Guide to Health Insurance Portability and
Accountability Act of 1996 Regarding
Individual Long Term Care
This is intended as a summary of the Long Term Care Insurance provisions of The Health Insurance Portability and Accountability Act of 1996. The final version of the legislation, also referred to as the Kennedy-Kassebaum Bill, was passed by Congress in early August 1996, and was signed into law by the President that same month.
The new law is an amendment to the Internal Revenue Code. It is an attempt to set standards and promote sales of LTC insurance products through the use of the tax code.
TAX QUALIFIED LTC POLICIES
Policies Issued Prior to January 1, 1997
All policies issued prior to 1/1/97, are automatically treated as tax qualified LTC insurance policies.
Policies Issued On or After January 1, 1997
LTC policies issued on or after 1/1/97, will need to conform to standards outlined in the new law to qualify for Federal tax-preferred status. Those standards are described later in this section of our guide.
- LTCi Tax Guide
- For State Tax Credits and Deductions, click here.
These are individual limits. Taxpayers filing a joint return can each deduct up to their individual limit. Also, these limits will grow with each year's increase in the Medical Care component of the Consumer Price Index.
The law does not address how LTC premiums paid or benefits received prior to 1/1/97, will be treated from a tax perspective.
Qualified LTC Benefit Payments Are Non-Taxable
The following rules regarding the exclusion of benefit payments from taxable income apply to all of the benefits a taxpayer receives under one or more policies (from any number of companies). Payments are excluded from Federal taxable income for 1997 returns filed in 1998, and beyond, as follows:
- Reimbursement Products: Benefit payments made as reimbursement for LTC services under a tax-qualified policy will be excluded from taxable income. Mass Mutual, John Hancock, Genworth, and other carriers with the exception of certain products from MedAmerica are reimbursement LTC contracts.
Tax qualified policies will provide coverage only for "qualified LTC services." As defined by the new law, those services are:
Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which are required by a chronically ill individual, and are provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Note: The need for a plan of care applies to facility as well as home care benefits.
Benefit Trigger (Chronically III Individual)
To meet the benefit trigger under a tax qualified policy, the policy holder needs to meet the laws definition or a chronically ill individual. A chronically ill individual is someone who has been certified within the preceding 12 months by a licensed health care practitioner as:
One who will be unable to perform without substantial assistance at least two activities of daily living (ADLs) for at least 90 days due to a loss of functional capacity. The 90 day requirement is an indicator of the severity of the condition; it is not a policy elimination period. OR One who requires substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment. OR One having a similar level of disability as determined under regulations developed by the Secretary of the Treasury in consultation with the Secretary of Health and Human Services. (Our carriers believe that it is highly unlikely that a medical necessity or injury or sickness benefit trigger will meet the intent of these regulations.)
The six possible ADLs are eating, toileting, transferring, bathing, dressing and continence. The policy must use at least five of these.
Also please remember that benefit eligibility requires certification by a licensed health care practitioner. The term "licensed health care practitioner" means any physician and any registered nurse, licensed social worker, or other individual who meets such requirements as may be prescribed by the Secretary of the Treasury.
Benefits under tax qualified policies can neither duplicate Medicare payments nor fill in Medicare deductibles or co-insurance. (Most Medicare Supplement policies pay these expenses.)
Tax qualified plans must include a mandatory offer of a non-forfeiture option. This non-forfeiture option shall provide at least one of the following:
- Reduced paid-up insurance
- Extended term insurance
- Shortened benefit period
- Other similar offering approved by the Secretary of Treasury
Note: There is no requirement that the applicant purchase a non-forfeiture option.
Consumer Protection Standards
Tax qualified policies must include certain consumer protection standards as outlined in the 1993 NAIC Model Act and Regulation. Our carriers products generally meet these standards.
Beginning in 1998, the insurance company, as payer of LTC benefits, must report the following to the Secretary of the Treasury:
- The aggregate amount of such benefits it paid to any individual during the previous calendar year.
- Whether or not such benefits are paid in whole or in part on a per diem or other basis without regard to the expenses incurred during the period to which the payments relate.
- The name, address and Taxpayer Identification Number of the chronically ill individual on account of whose condition such benefits are paid.
Individual receiving any LTC benefits will receive a written statement from the insurer showing the amount of LTC benefits reported by the insurer as paid to them. The written statement will not indicate whether the benefits paid are excludable from taxable income.
As Congress considered various versions or this legislation, it was proposed that penalty-free withdrawals from IRA's would be allowed to pay for tax qualified LTC insurance policies. However, this proposal was removed and such withdrawals are still subject to a 10% penalty.