Employer Deduction - LTC Premiums
When an employer pays the premium for qualified long term care coverage for its employees, the employer should be able to deduct those premiums as an ordinary and necessary business expense to the same extent that it can deduct premiums paid for other accident and health insurance covering its employees (IRC Sec. 162). However, an employer cannot provide long term care coverage as part of a cafeteria plan (IRC Sec. 125(f)). An employer can discriminate by making contributions to a specific class (es) of employees.
Employee Income - LTC Premiums
Under IRC Section 106(a), an employee does not have to include in gross income the cost of any employer-provided coverage under an accident or health plan. Consequently, with one exception, premiums paid by an employer for an employee’s qualified long term care insurance are not includible in the employee’s gross income. No distinction is made to the amount of premium which is not included in gross income. However, if an employer provides long term care coverage through a flexible spending arrangement, the employee must include the cost of that coverage in gross income (IRC Sec. 106(c)). Accordingly, the employee’s medical expense deduction is then limited to the lesser of actual premium paid or the eligible long term care premium, and the normal threshold of 7.5% of AGI applies.
Employee Income - LTC Benefits
Amounts received under a qualified long term care insurance contract are treated as reimbursements for expenses actually incurred for medical care (IRC Sec. 7702B(a)(2)). As a result, if an employer pays the premium for an employee’s qualified long term care coverage, the employee will NOT be taxed on the long term care-benefits paid under the insurance -- those benefits are treated as a non-taxable reimbursement for medical care. The result is the same whether the insurance reimburses actual long term care expenses or pays a per diem amount toward long term care. However, if the insurance pays a per diem benefit that exceeds the per diem limit provided under IRC Section 7702B(d) ($260 in 2007), the excess is taxable income to the employee unless the employee’s actual long term care expenses equal or exceed the per diem benefit paid.
Shareholder Employees
LTC premiums paid by a C corporation on behalf of any shareholder are treated as non-deductible dividends, unless the corporation can establish that it is providing coverage to the insured in his or her capacity as an employee. If a corporation cannot deduct LTC premiums -- because the premiums are treated as a dividend to a shareholder -- the insured must include the entire premium in gross income. Again, IRC Section 106(a) only allows employees to exclude from gross income the cost of employer-provided LTC coverage.
Note: Before making tax decisions about long-term care insurance it is essential that you consult with your attorney, accountant, or other tax professional, for advice regarding your own personal situation.
