DESCRIPTION OF FEDERAL TAX RULES AND 

LEGISLATIVE BACKGROUND 

RELATING TO LONG-TERM CARE

Scheduled for a Public Hearing 

before the

SENATE COMMITTEE ON FINANCE

on March 27, 2001

Prepared by 

the Staff of the

JOINT COMMITTEE ON TAXATION

JCX-18-01

March 26, 2001
(i)

CONTENTS

Page

INTRODUCTION.......................................................................................................... 1

I. PRESENT LAW FEDERAL TAX RULES RELATING TO

LONG-TERM CARE ................................................................................................ 2

A. In General....................................................................................................... 2

B. Exclusion from Gross Income of Proceeds Under Long-Term Care 

Insurance Contracts........................................................................................ 2

C. Deductibility of Long-Term Care Services and Premiums for Long-Term

Care Insurance................................................................................................ 3

D. Deduction for Long-Term Care Insurance of Self-Employed Individuals.... 3

E. Treatment of Employer-Provided Long-Term Care Coverage ...................... 4

F. Consumer Protection Provisions.................................................................... 5

G. Life Insurance Company Reserves ................................................................ 6

H. Definitions...................................................................................................... 6

1. Qualified long-term care insurance contract............................................ 6

2. Qualified long-term care services............................................................ 7

I. Reporting Requirements ................................................................................ 8

II. LEGISLATIVE BACKGROUND............................................................................. 9
1

INTRODUCTION

The Senate Committee on Finance has scheduled a public hearing on March 27, 2001, on 

issues relating to long-term care.

This document,1 prepared by the staff of the Joint Committee on Taxation, contains a 

description of present law Federal tax provisions and legislative background relating to longterm care services and contracts. 

 

1

 This document may be cited as follows: Joint Committee on Taxation, Description of 

Federal Tax Rules and Legislative Background Relating to Long-Term Care (JCX-18-01), 

March 26, 2001.
2

I. PRESENT LAW FEDERAL TAX RULES RELATING TO 

LONG-TERM CARE

A. In General

Present law provides favorable tax treatment for qualified long-term care insurance 

contracts and qualified long-term care services. This treatment is similar to the favorable tax 

treatment that applies to medical insurance and services and employer-provided accident or 

health plans.

In general, amounts received under a qualified long-term care insurance contract are 

excludable from income (subject to an annual dollar cap in the case of per diem contracts2). 

Employer contributions for qualified long-term care insurance are excludable from income, 

except that this exclusion does not apply to long-term care insurance or services provided under 

a cafeteria plan or flexible spending arrangement. Up to certain dollar limits, premiums for 

qualified long-term care insurance are treated as a medical expense for purposes of the itemized 

deduction for medical expenses, and are deductible under the rules relating to deduction of health 

insurance expenses for self-employed individuals. Expenses for qualified long-term care 

services are treated as medical expenses for purposes of the itemized deduction for medical 

expenses.

B. Exclusion from Gross Income of Proceeds Under Long-Term Care

 Insurance Contracts

Amounts (other than policyholder dividends or premium refunds) received under a 

qualified long-term care insurance contract generally are excludable from income, subject to a 

dollar cap in the case of per diem contracts. Long-term care benefits in excess of the annual 

dollar cap under per diem contracts are includible in gross income. 

The amount of the dollar cap with respect to any one chronically ill individual is $200 per 

day or $73,000 annually (for 2001), reduced by the amount of reimbursements and payments 

received by anyone for the cost of qualified long-term care services for the chronically ill 

individual. If more than one payee receives payments with respect to any one chronically ill 

individual, then everyone receiving periodic payments with respect to the same insured is treated 

as one person for purposes of the dollar cap. The amount of the dollar cap is utilized first by the 

chronically ill person, and any remaining amount is allocated in accordance with Treasury 

regulations. If payments under such contracts exceed the dollar cap, then the excess is 

excludable only to the extent of actual costs (in excess of the dollar cap) incurred for long-term 

care services. Amounts in excess of the dollar cap, with respect to which no actual costs were 

incurred for long-term care services, are fully includible in income.

 The $200 per day limit is indexed for inflation.

 

2

 Per diem contracts are contracts that provide payment on a daily or other periodic basis 

without regard to expenses incurred during the period. 
3

C. Deductibility of Long-Term Care Services and Premiums for 

Long-Term Care Insurance 

Present law provides that unreimbursed medical expenses, including expenses for 

medical insurance, are deductible as an itemized deduction to the extent the taxpayer’s total of 

such expenses exceeds 7.5 percent of adjusted gross income (“AGI”). Unreimbursed expenses 

for qualified long-term care services provided to the taxpayer or the taxpayer's spouse or 

dependents and, within limits, premiums for qualified long-term care contracts are treated as 

medical expenses for purposes of this itemized deduction. Amounts received under a qualified 

long-term care insurance contract (regardless of whether the contract reimburses expenses or 

pays benefits on a per diem or other periodic basis) are treated as reimbursement for expenses 

actually incurred for medical care and, thus, are not taken into account in determining the 

amount of deductible medical expenses.

