With the 1996 introduction of “tax-qualified” long-term care insurance under the Health Insurance Portability and Accountability Act and IRC Section 7702B, Congress affirmed that long-term care insurance benefits are tax-free, and began to offer tax benefits for purchased LTC insurance coverage.
However, over the years the evolving landscape of both individual tax deductions in general, and long-term care insurance tax preferences in particular, have created a confusing myriad of options to purchase LTCI and receive favorable tax treatment.
In this article, we explore the full range of options, from the most favorable (purchasing on behalf of employees, or for employee-owners of a C corporation or who are less-than-2% shareholders of an S corporation), to the slightly less favorable (purchasing for owner-employees of partnerships and LLCs, more-than-2% owners of S corporations, and sole proprietors), to the least favorable (paying for LTC insurance premiums directly, subject to age-based limitations, medical expense AGI thresholds, and itemized deduction limitations). And there are also the less-common-but-also-sometimes-appealing alternatives, like using the money in a Health Savings Account (HSA) to purchase LTC insurance, or funding it via a partial 1035 exchange into a standalone LTC insurance or hybrid LTC policy.
Ultimately, the reality is that some people won’t actually have many choices about how to pay for coverage – the choice will simply be whether to purchase or not, and write a check for the premiums as the only means eligible. Nonetheless, it’s important to understand the full breadth of options for how to pay premiums on LTC insurance, especially given the nuanced but substantial difference in tax treatment across the different choices!