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THE HEALTH INSURANCE PORTABILITY &
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The health insurance reform law, P.L. 104-191 popularly ° MSA's ° Self-Employed Health Insurance Deduction ° Long Term Care Insurance MEDICAL SAVINGS ACCOUNTS The new law created a "pilot program" for MSA's that will last up to four years. It will be in full effect from January 1, 1997 until September 1997. Whether it continues after September 1, 1997 will depend on how many MSA participants there are on September 1, 1997. (If there are more than 375,000 enrollments, the program will be suspended.) Who can participate in the MSA program? It is available to small employers (those with 50 or fewer employees), and to self employed individuals. All employers under common control are considered to be one employer. What if a small employer become large? A small employer that grows beyond 50 employees after it establishes an MSA/Catastrophic program can continue the program until it reaches more than 200 employees. Who can contribute to the MSA? Either the employer or the employee can pay for the catastrophic policy and/or contribute to the MSA. Contribution limits are the same whether the employer or the employee make the contribution. How does the MSA program work? An MSA program participant must be covered by a high deductible catastrophic health insurance policy. After a policy is in place, either the employer or the individual can contribute up to 65% (75% for family coverage) of the individual catastrophic policy's deductible into a tax favored MSA. What is considered a "high deductible" policy? A "high deductible" catastrophic policy health insurance policy is defines as a policy that has a deductible of at least $1500 and no more than 2,250 for individual coverage; and at least $3,000 and no more than $4,500 for family coverage. Thus, the maximum MSA contribution would be $975.00 to $1,462.50 for individual coverage, or $1,950.00 to $3,375.00 for family coverage. The cap amounts are indexed for inflation. How are contributions and withdrawals treated? Earnings on contributions to MSA's accumulate income tax free. Withdrawals from MSA's for "qualified medical expenses" (those that qualify as medical expenses under IRC Section 213, the tax rule that allows individuals to deduct medical expenses to the extent they exceed 7.5% of adjusted gross income) are also tax-free. What happens if the withdrawal isn't for medical expenses? Withdrawals from MSA's that are not for qualified medical expenses are subject to income tax, and if they occur prior to age 65, to a 15% penalty tax. Can MSA's be offered through a cafeteria plan? MSA/Catastrpohic coverage cannot be offered through a cafeteria plan. When do MSA balances become taxable? MSA balances become taxable income if/when an MSA participant does not have high deductible catastrophic coverage. Can MSA funds be used to purchase LTC insurance? Tax-free MSA withdrawals can be used to purchase Long Term Care insurance, but not to purchase other health insurance. What happens to participants if the enrollment cap is exceeded? MSA participants (whether individual or employer) can continue their MSA programs (including making new annual contributions) even after the enrollment cap is exceeded (if it is) and after the year 2000. The enrollment cap/cutoff will apply to new MSA program participants only. SELF EMPLOYED DEDUCTION Beginning January 1, 1997, self employed individuals will be able to deduct 40% of the cost of their health insurance premium. In 1998, 1999, 2000, 2001, and 2002-- 45%; 2003--50%; 2004-- 60%; 2005--70%. And, in the year 2006, the deductible premium amount is set at 80%, where it remains "forever" (until/ unless Congress changes the law). Note: "health insurance premium" includes "qualified LTC premiums".
Long Term Care Insurance How will LTC insurance be treated for federal income tax? For purposes of Federal income tax, "qualified" LTC insurance will be treated as if it's health and accident insurance. What is considered "qualified" LTC insurance? "Qualified" LTC is LTC insurance that: provides only coverage of qualified LTC services (generally, coverage triggered by physician certification that the insured cannot perform any 2 of a specified 5 activities of daily living without assistance, or is severely cognitively impaired - such as a person suffering Alzheimer's disease); is guaranteed renewable; does not provide for a cash surrender value (or other money that can be paid, assigned, pledged or borrowed); provides that refunds (other than by death or complete surrender) can be used only to reduce future premiums or to increase future benefits; does not pay or reimburse expenses reimbursable under Medicare (except where Medicare is a secondary payer or where the contract pays a per diem or other periodic benefit without regard to expense) and; complies with specified consumer standards (generally, NAIC model LTC consumer protection standards, except that there is no limit on agent commissions, and that while there is a requirement that nonforfeiture benefits are not themselves required). State-maintained LTC plans are deemed to be "qualified" LTC coverage. Are LTC insurance premiums tax deductible by employers? Are there any discrimination rules? Qualified LTC insurance can be provided tax free to employees and tax deductible by employers. There are no discrimination rules (as with fully insured health insurance) applicable to fully insured LTC plans; nor are there premium caps as described below which apply to individual and self employed purchases of LTC. What are the limitations regarding individual deduction of qualified LTC? Deductions apply if all medical expenses (including the LTC premium) exceed 7.5% of adjusted gross income. If the insured person is a dependent of the person paying the premium, the person paying the premium qualifies for the deduction. The limitation is also ties to the insured's age (i.e., annual premiums of $200 or less for insureds age 40-50; $750 for insured age 50-60; $2,000 for insured age 60-70; and $2,500 for insureds over age 70 qualify for the medical expense deduction). What are the limitations to self insured persons? Self insured persons can include the cost of LTC in the deduction they take for health insurance premiums paid by the self employed. The deduction is limited to the premium caps specified above. It is also subject to the cap on the amount of the premium that can be deducted. Thus, for example a self insured person, in 1997, can deduct 40% of his/her LTC premium (in addition to 40% of his/her "regular" health insurance premium), up to the specified maximum premium. Assume a 60 year old self employed person with an LTC policy that has an annual premium of $2,200. The person can deduct 40% of $2,000 of the premium (the $200 "excess" over the $2,000 cap on insureds between ages 60-70 is not allowable in calculating the deduction), or $800 of the LTC premium. By 2006, that deduction will be 80% of the $2,000 of the $2,200 premium (assuming no inflation, and therefore no inflation adjustment), or $1,600. When are benefits taxable? Benefits payable under an LTC policy are income tax free to beneficiaries, except benefits payable under a per diem LTC policy which are income tax free only up to a maximum of $175/day (indexed). If more than 175/day is paid, then the excess is excludable from taxable income only to the extent the individual has incurred actual costs for long term care services. Further, the excludable benefits amount will be reduced below the $175/day level if/when long term care costs are reimbursed (and payments are received) by anyone for the cost of qualified LTC services for the chronically ill individual. Is it possible for states to have more stringent rules? States may enact "consumer protection standards," with which LTC coverage must comply, that are more stringent than those specified in the legislation. How will policies issued before 1997 be treated? Pre-1997 LTC policies will be treated as qualifying LTC coverage if the policies meet the LTC insurance requirements in the state in which the policy was issued, and services provided under or reimbursed by the contract shall be treated as qualified LTC services. What if a current policy isn't considered "qualified"? Between date of enactment and January 1, 1998, "old" LTC coverage can be exchanged tax free for qualified LTC insurance, except when money or other property is received by the taxpayer as part of the exchange. In this case, the money or the property would be subject to income tax. When do these LTC rules become effective? These rules are effective for taxable years beginning December 31, 1996.
Group Insurance - Employee Census Form
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