Indiana 5 Hour Long-Term Care
Chapter 5
The federal government has recognized the urgency for long-term care insurance. Although funding the cost of institutionalization can be achieved through other means besides long-term care insurance, it is the most logical avenue for most people. As a result of this recognition, in 1996, the U.S. Congress enacted the Health Insurance Portability and Accountability Act, generally referred to as HIPAA. It may also be known as the Kennedy-Kassebaum Bill. President Bill Clinton signed this act into law in August of 1996. It may also be referred to as Public Law 104-191. The entire law is very complex, but for our purposes only the long-term care portion will be relevant.
Congress attempted to fulfill a number of different public policy objectives:
Specifically, the IRS defined qualified long-term care services as:
Necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, rehabilitative services and maintenance and personal care services required by a chronically ill individual pursuant to a plan of care prescribed by a licensed health care practitioner.
Obviously, this definition is very broad. It could include any type of health service. To control when the cost of long-term care services could receive favorable tax treatment, Congress established a trigger basis for initiating benefits by tying services to a state of disability defined as a chronically ill individual.
A chronically Ill Individual must be certified by a licensed health care practitioner within the previous 12 months as one of the following:
It is important to note that this standardized definition of a chronically ill person cannot be altered in any way by state law, and it is the only definition allowed to receive the favorable tax treatment for the cost of long-term care services.
Perhaps the most misunderstood aspect of HIPAA is the 90-day certification for activities of daily living. Its relevance to the deductibility of long-term care expenses is clear. Congress intended to limit long-term care costs to those associated with chronic illness. A clinical definition of chronic illness is one that is expected to last 90 days or more. Some expenses for acute or short-term illnesses were already deductible as a medical expense. If policy makers had ignored the distinction between acute and chronic, it would have had the unintended consequence of allowing taxpayers to deduct all their expenses associated with short-term disabilities, due to the vague nature of the definition of qualified long-term care service.
A taxpayer who wishes to deduct qualified long-term care expenses using the ADL definition must have a licensed health care practitioner certify that the insured is likely to need substantial assistance for at least 90 days. It is important to note the requirement concerns the likelihood of needing care, not necessarily the actual receipt of care. In fact, there is no requirement that the person actually receives the full 90 days of care. The insured must be re-certified at least annually.
The IRS Publication 502 stipulates that the 90-day certification period is not a deductible period for people who have long-term care insurance. Long-term care insurance may still pay benefits following the deductible period of the policy, if any, as long as the certification stipulates that the person is likely to need qualified long-term care services for at least 90 days. The certification may also be done retroactively in the event a claim is not filed until after the deductible period in the policy has been met.
While questions of tax deductibility follow non-tax qualified LTC policies, tax-qualified long-term care contracts are clearly deductible if specified qualifications are met. Under HIPAA any long-term care insurance contract that meets the Act's requirements will receive specific tax advantages. All other policies are considered to be non-tax qualified. There is an exception, which was made for all long-term care policies issued before HIPAA had been state approved. These policies were "grandfathered" in. Therefore, they are considered tax-qualified even though they did not meet the requirements that were spelled out in the legislation. However if these policies are altered the grandfathered tax-qualified status is lost.
It would be easy to assume that all consumers would want to purchase only tax-qualified policies if they are to receive favorable tax treatment. In fact, this is not necessarily true. When the Act was passed, it set specific terms regarding tax-qualified benefits, benefit triggers, provisions, and so forth. Perhaps the most dramatic difference between the qualified and non-qualified plans are the benefit triggers. A benefit trigger is the circumstance (typically medical in nature) that "triggers" the start of insurance benefits. For most types of insurance, the circumstance that triggers benefit payment from the insurance company is fairly easy to understand. For example, in life insurance when the insured dies benefits are paid. While there may be variations that allow cash to be withdrawn, as a benefit trigger, this is pretty easy to understand. In health insurance, if the insured breaks a leg benefits are paid by the insurance company after a deductible is met. When it comes to nursing home policies, however, benefit payments are not necessarily so easily understood.
Before the creation of tax-qualified long-term care insurance plans, benefits were paid when it was determined they were medically necessary. If the insured's doctor felt that it was necessary for his patient to be in a nursing home, his written statement was all that was required to trigger benefit payments, assuming the type of nursing home care was covered under the policy terms. Some policies might also require an inability to perform some type of activity (called activity of daily living or ADL) such as bathing oneself without assistance. Another formal benefit trigger was cognitive impairment, the inability to reason or a loss of mental capacity due to some organic disorder such as Alzheimer's disease.
