Long Term Care - Is Pre Tax Payment Possible?

[holdco]

A question concerning the taxation of long-term care (LTC).

Assume a C corporation, with shareholder-employees (in this case, law firm "partners"). At the beginning of the year, the law firm pays a LTC premium on behalf of a few partners in the amount of $5,000 each. At the end of the year, each partner is entitled to a $100,000 bonus. Instead, the law firm books each partner a $95,000 bonus, conducts the requisite withholding, and gives the balance as bonus to the partner.

The employer is not ultimately paying the premium. The employee is. The employer not deducting anything in connection with this LTC premium. If it did, I understand certain requirements come into play to permit the deduction, and that the this coverage isn't includable in the gross income of the partner. I also understand that any premium paid by the employee is after-tax and can be treated as unreimbursed medical expense (limited to an amount no greater than the eligible LTC premium). However, in the example above, the reduction in bonus is de facto pre tax, and that isn't allowed when an employee is paying the premiums. However, brokers are saying that this is a common arrangement, that everyone uses it, and that it's been done for years. One lone broker we've spoken with says you simply can't "pre tax LTC."

Who is right? Does the law firm have to give the employee $100,000 (minus withholding), and then reduce that amount by $5,000? Is there tax revenue the IRS is missing if the firm continues to do what it's been doing? Any thoughts will be appreciated.

[masteff]

This seems to give appropriate citations for you to reach a conclusion: http://www.massmutual.com/efiles/ltc/pdfs/ltc1419.pdf

[Guest merkramirez]

That is a very complicated question. Long-term care insurance can be paid by the employer but the manner on how it should be paid is left to the discretion of the employer. The situation you are into involves a little dash of law. You should get a consult as soon as possible.