Tax Qualified versus Non-Tax Qualified
This section addresses the main differences between the tax qualified (TQ)
and the non-tax qualified policies. Which one is right for you? You can only
make this decision after you look at both of your options.
Because tax qualified policies are now considered the same as accident and
health policies, they may be eligible for tax deductions. They must also adhere
to the standards set forth by HIPAA. Non-tax qualified policies are currently
not eligible for any tax deductions and they do not have to meet any of the
standards that HIPAA requires. Below we will examine the differences in benefit
triggers, tax deduction status, and the taxability of benefits.
Benefit Triggers
Tax Qualified Policies:
These policies are required to use the same criteria to determine when benefits
should be paid under a policy. Included in the benefit triggers for a TQ policy
are the following:
- The insured is expected to be unable to perform
(without "hands-on or stand-by" assistance) at least 2 of 5 or
more activities of daily living (ADLs). The activities of daily living are:
bathing, eating, dressing, toileting, transferring, and maintaining
continence. (California requires all 6 ADLs to be used.)
- Cognitive Impairment: The insured is diagnosed with a severe cognitive
impairment where it is determined they are a threat to themselves or others.
- 90-Day Certification: TQ policies require certification of expected need
for care of at least 90 days. NTQ policies do not require this
certification.
 | If you do not initially get the 90-day
certification and you end up needing care longer than 90 days, your
health care practitioner can certify that happened and the insurance
company will pay retroactively based on your elimination period.
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| If you do not get the 90-day certification and only need care for say,
twenty days, those days would not count towards your deductible. |
Non-Tax Qualified Policies:
These policies have no standardized benefit triggers. Therefore, the carrier can
determine how liberal or strict they want their benefit triggers to be. Non-Tax
Qualified benefit triggers can include medical necessity as a benefit
trigger, and can require that the policyholder only needs help with one
activity of daily living.
Tax Deduction Status
Tax Qualified Policies:
The premiums paid for these policies are eligible for both Federal and State tax
deductions. These are discussed in detail in the Federal and State section.
Non-Tax Qualified Policies:
The premiums paid for these policies currently do not receive any tax
deductions.
Taxability of Benefits
Form 1099-LTC:
All carriers are required to issue Form 1099-LTC to all beneficiaries when
benefits are paid from either a TQ or NTQ policy. According to HIPAA, the
benefits on a TQ policy are definitely not taxable, but there is no mention
or decision relative to the taxation of benefits on a non-tax qualified policy.
Some proponents of NTQ policies are not concerned about the tax ramifications
from a Form 1099-LTC because they think that the cost of the long-term care can
be deducted as a medical expense so it will be a wash. Unfortunately, this is
not true because the instructions for IRS Form 1040, Schedule A-Itemized
Deductions, say: “Caution: Do not include expenses reimbursed or paid by
others.” A policyholder may deduct only the costs of care that were not
reimbursed.
Per diem benefits received on a TQ policy are tax free up to $230 for the
year 2004. If you receive per diem benefits above $230, they will be taxed as
income, unless your actual long-term care expenses were also above $230.
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