EF Fall 07.indd - National Association of Professional Allstate ...

marketingA Small Business PerspectiveBY DEAN HORGER CLU CHFC CLTCGENWORTH FINANCIAL’S LONG TERM CARE INSURANCE DIVISIONWhat if a business owner could offera highly desirable benefit to an employeethat was selective, available to spouses,did not increase the employee’s taxableincome, let the employee receive futurebenefits tax free yet still allowed the businessowner to deduct most, if not all, ofthe contributions? A dream come true?Believe it or not, there is such a productavailable and it is a hot commodity thesedays. What is it? It’s called long termcare insurance.In this day and age, many families,especially those with aging parents, understandthe need for long term care insurance,but keep putting off the decisionto buy because of the expense. There areways, however, that an employer can helpfill this need and look like a hero whileproviding an important benefit thathelps retain key employees and possiblyget a tax break at the same time.2007 Eligible Long Term Care Insurance PremiumsAge-Based Deduction LimitsAgeLet’s look at some of theparameters:• Selectivity: A business owner canchoose a class of employees for inclusionin such a plan (including the owner-employee)provided there is a rational basisfor including some and excluding others.• Spouse Coverage: The owner mayinclude employees’ spouses within the plan(including his or her own). This is very differentfrom the way other executive benefitplans generally work, such as 162 bonusplans with life insurance or non-qualifieddeferred compensation plans.• Deductibility: Depending on theform of business entity, the businessowner may deduct premiums paid for anon-owner employee and spouse, andmay also be able to deduct all or someof the premiums paid for the employeeowner’sand spouse’s premium.Let’s take a closer look at deductibility.Individuals who itemize deductionscan add their eligible premium toany unreimbursed medical expenses. Ifthe combined total exceeds 7.5% of theiradjusted gross income, the amount overthat threshold can be considered for a deduction.“Eligible premium” is the lesserof actual premiums paid or the age-basedlimits indicated in the chart above. Veryfew individuals qualify for this deduction.A sole proprietor can purchase longterm care insurance on himself and hisspouse, and deduct the premium or theeligible Age Based Limit whichever isless. Keep in mind that the sole proprietordoesn’t have to consider the 7.5% ofadjusted gross income requirement.Here is an example: Kathy is the soleproprietor of a gift shop and is marriedto John. Both of them are age 55. Thepremium for their long term care coverageis $2,800. Generally speaking andassuming she itemizes, Kathy could deducta total of $2,220, or $1,110 each forherself and John.In any of the pass-through business entityforms such as Partnerships, S-Corporations(assuming more than 2% owner),and LLCs (assuming the LLC is taxedas a partnership), the entity could pay forAmount Deductible*40 or under $29041 through 50 $55051 through 60 $1,11061 through 70 $2,95071 and above $3,680*IRC Sec. 213(d)(10)(A). Rev. Proc. 2006-53, 2006-481.R.B.1those premiums and consider it a businessexpense. The premium expense wouldpass to the owner as income, and then theowner could deduct up to the Age BasedLimits on the individual tax return.If you have a non-owner employee,the business entity can pay and deduct thelong term care insurance premiums for apolicy owned by the employee and also fora policy owned by his or her spouse. Thepremium is not considered taxable incometo the employee or the spouse, nor is thebenefit taxable when paid to the insuredat time of claim reimbursement.In a C-Corporation, if a stockholderemployee is actively at work in the business,the corporation can pay the premiumsfor the stockholder employee andspouse, and deduct the premium coststo boot. Additionally, the premium paidby the C-corporation is not consideredincome to the stockholder employee.As with all tax qualified long term careinsurance policies, benefits paid in theform of reimbursement are not taxable.In terms of selectivity, spousal availabilityand deductibility, long term careinsurance is one of the few executive benefitsthat is a win-win for each party. Plus,the employee owns these individual poli-32 — Exclusivefocus Fall 2007