What are the tax implications of providing long-term care?

When a company offers long-term care coverage, the employer can provide the plan on a contributory or voluntary basis. Of course, the employee pays 100% of the premium for a voluntary plan and, except for Health Savings Accounts (HSAs), all payments must be made on a post-tax basis. The same is true for policies purchased individually outside of the workplace. However, with certain limitations, employers may deduct their contributions to long-term care plans and such payments are not taxable to the employee resulting in an overall tax savings for the coverage.

Accordingly, for employees who are going to purchase long-term care coverage, they would economically prefer that their employer pay for the plan and reduce their salaries to make up for the coverage. However, such choices are not allowed, except under Section 125, and long-term care coverage is currently not eligible for this section.

How can an employer achieve greater tax effectiveness for a long-term care plan?

The most frequent method for employers to contribute to long-term care coverage is through the use of "core buy-up" programs. In these programs, every employee is given core (usually inexpensive and often inadequate) coverage. Employees then have the option of buying-up to a more complete program. This approach lacks any tax effectiveness, however. On the other hand, a program offering a 50% employer and 50% employee contributory method creates tax efficiency on the portion for which the employer pays. Here’s how it works:

The participation rate of the two programs may be similar though some employees are lulled into believing that the core program provides adequate coverage and thus do not contribute. However, all employer contributions in a 50/50 program are on behalf of employees who have indicated an interest in the program. This translates into a more tax effective long-term care program for the employer and a more valuable long-term care plan for the employee.

Why is true group long-term care so important?

• Many Americans will have no way to pay for long-term care services when they are needed.
• Insurance for long-term care will not become widespread if only available on an individual basis, which means that the change will need to come first from employers.
• Group coverage needs to include employer contributions to make it affordable to employees and vesting to make it affordable to employers.