care insurance premiums could help boost enrollment rates, which are less than 10 percent for many plans. According to HIAA, the cost of long-term care insurance often is the most significant barrier for employees who decide not to enroll in their employers' plans.

Bill Summary

The following summary of the relevant provisions of the Long-Term Care and Retirement Security Act is based on the House version (H.R. 2096) of the bill. Senators Grassley and Graham introduced the Senate version (S. 1335) on June 25, but the bill text is not yet available. Based on a brief summary of S. 1335 provided by Senator Graham's office, the two bills appear to be very similar, but they may not be identical.

Tax Incentives

In general, H.R. 2096 would amend IRC section 125(f) to specify that employees can use their employers' cafeteria plans to pay qualified long-term care insurance premiums on a pretax basis, up to certain age-based limits. In order to be "qualified," the insurance contract must satisfy a number of specific requirements from IRC section 7702B.

Additionally, the bill would repeal IRC section 106(c), which prevents employers from providing coverage for qualified long-term care services through flexible spending arrangements on a tax-favored basis. In general, both IRC section 125 Health FSAs and health reimbursement arrangements (HRAs) are "flexible spending arrangements" under IRC section 106(c).

The bill also would create a new itemized deduction for individuals who pay qualified long-term care insurance premiums with after tax dollars, subject to the same age-based limits. These premiums are currently deductible as "medical expenses" under IRC section 213, but that deduction is available only to the extent the individual's total medical care expenses-- including qualified long-term care insurance premiums-- exceed 7.5 percent of adjusted gross income. The proposed deduction would not be subject to this 7.5 percent threshold.

Consumer Protections

In addition to these and other tax incentives, the bill would update the qualified long-term care insurance contract rules to reflect changes to the National Association of Insurance Commissioners' Long-Term Care Insurance Model Act and Regulations. Among other things, the bill would amend the IRC to require qualified long-term care insurance contracts to follow the Model Act's requirements relating to nonforfeiture benefits.

Employers do not have to offer qualified long-term care insurance contracts to employees. However, only qualified contracts are eligible for special tax treatment under the IRC. In general, qualified long-term care insurance contracts are treated the same as employer-provided accident and health benefits-- i.e., employees are not taxed on the value of employer-paid premiums and benefit payments are not taxable, among other things.

The new qualification requirements would apply only to policies issued more than 1 year after the bill is enacted.

Outlook

It is not clear whether Congress will act on these bills this year. The fact they are being sponsored by several influential members of Congress (Senator Grassley chairs the Senate Finance Committee, and Representative Johnson chairs the House Ways and Means Committee's Health Subcommittee) should help, but growing budget deficits are clouding the prospects for all bills with negative revenue implications.

Nonetheless, policymakers increasingly are recognizing the strain long-term care costs are putting on states and their Medicaid programs. This burden is expected to grow as the baby boom generation ages. As a result, Congress probably will have to revisit these issues in the near future.

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.