The maximum amount of long-term care insurance premiums that can be taken into 

account for purposes of the itemized deduction for medical expenses cannot exceed the 

following limits (for 2001):

The limitation on premiums paid for such taxable years is:

In the case of an individual The limitation on

with an attained age before the premiums paid for such

close of the taxable year of: taxable years is:

Not more than 40 $ 230 

More than 40 but not more than 50 430 

More than 50 but not more than 60 860 

More than 60 but not more than 70 2,290 

More than 70 2,860 

These dollar limits are indexed for inflation.

D. Deduction for Long-Term Care Insurance of Self-Employed Individuals

Self-employed individuals may deduct 60 percent of their premiums on qualified longterm care insurance contracts covering themselves or their spouse or dependents for 2001. The 

amount of premiums that can be taken into account for purposes of the deduction is limited to the 

maximum premium treated as a medical expense under the itemized deduction for medical 

expenses, described above. The deductible percentage of qualified long-term care insurance 

premiums of self-employed individuals increases to 70 percent for taxable years beginning in 

2002, and to 100 percent for taxable years beginning in 2003 and thereafter. 

The deduction for qualified long-term care insurance expenses of a self-employed 

individual is not available for a month for which the individual is eligible to participate in any 
4

subsidized long-term care plan maintained by any employer of the individual or the individual's 

spouse.

E. Treatment of Employer-Provided Long-Term Care Coverage

A plan of an employer providing coverage under a qualified long-term care insurance 

contract generally is treated as an accident or health plan. Thus, employer contributions for 

qualified long-term care insurance for the employee, his or her spouse, and his or her dependents 

are excludable from gross income and from wages for employment tax purposes. This exclusion 

does not apply, however, to employer-provided coverage provided through a cafeteria plan.3 

Similarly, employee expenses for long-term care services cannot be reimbursed under a flexible 

spending arrangement on a tax-free basis.4 Amounts received from long-term care insurance 

purchased by the employer are excludable from income (subject to the cap on per diem 

contracts).

Employer contributions for long-term care insurance are deductible by the employer as a 

trade or business expense. 

A group health plan under which substantially all of the coverage is for qualified longterm care services is not subject to the continuation health care coverage rules.5

 

3

 A cafeteria plan is an arrangement under which employees are given the option of 

receiving cash or certain nontaxable benefits, such as health insurance coverage or dependent 

care. If certain requirements are satisfied, the employee is not required to include the amount of 

cash offered in income unless the employee actually elects to receive the cash. Sec. 125.

4

 A flexible spending arrangement (“FSA”) is a reimbursement account or other 

arrangement under which an employer pays or reimburses employees for medical expenses or 

certain other nontaxable benefits, such as dependent care. An FSA may be funded by direct 

employer contributions, or may be funded by employee salary reduction contributions through a 

cafeteria plan. FSAs are commonly used, for example, to reimburse employees for medical 

expenses not covered by the employee’s insurance (e.g., expenses below the deductible amount 

under the employee’s insurance). While long-term care expenses cannot be reimbursed under a 

FSA (or provided through a cafeteria plan), if certain requirements are satisfied, under present 

law, individuals may be able to exclude amounts paid by an employer through an FSA or 

cafeteria plan for certain work-related expenses relating to the care of dependents who are 

physically or mentally incapable of caring for themselves. Sec. 129.

5

 The health care continuation rules generally require a group health plan to provide 

qualified beneficiaries who would otherwise lose coverage under the plan due to termination of 

employment or certain other events to elect to continue to participate in the plan. Within limits, 

the plan is permitted to charge for such continuation coverage. Sec. 4980B.
5

F. Consumer Protection Provisions

Qualified long-term care insurance contracts, and issuers of such contracts, are required 

to satisfy certain provisions of the long-term care insurance model Act and model regulations 

promulgated by the NAIC (as adopted as of January 1993).

