There are many sound benefits of long-term care insurance (LTCI) worth reviewing with employers, but one that is often overlooked—but shouldn't be—is tax deductibility. Here are a few of the considerations:
If a Subchapter C corporation employer pays all or a portion of a tax-qualified LTCI premiums on behalf of an employee, the amount paid is deductible by the employer as an ordinary and necessary business expense and is not subject to the age-based deduction limits applicable to individual LTCI policies. The entire employer contribution would also be excluded from the employee's Adjusted Gross Income (AGI).
If the employer only pays a portion of the premium, the employee is able to apply the balance paid towards the employee's medical expenses, up to the eligible premium amount, and would then be entitled to a deduction for medical expenses that exceed 10% of AGI.* However, it is worth noting that life insurance policies that include an long-term care insurance benefit are generally not eligible for the tax deduction.
It is also important to note that LTC insurance premiums paid by a Subchapter 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 shareholder in his or her capacity as an employee. If a corporation cannot deduct LTC insurance premiums because they are treated as a dividend to a shareholder, the employee must include the entire premium in gross income.
The American Association for Long-Term Care Insurance website contains a helpful page reviewing many of the tax implications of employer-paid as well as individual LTCI premiums. Take a minute to check it out. With the potential deductions available for both an employer and its employees, tax benefits should definitely be part of the conversation when discussing long-term care insurance with your clients.
* 7.5% of AGI for tax years prior to 2017 if the taxpayer or the taxpayer’s spouse has attained age 65 before the end of the tax year.