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HIPAA's impact on long-term care insurance
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) affects how premiums and benefits are taxed and offers consumer protection standards for long-term care insurance. The following are answers to commonly asked questions about HIPAA.
Tax treatment
Q. What is tax clarification for private long-term care insurance, and why is it necessary?
A. The clarifications assure that, like major medical coverage, benefits from qualified long-term care insurance plans generally are not taxed. Without HIPAA clarifications, these benefits might be considered taxable income.
Q. Will consumers be able to take a tax deduction for the premiums they pay on a tax-qualified long-term care insurance policy? Can consumers deduct from their taxes costs associated with receiving long-term care?
A. The answer to both questions is "yes. " HIPAA says that qualified long-term care insurance will now receive the same tax treatment as accident and health insurance. That means that premiums for long-term care insurance, as well as consumers' outof-pocket expenses for long-term care, can be applied toward meeting the federal tax codes' 7.5 percent floor for medical expense deductions. However, there are limits, based on a policyholder's age, for the total amount of long-term care premiums that can be applied toward the 7.5 percent minimum. (Check with your financial planner or tax adviser to see if you are eligible to take this deduction.)
Q.Will employers be able to deduct anything for the cost of providing or paying for qualified long-term care insurance for their employees?
A. Generally, employers will be able to deduct, as a business expense, both the cost of setting up a long-term care insurance plan for their employees, and the contributions that they may make toward paying for the cost of premiums.
Q. Will employer contributions be excluded from the taxable income of employees?
A. Yes.
Q. Can Individual Retirement Accounts (IRAs) and 401k funds be used to purchase private long-term care insurance?
A. No. However, under a demonstration project, tax-free funds deposited in Medical Savings Accounts can be used to pay long-term care insurance premiums.