Ensuring a happy ending

YEAH, I KNOW. You are going to live forever. That may be the problem. The longer you hang on, the more likely you are going to need assisted living. That will be quite expensive. According to Christopher and James Bell of the Mobile, Ala., firm of Branch, Bell & Associates, "The need for long-term care touches eight out of 10 families in the United States." Your risk is higher than destroying your car in an accident, or even having a fire at home.

Frank Keating, president of the American Council of Life Insurers, reports that it currently runs more than $16,000 annually for daily visits by a home health care aid and over $55,000 per year for a nursing home. Those expenses are projected to reach $68,000 and $190,000, respectively, within the next 30 years. Moreover. you do not have to be old to worry about long-term care. More than 35% of the LTC benefits paid in 2001 were to those under age 40.

Without some sort of long-term-care plan, these extraordinary expenses can be catastrophic. They can wipe out your retirement savings and decimate your investments. Rep. Earl Pomeroy (D.-N.D.), talking about such coverage, states. "If you don't have it, you've got to impoverish yourself for Medicaid to pay for prolonged care." Adds Marc Rosenblum, a chartered life underwriter and financial consultant who sells long-term-care policies; "The fact of the matter is, a good policy will actually keep you out of the nursing home.... A quality LTC insurance policy with extensive home health care benefits can help you remain at home by providing the cash necessary for home care."

Not only that, but there are ways to get the Internal Revenue Service to pick up a piece of the tab. Currently, "eligible" premiums for long-term-care insurance are allowed as medical deductions. To get the tax benefit, you normally have to itemize your deductions. The total of your medical expenses, including eligible long-term-care premiums, must exceed 7.5% of your adjusted gross income. That is your total gross income less any above-the-line deductions. If your adjusted gross income is $100,000, 7.5% of that amount reduces your medical deduction. So, in this case, your first $7,500 in medical expenses would not count.

However, since eligible premiums for long-term care can be credited as medical expenses, you might think they can be paid on a pretax basis with a Cafeteria/Salary Reduction Plan or with a Health Reimbursement Arrangement. These eliminate the need to itemize and exceed the 7.5% floor in order to enjoy the deduction. Unfortunately for tax payers, long-term care specifically is excluded as a benefit for Cafeteria Plans.

Health Reimbursement Arrangements are new and were created by IRS authorization rather than by statute. I am not aware of any specific prohibition against long-term-care benefits. They were designed to cover medical expenses. The rulings I have seen have been liberal in their interpretation of what constitutes a medical expense. Yet, the IRS might view them as similar to Cafeteria Plans. How aggressive do you want to get?

Alternatively, if your employer pays the long-term-care premiums directly, that is a tax-free employee benefit. The employer can pay for you and your dependents. Your employer gets the deduction and you pay no tax on the benefit. There is no limit on what your employer can pay. Tax free is always better than tax deductible. All you have to do is convince your employer. Annual eligible premiums are limited. They include what you pay for yourself. spouse, and dependents: age 40 and younger ($260); 41-50 ($490); 51-60 ($980); 61-70 ($2,600); and 71 and older ($3,250).

If you are self-employed, you can deduct as much as 100% of your eligible premiums above the line without any reduction. They count as part of your health insurance deduction. This is limited to your net income from the business. If you are a highly paid executive, or own a regular corporation (called a C-corp. by the tax professionals), you have a special opportunity In take advantage of our tax code.

Remember. the owner also is an employee of the corporation. So, 100% of the premiums paid by the corporation would be deductible. And none of them would be income to the employees. No limit on what the employer can pay. Nothing different from what we discussed above. Here's the kicker! With most employee benefits, all eligible employees must be covered--and the IRS tells you which employees must be eligible. That, however, is not true for long-term care. This employee benefit can be offered on a fully discriminatory basis to favored employees. Actually, a business owner can choose to give this perk just to himself and his family!

For those of us without our own corporations, keep an eye on a proposed bill called the Long Term Care and Retirement Security Act. It calls for a phased-in, above-the-line deduction available to all taxpayers. Under the bill, 25% of your premiums could be deducted through 2005. The deduction would go to 35% in 2006, 65% in 2007, and 100% in 2008 and after.