In a previous article we talked at length about the importance of long-term care insurance as part of a comprehensive financial and estate plan. We also spent a considerable amount of time discussing how to compare and select a policy that meets your family’s needs. The next question we should ask ourselves is “What is the most efficient way to pay the premium for this protection”? Well, if you’re a business owner, the most efficient way to pay for long-term care insurance premiums may very well be through your business. Business owners actually have the opportunity in many cases to purchase long-term care insurance in a tax advantage way to their companies. In many cases, all or a portion of the premium paid by the business on behalf of the executive is tax-deductible at the business level, and not considered taxable income to the employee receiving the coverage. Furthermore, this coverage can be offered on a selective basis and does not have to be offered to a large group of eligible participants, similar to what employers must offer in the qualified plan arena.
This article will explore in more detail how business owners can purchase long-term care insurance in a tax-advantaged way and significantly reduce the net cost of this coverage. Also, we have assembled a number of additional resources that will provide links to support this discussion.
The focus of this piece is on the tax-advantages of purchasing long-term care insurance through your business. However, there must first be an underlying need for the coverage. A discussion of why long-term care insurance is an important component of most financial plans is beyond the scope of this particular article. However, an extensive discussion of the need for this type of coverage can be found at this link.
The benefits available to a business and to the employee receiving the benefit vary based on the type of entity structure for that company. For example there are some significant differences in the tax-deductible of the premium if it is paid by a C corporation versus some type of a pass-through entity such as an S corporation or a partnership.
The most powerful benefits at both the business and individual level are available to C corporations and their employees purchasing this coverage. We have outlined some of the more significant benefits and provisions below:
- For C corporations the premium for long-term care insurance paid for by the business is fully deductible as a necessary business expense
- From the employee standpoint, the premium paid by the company is not considered taxable income to the employee receiving the benefit.
- The employee is not required to account for these dollars as economic benefit
- The company could decide to continue to pay these premiums on behalf of a retired employee and the premiums would continue to be deductible by the company and not considered taxable income either retiree
- This long-term care coverage can also be extended to an employee's spouse with the same tax benefits applying at both the business and employee level. Dependents of the employee may also be eligible to receive these benefits with the same tax implications
- The company is not required to offer this coverage to all employees and may designate a certain group or class of employees to receive this coverage. Long-term care insurance offered as an employer paid benefits does not have to meet the same type of coverage requirements that are typically found with qualified retirement plans such as 401(k).
As you can see, there are compelling tax benefits to a C corporation to consider offering long-term care insurance as an employer-sponsored benefit. Although the benefits for pass-through entities such as S corporations, partnerships and LLC's are different, they still warrant consideration. Some specific considerations for S corporations, partnerships, LLPs and LLCs related to the tax implications of this coverage include:
- If the premium is paid for long-term care coverage for an employee who owns less than 2% of the company, the premium is still fully deductible by the business and not considered taxable income for that employee. Therefore for employees that don't own at least 2% of the company the benefits are quite comparable to a C corporation
- Employees who happen to own 2% or more of the company must account for those premiums paid as part of their taxable income. However, they may be able to deduct part of the premium expense. Additionally, there is a maximum allowable reduction based on the age of the employee receiving this benefit. We have included a table reflecting these age-based premium limits below.
For the 2009 tax year, the following age-based premium limits apply for deduction purposes:
For the 2009 tax year, the following age-based premium limits apply for deduction purposes:
Age on 12/31/09 Maximum Amount Considered Health Ins. Premiums
40 or under $320 41 to 50 $600 51 to 60 $1,190 61 to 70 $3,180 Over 70 $3,980
Generally, employers considering offering this benefit should consult their CPA or other tax advisor prior to making a decision to move forward. As you can see from the information reviewed above, the tax implications can vary significantly depending on the entity structure you've chosen for your business.
Additionally, there are a number of other policy design considerations that should be discussed with an experienced insurance professional. For example, many carriers in this space offers significant discounts for multiple life plans offered through the same employer. Also, some companies make limited pay policies available such as a 10 pay premium option where the policy is effectively paid-up after 10-years of premium payments and no further contributions are due.
In conclusion, many Americans will consider long-term care coverage as part of their overall protection plan. Regrettably, chances of someone in this country needing this coverage are significant and the cost of a single stay in a nursing home can be financially devastating for many families. Fortunately, for employers that would like to offer this coverage as an employer-sponsored benefit can do so in a tax-advantaged way at both the company and participant level. Although the benefits from a tax standpoint to vary significantly based on the type of business entity a competent tax professional should be consulted, this technique warrants careful consideration by many companies.
Disclosure:
Dean Piccirillo offers insurance products through HBK Sorce Insurance LLC. Investment advisory services are offered through HBK Sorce Advisory LLC d/b/a HBKS Wealth Advisors. Mr. Piccirillo is not able to transact business in a state that he is not licensed or registered.
NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPLE. NOT INSURED BY ANY STATE OR FEDERAL AGENCY.