Before anyone had ever heard of tax-qualified long-term care plans, insurance policies could require the inability to perform a certain number of activities of daily living (ADLs), which were spelled out in the policy. The actual number of ADLs sometimes varied since not all companies included the same amount. Typically, there were between five and seven listed. The number of ADLs that could no longer be performed by the insured could vary. Some policies required only one, while others required more than one. If a policy listed 7 ADLs and only required an inadequacy in performance of one, benefits were easier to obtain than one which listed 5 ADLs with an inadequacy in performance of one (1 out of 7 are better odds than 1 out of 5). Few consumers recognized the importance of this. In fact, agents often did not recognize it either.
Today, most non-tax qualified plans list seven activities of daily living, while tax-qualified plans list six. It is important to note that we said "most". An agent must always refer to the policy for exact requirements. Simply adding the seventh trigger gives receiving benefits a better chance with the non-qualified plans. The benefit trigger that has been eliminated in the tax-qualified plans is ambulating. Ambulating is the ability to get around adequately without assistance.
Let's look at the activities of daily living. First, we'll examine the non-qualified plans, which typically have seven ADLs.
Eliminating ambulating is a serious change. For many elderly people, ambulating is the first activity of daily living that is lost. The inability to move around means the person may not be able to fix meals, get to the bathroom, or even get up to answer a ringing telephone.
The six ADLs that are included in HIPAA are:
The definitions, you'll notice, are somewhat different although the meanings remain very close.
Most professionals feel that home care benefits have especially been limited by the difference in the ADLs since the loss of ambulation is almost always part of the need for care in the home. Even so, the qualified plans do also offer consumer protection requirements. As a result, there is a great deal of disagreement about which plan, qualified or non-qualified, should be sold.
Perhaps the greatest difference lies in the benefit triggers. Most people did not purchase their long-term care policy to receive a tax deduction. They purchased their policy for health care protection. Therefore, if the ability to use the policy is limited when health care is needed, was it really worth having a tax benefit? Agents must be very careful about explaining the benefit trigger difference when presenting policies. Currently, both types are available in most states. Some of the states have resisted the approval of tax-qualified plans because they felt the benefit triggers were more restrictive than the state requirements. Such was the case in California, for example. By fully explaining the difference at the point of sale, the agent is allowing the consumer to do several things:
Decide whether the tax benefit of the premium deduction will benefit them personally;
Decide whether the loss of the ambulating ADL could affect them personally (especially if home care benefits are important to them); and
Fully understand the circumstances that will allow benefits to be paid under their policy. Most policyholders want to understand this and it is in the agent's best interest to be sure that they do.
The federally qualified (tax-qualified) plans do provide worthwhile benefits, even though ambulating is not an ADL. Federally qualified plans, which provide coverage for long-term care services (nursing facility, home care, and comprehensive) must base payment benefits on the following criteria:
Although currently the insured must be either chronically ill by virtue of the ADLs or due to cognitive impairment, it is possible that the federal government could expand these requirements at some point. If that were to happen, each state would have to adopt the new triggers as well.
As an insurance agent, we know that definitions are extremely important in policies. This is also true of the tax-qualified plans. Because certain phrases were used for specific meanings, IRS Notice 97-31 has established guidance for many of these terms.
Substantial Assistance in the ADLs means hands on assistance and standby assistance.
Hands-On Assistance means the physical assistance of another person without which the individual would be unable to perform the activity of daily living (ADL).
Standby Assistance means the presence of another person within arms reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the individual is performing the activity of daily living. The IRS Notice gives the examples of being ready to catch the person if they fall, or seemed to be ready to fall, while getting into or out of the bathtub or shower or being ready to remove food from the person's throat if the individual chokes while eating. Overall, standby assistance is just what it indicates: being near to help when necessary.
Severe Cognitive Impairment means a loss or deterioration in intellectual capacity that is comparable to Alzheimer's disease and similar forms of irreversible dementia and measured by clinical evidence and standardized tests that reliably measure such impairment. The impairment may be in either their short-term or long-term memory. It would include the ability to know people, places, or time. It would include their deductive or abstract reasoning, as well.
Substantial Supervision is used in reference to cognitive impairment. It means continual supervision, including verbal cueing, by another person that is necessary to protect the severely cognitively impaired person from threats to their health or safety. Such impaired people are prone, for example, to wander away. Substantial supervision is needed to prevent this.
It is not possible to use the activities of daily living to measure severe cognitive impairment. Individuals with such impairment are often able to perform all of the ADLs without difficulty. Even so, they are unable to care for themselves due to their cognitive impairment. Therefore, the ADLs are not used when assessing this.
State laws may not be the same as the federal requirements. In fact, it would be surprising if they were the same. Non-qualified plans will meet the state's requirements while qualified plans will meet the federal requirements. Because states do differ, it is not always easy to state the differences between qualified and non-qualified long-term care policies. Generally speaking, however, it is usually safe to say that federally qualified plans are harder to receive benefits under than are the state's non-tax qualified plans.
