Long-term care insurance gets health insurance tax treatment.

• Author: Gray, Shelley

Until the recent passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), there were no specific provisions dealing with the treatment of the cost of long-term care and long-term care insurance premiums. This new legislation gives qualifying long-term care insurance the same tax treatment as health insurance.

In general, for tax years after 1996, premiums paid for qualified long-term care insurance will be deductible as a medical expense (subject to the 7.5% floor), and benefits received from the same plans will be excludible from income. Both the deduction and exclusion are subject to special limitations. The provision is generally applicable to contracts issued after 1996. Contracts issued before 1997 that met the long-term care insurance requirements of the state in which they were located will be treated as qualified long-term care insurance contracts.

In order for a plan to qualify as a long-term care insurance contract, several requirements must be met: * The contract must be guaranteed renewable. * The contract may not provide for a cash surrender value or other money that can be paid, assigned, pledged or borrowed. * Refunds, unless paid on the death of the insured or complete surrender or cancellation of the contract, and dividends may only be used to reduce future premiums or future benefits. * The contract may not pay or reimburse expenses reimbursable under Medicare, except when Medicare is a secondary payor or when the contract makes payments per diem or on another periodic basis without regard to actual expense. * The contract must satisfy certain customer protection provisions that relate to disclosure, nonforfeitability, noncancellability, etc.

In addition, the contract must provide coverage only of qualified long-term care services. These include necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance or personal care services required by a chronically ill individual. A chronically ill individual is one who has been certified within the past 12 months by a licensed health care practitioner as (1) being unable to perform, without substantial assistance, at least two activities of daily living for at least 90 days due to a loss of functional capacity, (2) having a similar level of disability as determined by the Secretary of the Treasury in consultation with the Secretary of Health and Human Services or (3) requiring substantial...