The Status of Non-Tax-Qualified Long-Term Care Policies
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The Status of Non-Tax-Qualified Long-Term Care Policies
Insurance companies are required to advise the IRS of benefits paid to anyone from any type of long-term care (LTC) insurance policy, tax-qualified or not. Policyholders/taxpayers are required to report benefits paid from any type of LTC policy on IRS Form 8853. The form distinguishes between tax-qualified and non-tax-qualified policy benefits, but neither the form nor its instructions make clear whether the non-tax-qualified benefits are taxable.
Things To Know
- The big issue is the possibility that benefits under a policy might be subject to income tax.
- The IRS has not issued any formal guidance on this matter.
Non-tax-qualified premiums are not deductible by individuals at all; there is no uncertainty about that. The big issue is the possibility that benefits under the policy might be subject to income tax.
Context
The same law that provided clear guidance on tax-qualified policies gave virtually no clue about the taxability of long-term care (LTC) benefits paid from any other kind—i.e., a non-tax-qualified policy. Financial advisors and insurance industry observers are uncertain how to interpret the law’s silence.
If the tax breaks were intended to apply to all LTC policies, some ask, why does the Health Insurance Portability and Accountability Act (HIPAA) identify only those that have certain design features? If the goal is to steer people toward tax-qualified insurance, it does not make sense unless those policies are given an advantage over others. Using that rationale, maybe non-tax-qualified benefits are taxable.
On the other hand, it is quite possible Congress was thinking about HIPAA’s tax favoritism only in terms of premium deductibility. Without a clear directive in the statute, many feel the IRS would be reluctant to tax non-qualified policy benefits. Taxation would be perceived as a punitive stance and certainly bad politics among the elderly.
The IRS’ position
The IRS has not issued any formal guidance on this matter, but so far it apparently has not taken the position that non-qualified benefits are taxable. There is reason to believe the IRS will treat non-tax-qualified benefits to the taxpayer in the same manner as accident and health insurance: benefits are not taxable if paid due to personal injury or sickness.