The tax treatment of long-term care insurance was made more favorable by the Health Insurance Portability and Accountability Act. Because favorable tax treatment is only given if long-term care insurance policies meet prescribed standards, the nature of most long-term coverage has changed. In most cases, the imposition of federal standards results in broader coverage for consumers. However, Congress seems to have been concerned with the revenue loss associated with this tax legislation. As a result, policies that are modified to comply with the federal standards may in some cases actually provide more limited coverage than has been previously required in several states, posing a dilemma for the states. Unless they approve the sale of more restrictive policies, state residents will not obtain the new tax benefits. However, the approval of these policies may make it more difficult for an insured to qualify for benefits. Consumers who want to purchase long-term care insurance may also be faced with a difficult and confusing decision unless a state adopts the federal standards for all policies: Should the choice of policy be based on the potential long-term care benefits or on tax advantages?

It should be emphasized that the long-term care changes in the act are primarily changes in the income tax code. States still have the authority to regulate long-term care insurance contracts. They have no obligations to bring state rules and regulations into conformity with these tax changes. However, all states allow qualified contracts.

The act provides favorable tax treatment to a qualified long-term care insurance contract. This is defined as any insurance contract that meets all the following requirements:

The act also provides that any contract issued before January 1, 1997, that met the long-term care requirements in the state where the policy was issued will be considered a qualified long-term care contract.

Beginning in 1997, a qualified long-term care insurance contract is treated as accident and health insurance. With some exceptions, expenses for long-term care services, including insurance premiums, are treated like other medical expenses. That is, self-employed persons may deduct a portion of premiums paid, and persons who itemize deductions can include the cost of long-term care services, including insurance premiums, for purposes of deducting medical expenses in excess of 7.5 percent of adjusted gross income. However, there is a cap on the amount of personally paid long-term care insurance premiums that can be claimed as medical expenses. These limits, based upon a covered individual�s age and subject to cost-of-living adjustments after 1997, are shown in table 8-1. (Deductions cannot be taken for payments made to a spouse or relative who is not a licensed professional with respect to such services.)

Any employer contributions for group contracts are deductible to the employer and do not result in any taxable income to an employee. Benefits received under a group plan are received tax free by an employee with one possible exception. Under contracts written on a per diem basis, proceeds are excludible from income up to $175 per day. (This figure is indexed annually after 1997.) Amounts in excess of $175 are also excludible to the extent that they represent actual costs for long-term care services.

Coverage cannot be offered through a cafeteria plan on a tax-favored basis. In addition, if an employee has a flexible spending account for unreimbursed medical expenses, any reimbursements for long-term care services must be included in the employee�s income.