The contract requirements relate to disclosure, nonforfeitability, guaranteed renewal or 

noncancellability, prohibitions on limitations and exclusions, extension of benefits, continuation 

or conversion of coverage, discontinuance and replacement of policies, unintentional lapse, postclaims underwriting, minimum standards, inflation protection, preexisting conditions, and prior

hospitalization. Disclosure and nonforfeiture requirements also apply. The nonforfeiture 

provision gives consumers the option of selecting reduced paid-up insurance, extended term 

insurance, or a shortened benefit period in the event a policyholder who elects a nonforfeiture 

provision is unable to continue to pay premiums. The requirement that insurers offer 

policyholders a nonforfeiture benefit does not preclude the imposition of a reasonable delay 

period. The consumer protection provisions that apply with respect to the terms of the contract 

apply only for purposes of determining whether a contract is a qualified long-term care insurance 

contract.

The requirements for issuers of long-term care insurance contracts relate to application 

forms, reporting requirements, marketing, appropriateness of purchase, format, delivering a 

shopper's guide, right to return, outline of coverage, group plans, policy summary, monthly 

reports on accelerated death benefits, and incontestability period. A tax is imposed equal to 

$100 per insured per day for failure to satisfy these requirements. The consumer protection 

requirements for issuers of contracts apply with respect to contracts that are qualified long-term 

care insurance contracts.

An otherwise qualified long-term care insurance contract will not fail to be a qualified 

long-term care insurance contract solely because it satisfies a consumer protection standard 

imposed under applicable State law that is more stringent than the analogous standard provided 

in the Code.

G. Life Insurance Company Reserves

In determining reserves for insurance company tax purposes, the Federal income tax 

reserve method applicable for a long-term care insurance contract issued after December 31, 

1996, is the method prescribed by the NAIC (or, if no reserve method has been so prescribed, a 

method consistent with the tax reserve method for life insurance, annuity or noncancellable 

accident and health insurance contracts, whichever is most appropriate). In no event may the tax 

reserve for a contract as of any time exceed the amount which would be taken into account with 

respect to the contract as of such time in determining statutory reserves.
6

H. Definitions

1. Qualified long-term care insurance contract

In general

A qualified long-term care insurance contract is defined as any insurance contract that 

provides only coverage of qualified long-term care services and that meets other requirements. 

The other requirements are that (1) the contract is guaranteed renewable, (2) the contract does 

not provide for a cash surrender value or other money that can be paid, assigned, pledged or 

borrowed, (3) refunds (other than refunds on the death of the insured or complete surrender or 

cancellation of the contract) and dividends under the contract may be used only to reduce future 

premiums or increase future benefits, (4) the contract generally does not pay or reimburse 

expenses reimbursable under Medicare (except where Medicare is a secondary payor, or the 

contract makes per diem or other periodic payments without regard to expenses), and (5) the 

contract satisfies the consumer protection requirements described above.

A contract does not fail to be treated as a qualified long-term care insurance contract 

solely because it provides for payments on a per diem or other periodic basis without regard to 

expenses incurred during the period. 

State-maintained plans 

An arrangement is treated as a qualified long-term care insurance contract if an individual 

receives coverage for qualified long-term care services under a State long-term care plan, and the 

terms of the arrangement would satisfy the requirements for a long-term care insurance contract 

under the provision, were the arrangement an insurance contract. For this purpose, a State longterm care plan is any plan established and maintained by a State (or instrumentality of such 

State) under which only employees (and former employees, including retirees) of a State or of a 

political subdivision or instrumentality of the State, and their relatives, and their spouses and

spouses' relatives, may receive coverage only for qualified long-term care services. "Relative" is 

defined as under section 152(a)(1)-(8). 

Long-term care riders on life insurance contracts

In the case of long-term care insurance coverage provided by a rider on or as part of a life 

insurance contract, the requirements applicable to qualified long-term care insurance contracts 

apply as if the portion of the contract providing such coverage were a separate contract. The 

term "portion" means only the terms and benefits that are in addition to the terms and benefits 

under the life insurance contract without regard to long-term care coverage. As a result, if the 

applicable requirements are met by the long-term care portion of the contract, amounts received 

under the contract as provided by the rider are treated in the same manner as long-term care 

insurance benefits, whether or not the payment of such amounts causes a reduction in the 

contract's death benefit or cash surrender value. The guideline premium limitation applicable 

under section 7702(c)(2) is increased by the sum of charges (but not premium payments) against 

the life insurance contract's cash surrender value, the imposition of which reduces premiums paid 

for the contract (within the meaning of sec. 7702(f)(1)). In addition, it is anticipated that 

Treasury regulations will provide for appropriate reduction in premiums paid (within the 
7

meaning of sec. 7702(f)(1)) to reflect the payment of benefits under the rider that reduce the cash 

surrender value of the life insurance contract.

2. Qualified long-term care services

Qualified long-term care services means necessary diagnostic, preventive, therapeutic, 

curing, treating, mitigating and rehabilitative services, and maintenance or personal care services 

that are required by a chronically ill individual and that are provided pursuant to a plan of care 

prescribed by a licensed health care practitioner. Maintenance and personal care services may 

include meal preparation, household cleaning, and other similar services which the chronically ill 

individual is unable to perform. 

