July 31, 2017
As the Baby Boom generation continues to age, there is an increasing interest in insurance to pay some of the high costs involved in staying in a long-term care facility. Your family business can provide group coverage for yourself and your employees. If you are interested in long term care insurance, it can be worthwhile to obtain the coverage through your business — rather than as an individual.
We’ll explain why, but first, let’s go over some basic tax information about long term care insurance. A qualified long-term care policy is considered health insurance under federal income tax rules. If you buy a qualified policy as an individual, the premiums paid are treated as medical expenses for itemized deduction purposes on your tax return.
However, there are limits. You can only treat the age-based amounts listed below as medical costs (these numbers are adjusted annually for inflation). Don’t forget to count premiums paid for coverage on your spouse, as well as premiums paid for a family member who is eligible to be your dependent for tax purposes.
Age on 12/31/16
Treated as a Medical Expense
Age on 12/31/17
Treated as a Medical Expense
40 or under
40 or under
41 to 50
41 to 50
51 to 60
51 to 60
61 to 70
61 to 70
Older than age 70
than age 70
Don’t get too enthusiastic about the tax savings received by individual taxpayers, because this is only part of the story. The next step is to take these age-based amounts and combine them with your other medical expenses (such as health and dental insurance premiums, insurance co-payments, out-of-pocket prescription costs, and other unreimbursed medical outlays). If the resulting total exceeds 10% of your adjusted gross income (AGI) in 2017 (and 2016), you can write off the excess as an itemized medical expense on your Schedule A. But if you can’t get over the 10% of AGI hurdle, you get no tax savings.
Note: If you or your spouse is age 65 or older in 2016, your threshold amount is 7.5% of AGI, but only for 2016. Beginning in 2017, the 10% figure applies regardless of age.
If you personally pay premiums for a long-term care policy that is not a qualified policy, the premiums are treated as a nondeductible personal expense.
Tax Savings if Your Business Operates as a C Corporation
As you can see, the write-offs taxpayers receive for long-term care insurance can often be less than expected. However, the tax rules are much more generous if you run your own business as a C corporation, work for the firm as a shareholder-employee, and provide the insurance as a fringe benefit.
Qualified vs. Non-Qualified
The difference between a qualified plan (which is tax deductible) and a non-qualified plan (which is not deductible) lies mainly in what triggers the benefits. A tax-qualified plan must meet certain criteria, including a medical certification that the necessary care will last at least 90 days. Another requirement specifies the kind of care needed during that time.
If you’re expecting to get tax benefits from a long-term care plan, check with your tax adviser to make sure the plan is qualified.
Strategy: Have your C corporation provide company-paid qualified long-term care coverage as an employee benefit for selected employees, such as yourself. The coverage is eligible for the same tax-advantaged treatment as regular company-paid health insurance.
Implications: This means the corporation can generally deduct 100% of the premiums as a business expense (the age-based deduction limits don’t apply when the insurance is provided as an employee benefit). As a covered employee, you don’t have to report any taxable income from the company-paid premiums or any benefit payments you might receive under the policy.
The same tax advantages apply to company-paid coverage for your spouse and for your dependent parent or grandparent (this assumes you pay over half the support for that person and that he or she doesn’t file a joint federal income tax return). You can also provide tax-favored long-term disability coverage for other family members who are employed by your corporation and for any other employees you want to provide with this extra benefit.
What about employees you would rather not cover? No problem. You don’t need to provide coverage to them, because there are no nondiscrimination rules for long-term care insurance provided as an employee benefit.
Tax-Saving Strategy for Sole Proprietors And Single-Member LLCs
Now let’s say you run your business as a sole proprietorship or single-member LLC, which is treated as a sole proprietorship for federal tax purposes. In these scenarios, a good tax-saving strategy is to hire your spouse as a bona fide employee of the business. Then, arrange to have your business provide
Note: If you can’t hire your spouse as an employee, you can still claim a self-employed health insurance deduction for the age-based long-term care insurance premium amounts listed earlier. This is an “above-the-line” write-off entered on Form 1040, which means you don’t need to itemize and you don’t have to worry about the 10% of AGI rule either. Ask your tax adviser for more information.
health insurance coverage and long-term care insurance as a fringe benefit for your employee-spouse. Your spouse can then elect family coverage that protects you and other family members who are dependents.
Under this arrangement, you can deduct 100% of the premiums on your Schedule C. The age-based long-term care insurance deduction limits don’t apply so there’s no taxable income for the covered individuals. As with a C corporation, you don’t have to provide coverage for other employees, because there are no nondiscrimination rules for this benefit.
Important: Make sure the value of the insurance coverage, plus any other compensation given to an employee, is reasonable for the work performed.
Rules for S Corporations
If you run your business as an S corporation, the company can pay for qualified long-term care insurance premiums on behalf of shareholder-employees, including you. If you are a more-than-two-percent shareholder, the company-paid premiums that benefit you are treated as additional taxable wages on your Form W-2. The extra amount can be deducted by your S corp and can be exempt from the Social Security and Medicare taxes with proper planning.
You can then claim a write-off on Form 1040 equal to 100% of the age-based premium amount listed earlier. It is included as part of self-employed health insurance premiums.
Contact your employee benefits professional if you want more information about long-term care insurance and how to maximize the tax breaks available to business owners.