For those who do itemize, they can deduct their regular medical expenses (including LTC premiums) if they exceed 7.5 percent of their adjusted gross income (AGI). For long-term care insurance, the maximum deduction a taxpayer can take for their premiums depends upon their age. The dollar amounts of the deductions changes from year to year, so it is best to consult your personal tax advisor. The deductions are based on individuals, so if there are two people in the household (husband and wife) who each have a policy, the deductions will apply to each one of them.
To deduct the premiums, several conditions must exist. First of all, the taxpayer must itemize their deductions on their tax returns. Many people in these age groups do not itemize because they do not have enough deductions to allow it. Nationally, less than 30 percent of all federal taxpayers itemize according to "Statistics of Income", Department of Treasury. This 30 percent reflects ALL taxpayers; even less itemize that are 65 and older.
In addition, in order to deduct the premium cost, the amount of total medical expenses (counting the premium) must exceed 7.5% of the taxpayer's adjusted gross income (AGI). Since many of these taxpayers pay very little of their medical expenses, this is unlikely. Reimbursed expenses will not count towards this percentage amount.
To benefit from the tax-favored status, the contract must meet certain provisions. It must provide only coverage for qualified long-term care services and meet the following requirements:
The deduction and benefit exclusions generally apply to contracts issued after December 31, 1996. A grandfather rule provided that contracts issued earlier and that met the long-term care insurance requirements of the state where issued, would be treated as a qualified long-term care contract. Non-qualified contracts could be exchanged tax-free for qualified contracts until December 31, 1997.
Accelerated death benefits can be available under certain conditions. A taxpayer who is terminally ill, or in some cases chronically ill, may elect to receive accelerated life insurance death benefits tax-free. Accelerated death benefits must be aggregated with long-term care benefits in determining whether the income exclusion limitations have been exceeded.
There are also issues regarding the long-term care policies issued prior to 1997, which were grandfathered in as tax-qualified policies. Although these pre-1997 policies were granted tax-favorable status, any material changes will revoke this status. It is the definition of "material changes" that has raised questions. Initially, even a premium change could have constituted a material change in the policy. If this were the case, insurance companies could cause a material change simply by raising the premium charged.
When policies issued prior to 1997 were grandfathered in as tax qualified plans, consumers had the impression that they were guaranteed this tax-favored status. In fact, this was not necessarily the case.
The Kansas Insurance Department said in comments that if it was possible to loose the tax-favored status by virtually any change implemented, it would have a serious impact on the long-term care market in that state. The federal law did not in any way indicate that a change in the contract language would result in a pre-1997 policy becoming non-qualified, the Kansas department said. The IRS stance is contrary to the intent of HIPAA they felt.
Actually HIPAA did not specify the circumstances in which changes to a contract would be so significant that they would cause a new policy to be issued. Insurance companies have historically decided which changes indicated a new policy rather than a modification to an existing policy. State law also provided guidelines. The aim is generally to preserve the pre-1997 grandfathered policy.
Since consumers are not likely to be aware of these issues, they may make changes that would allow them to loose their tax-favored status. The American Council of Life Insurance, which said its member companies represent 80 percent of the long-term care insurance market, was extremely troubled by the very narrow interpretation of the grandfather rule contained in the IRS Notice 97-31. The group called it inconsistent with statutory changes and will lead to the inappropriate loss of grandfathering of many policy contracts.
So many groups were concerned about the material modification issue, that classifications were eventually made. The Treasury responded to the obvious concerns by clarifying what a material modification represented. They applied "exceptions." This meant that specific changes were not considered grand enough to require a new policy; rather they were considered endorsements to the existing policy. These exceptions include:
The Final Regulations suggest that the following practices will be treated as issuance of a new contract (which would then remove any grandfathered status):
What does a material modification mean to the selling agent? Any time a consumer or agent consider replacing a policy issued prior to January 1, 1997 extreme caution should be exercised. A pre-1997 HIPAA policy may contain provisions that make it easier to qualify for benefits while still enjoying tax qualified status.
Beginning in the tax year 1997, every insurance carrier is required to report to the Internal Revenue Service on Form 1099 any benefit paid under any contract that was sold, marketed or issued as a long-term care insurance contract. The insurer is not required to determine whether the benefits are taxable or not; they must simply report the benefits paid.
The financing of long-term care needs for the elderly is becoming an increasing problem that will only get worse as the baby boomers age. How much should taxpayers be expected to shoulder? Would it be wiser to encourage, perhaps even force, individuals to plan ahead for the occurrence?
To be fair, most of those currently receiving nursing care thought they had planned ahead. They simply did not anticipate the amount of costs the care would bring. As a result, they spent every dime they saved and still it was not enough so they were forced to turn to Medicaid.