For purposes of the deduction for medical expenses, qualified long-term care services do 

not include services provided to an individual by a relative or spouse (directly, or through a 

partnership, corporation, or other entity), unless the relative is a licensed professional with 

respect to such services, or by a related corporation (within the meaning of Code section 267(b) 

or 707(b)).

A chronically ill individual is one who has been certified within the previous 12 months 

by a licensed health care practitioner as (1) being unable to perform (without substantial 

assistance) at least 2 activities of daily living for at least 90 days due to a loss of functional 

capacity, (2) having a similar level of disability as determined under regulations prescribed by 

the Secretary of the Treasury in consultation with the Secretary of Health and Human Services, 

or (3) requiring substantial supervision to protect such individual from threats to health and

safety due to severe cognitive impairment. Activities of daily living are eating, toileting, 

transferring, bathing, dressing and continence. 

An individual who is physically able but has a cognitive impairment such as Alzheimer's 

disease or another form of irreversible loss of mental capacity is treated similarly to an individual 

who is unable to perform (without substantial assistance) at least 2 activities of daily living. 

Because of the concern that eligibility for the medical expense deduction not be diagnosisdriven, the provision requires the cognitive impairment to be severe. It was intended that severe 

cognitive impairment mean a deterioration or loss in intellectual capacity that is measured by 

clinical evidence and standardized tests which reliably measure impairment in: (1) short- or longterm memory; (2) orientation to people, places or time; and (3) deductive or abstract reasoning. 

In addition, it was intended that such deterioration or loss place the individual in jeopardy of 

harming self or others and therefore require substantial supervision by another individual.

A licensed health care practitioner is a physician (as defined in sec. 1861(r)(l) of the 

Social Security Act) and any registered professional nurse, licensed social worker, or other 

individual who meets such requirements as may be prescribed by the Secretary of the Treasury. 

A licensed social worker includes any social worker who has been issued a license, certificate, or 

similar authorization to act as a social worker by a State or a body authorized by a State to issue 

such authorizations.
8

I. Reporting Requirements 

A payor of long-term care benefits (defined for this purpose to include any amount paid 

under a product advertised, marketed or offered as long-term care insurance) is required to report 

to the IRS the aggregate amount of such benefits paid to any individual during any calendar year, 

and the name, address and taxpayer identification number of such individual. In addition, a 

payor is required to report the name, address, and taxpayer identification number of the 

chronically ill individual on account of whose condition such amounts are paid, and whether the 

contract under which the amount is paid is a per diem-type contract. A copy of the report must 

be provided to the payee by January 31 following the year of payment, showing the name of the 

payor and the aggregate amount of benefits paid to the individual during the calendar year. 

Failure to file the report or provide the copy to the payee is subject to the generally applicable 

penalties for failure to file similar information reports.
9

II. LEGISLATIVE BACKGROUND

The present-law provisions relating to long-term care were added by H.R. 3103, the 

Health Insurance Portability and Accountability Act of 1996 (“HIPAA”).6 

Prior to the enactment of HIPAA, there were no explicit rules in the Internal Revenue 

Code relating to the tax treatment of long-term care insurance contracts or long-term care 

services. Prior and present law do provide rules relating to medical expenses and accident or 

health insurance. Prior to HIPAA, the extent to which these rules applied to long-term care 

insurance contracts or long-term care services was unclear.

The legislative history to HIPPA provides that the tax provisions relating to long-term 

care insurance contracts and long-term care services were adopted to provide an incentive for 

individuals to take financial responsibility for their long-term care needs. Thus, HIPPA 

generally provided favorable tax treatment with respect to long-term care insurance contracts and 

services meeting HIPPA’s requirements.7

 Contracts or services that do not meet HIPPA’s 

requirements continue to be subject to the prior-law rules. 

 

6

 Pub. L. No. 104-191, signed on August 21, 1996. H.R. 3103 was reported by the 

House Committee on Ways and Means on March 25, 1996 (H.R. Rept. 104-496, Pt. 1), and was 

passed by the House on March 28, 1996. The Senate version of the bill was S. 1028, which was 

reported by the Senate Committee on Labor and Human Resources on October 12, 1995 (S. Rpt. 

104-156). H.R. 3103, as amended, was passed by the Senate on April 23, 1996. The conference 

report was filed on July 31, 1996 (H.R. Rept. 104-736), and was approved by the House on 

August 1, 1996, and by the Senate on August 2, 1996.

7

 H.R. Rpt. 104-496, Pt. 1, at 115.