TaxClinic.

• Author: Koppel, Michael D.

PRACTICAL ADVICE ON CURRENT ISSUES

EMPLOYEE BENEFITS & PENSIONS

Long-arm Care, Planning

As the U.S. population ages, many practitioners will deal with longterm care planning for their elderly clients or their 'clients' aging parents. Most older people wish to stay in their homes for as long as possible. However, the reality is that many of these people will some day require assistance with their daily personal needs., Clients may wish to explore various options for long-term care, including how to fund it, various types of facilities available and how to select a care facility.

With medical costs skyrocketing and individuals living longer, people must carefully consider how best to fund an extended stay in a long-term care facility. Generally, there are five options for funding long-term care:

1. Medicare;

2. Medicare supplemental insurance ("medigap" insurance);

3. Medicaid;

4. Long-term care insurance; and

5. Personal savings.

   Medicare

   Medicare generally is available to individuals who are at least 65 years old and eligible for Social Security benefits; are less than 65 years old, disabled and eligible for Social Security benefits for more than 24 months; or are in end-stage renal disease (permanent kidney failure). Medicare is limited and covers only skilled nursing facility care (SNF), home health services following a hospital or SNF stay, or hospice care. Also, specific requirements apply even for these Medicare-covered costs.

   Medicare Supplemental Insurance

   Also known as "medigap" insurance, Medicare supplemental insurance is privately-obtained insurance that covers Medicare deductibles and copayment amounts. There are 10 traditional types of policies (Types A through J) and two new high-deductible plans that are variations of Plans F and J. (Note: Policy types may vary in Massachusetts, Minnesota and Wisconsin.) Most medigap plans cover a portion of the costs of skilled nursing care when covered by Medicare. Likewise, most plans exclude nursing home coverage.

   Medicaid

   Medicaid is available to individuals with limited income and assets; needy individuals who qualify for Medicaid generally will have all long-term care expenses paid for. Income and asset limitations are fairly restrictive and vary by state. Income cap states, for instance, limit a Medicaid applicant's income to $1,482 or less per month (in 1998) based on Federal guidelines. The asset limitation, in most states, is $2,000, excluding "exempt assets." Some exempt assets include (but are not limited to) one home, one car, limited household items and furniture, and term insurance. Some clients may try to transfer assets to their children or heirs in an effort to qualify for Medicaid benefits. States will disallow benefits when transfers of assets occur within 36 months of the date a Medicaid applicant applies for benefits (60 months for some trusts). Additionally, transfers for less than fair market value may be subject to a penalty period. Theoretically, criminal penalties may be imposed on advisers suggesting asset transfers made solely for purposes of qualifying for Medicaid benefits (although there are questions about the legality of these penalties).

   Long-Term Care Insurance

   Long-term care insurance may be purchased through private insurance companies and may be appropriate for people who want to preserve their personal assets. Most policies require some type of waiting period before benefits will begin. The cost of a long-term care policy may be prohibitive to certain clients, and costs increase as the client's age increases. A long-term care policy should be evaluated using "activities of daily living" (ADLs). There are six ADLs, such as eating, bathing and dressing. Policies should specify that benefits commence when a policyholder is unable to perform or remember to perform a given number of ADLs for himself (e.g., three of the six AGEs). Long-term care premiums are deductible as medical expenses, subject to the 7.5% adjusted gross income floor and age-based limitations

   There are three basic types of care facilities:

1. Assisted living facilities (ALFs);

2. Continuing care retirement communities (CCRCs); and

3. Nursing homes.

   ALFs. ALFs generally are for individuals requiring help with certain ADLs, but who do not require skilled medical care. Many ALFs provide clients with a sense of independence, while assisting them with meals, medical reminders, cleaning and laundry services. They often offer apartment-type rooms to which older people bring their own furniture and belongings. However, when an individual requires skilled medical care, many ALFs require that the individual be moved to a nursing home.

   CCRCs. CCRCs are community-type facilities that provide levels of care commensurate with a resident's needs. All levels of care are available in CCRCs, which make them appealing to many individuals. CCRCs usually provide social activities, as well as meals, cleaning/laundry services, transportation, crafts, physical therapy, security and infirmary services. CCRCs may be paid for by a monthly fee (similar to rent), an entrance fee plus a monthly charge, or an ownership interest.