Budget constraints at the state and federal level make it unlikely that the taxpayers (government) can assume additional financing responsibility, yet they are facing that likelihood. Something had to be done. Government is hoping that the partial fix may be found in the Deficit Reduction Act of 2005. Not all agree that it will, but the hope is there.
One aspect of DRA 2005 is the opening of Partnership LTC policies beyond the initial four states of California, Connecticut, Indiana, and New York. Many other states may have initiated the Partnership program but federal legislation placed barriers that could not be overcome. The DRA has removed those barriers. Since Indiana was one of the four initial states, agents are already aware of the Partnership asset protection aspects; agents in other states are just now becoming aware of it.
While a major aspect of DRA is the allowance of Partnership LTC plans in the other 46 states, there is more to the legislation than just that, although it seems to be the main focus in the media. State policy makers have become quite vocal about their financial exposure to long-term care costs. The Deficit Reduction Act of 2005 included a number of reforms related to long-term care services. Of course, the one agents are familiar with is the lifting of the moratorium on Partnership programs, which allows all states to implement them.
The DRA addresses some issue related to consumer and agent education:
As it relates to Partnership plans, the Deficit Reduction Act of 2005 includes the following:
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Components |
Partnership Requirements |
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Definition of qualified plan: Dollar-for Dollar: for every dollar of benefit purchased in a qualified policy, a dollar of assets is protected from Medicaid spend-down requirements. Income is never protected only assets. Tax qualified policies constitute 98% of the market and allow for uniformity in programs nationwide. |
States must have an approved state plan amendment (SPA) that provides for the disregard of any assets or resources in an amount equal to the insurance benefit payments that are used on behalf of the insured. Income is never protected, only assets. There are specific requirements that must be met, including:
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Inflation Protection: Most people do not use an LTC policy for many years. In fact, it is common for 20 years to pass before benefits are requested. Inflation protection is intended to keep policy benefits current with the costs of care as time goes by. |
Inflation Requirements:
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Plan Reporting Requirements: Not everyone agrees that Partnership plans will save Medicaid dollars. In fact, the GAO believes the most likely buyers would not have ended up on Medicaid anyway. Many disagree with this 2007 report however. Reporting requirements will eventually decide who is right. |
The issuers will provide regular reports to the HHS Secretary and include the following information:
The state may not impose any requirements affecting the terms or benefits on Partnership policies that are not also imposed on non-Partnership plans. States may require issuers to report additional information beyond those specified by the Secretary. |
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State Plan Amendment (SPA) Those states interested in participating in the Partnership program will adopt a State Plan Amendment. |
The LTC policy must meet several conditions to qualify under the Partnership program. These conditions include meeting the requirements of specific portions of the NAIC LTC Insurance Model Regulations and Model Act.
If an insured has an existing LTC policy that is not qualified as a Partnership contract due to the issue date, and that policy is exchanged for another, the State Insurance Commissioner or other State authority must determine the issue date for the policy that is received in exchange. To be a qualified Partnership policy the issue date must not be earlier than the effective date of the Qualified Partnership SPA. Changes, revisions, updates or other modifications of the model regulation or model act will be made no later than 12 months by the Secretary after consultation with the NAIC. The issuer of the policy must provide reports to the Secretary that include notice of when benefits are paid, the amount of those benefits, notice of termination of the policy, and any other information that may be deemed appropriate. |
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Reciprocity |
The Secretary, in consultation with the NAIC, issuers, States with Partnership experience, and representatives of consumers will develop standards for uniform reciprocal recognition for Partnership plans. As we know Indiana already developed a reciprocity agreement, but all Partnership plans will begin recognizing other state Partnership contracts. Benefits will be treated the same by all states and opt out provisions will be available by notifying the Secretary in writing. |
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Effective Date |
Qualified State long-term care insurance Partnership policies issued on the first calendar quarter in which the plan amendment was submitted to the Secretary. |
One very important change that DRA introduced is the extension of the time allowed for transferring assets. Previously, an individual had three years in which to transfer assets prior to applying for Medicaid benefits. This was done to prevent those assets from the spend-down requirements that existed for Medicaid eligibility. That time period was extended to five years under the DRA. Since there is little data available it is hard to know if this was an extensive practice, but for those who choose this route it will be more difficult. Once assets are transferred to another, the original owner has given up all control and ownership, meaning he or she can no longer use them. It is unlikely that an individual would know five years in advance that a nursing home is necessary.
Agents will play a vital role in promoting Partnership long-term care contracts. What agents may not realize is that they are performing a financial service for taxpayers everywhere!
Thank you,
United Insurance Educators, Inc.
Updated 2008