   Nursing homes. Nursing home care is required when individuals are unable to live independently because of physical or mental impairment. Nursing care facilities should be carefully evaluated, including an analysis of staffing (to determine if it is sufficient to provide adequate care to all residents). Generally, a nursing home must provide a given number of beds for Medicare patients.

   Provisions vary significantly from state to state, and practitioners must carefully examine the rules and laws governing their state before giving specific advice. It also is advisable to have an elder law attorney review any contract for an assisted-living facility prior to a client signing an agreement. Additional resources include:

   * Continuing Care Accreditation Commission (www.ccaconline.org);

   * American Association of Home & Services for the Aging (202-783-2242);

   * Administration on Aging (www. aoa.dhhs.gov);

   * Assisted Living Facilities Association of America (703-691-8100);

   * Assisted Living Network (888-532-9280);

   * Long-term Care Quote (800-587-3279); and

   * Medicare/Medicaid Services (www. hcfa.gov).

   From Marilyn M. Falkenhagen, CPA, Maxwell Locke & Ritter, P.C., Austin, TX

   Nondiscrimination Safe Harbors for Sec. 401(k) Plans

   The Small Business Job Protection Act of 1996 (SBJPA), effective for tax years beginning after 1998, provided an alternative for plan sponsors to satisfy their Sec. 401(k) plan nondiscrimination requirements. Plan sponsors who elect to make safe harbor contributions can avoid discrimination testing for their plans. The SBJPA provision treats the actual deferral percentage (ADP) test for employees' elective deferrals as being met if the sponsor elects either of two types of safe harbor contributions. The safe harbor (Sec. 401(k)(12)(B)) is a matching contribution, requiring contributions of 100% of an employee's elective deferrals up to 3% of compensation, and 50% of an employee's elective deferrals from 3% to 5% of compensation. The first matching contribution rate for any highly compensated employee (HCE) may not be greater than the rate for nonhighly compensated employees (NHCEs).

   Some variation is permitted in the matching formula if the matching contributions for each level of elective deferrals are at least equal to the rates computed under the formula described. Also, alternative matching formulas may not provide for a higher rate of matching as the level of elective deferrals increases. For example, if a Sec. 401 (k) plan currently provides for matching contributions of 150% of elective deferrals up to 2% of compensation, and 50% of elective deferrals from 3% to 4% of compensation, it would not be necessary to modify that formula to meet the safe harbor requirements. A participant would not receive a lower rate of matching contributions at any level of elective deferrals under the plan's current formula than under the safe harbor provided in Sec. 401(k)(12)(B). Therefore, no modification of the plan's formula would be needed.

   The second safe harbor (Sec. 401(k)(12)(C)) is a nonelective contribution of at least 3% of compensation for NHCEs. The contribution is mandatory for all eligible NHCEs, even if they do not elect to make salary deferral contributions.

   Regardless of which type of safe harbor contribution is elected, the contribution must be fully vested and subject to the distribution restrictions applicable to elective deferrals under a Sec. 401(k) arrangement. One additional requirement is that plan sponsors must provide eligible employees with notice prior to the beginning of each year, informing them of their rights and obligations under the arrangement.

   In addition to the safe harbor described for ADP testing, the SBJPA also provides a safe harbor for meeting the actual contribution percentage (ACP) test. The ACP test applies to matching contributions and employee after-tax contributions.

   The ACP safe harbor (Sec. 401(m) (11)) first requires a plan to meet the ADP safe harbor described above. In addition, the plan must meet the following three requirements:

1. Matching contributions may not be made for elective deferrals or employee after-tax contributions greater than 6% of compensation;

2. The matching contribution rate may not increase as the rate of elective deferrals or employee after-tax contributions increases;

3. The matching contribution for HCEs at any rate of elective deferrals or employee after-tax contributions may not be greater than the matching contribution for NHCEs.

   The discrimination safe harbors may be beneficial to employers whose matching or nonelective contributions presently equal or exceed the safe harbor requirements or are not significantly less. These employers should consider the effect of 100% vesting of employer contributions. On the other hand, employers who would increase their matching or...