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2005-01-01 08:51:00

What is the HIPA Act?

: Last issue you mentioned the HIPA Act.  What is this all about?

ANSWER: This law is also known as HIPA '96, or the J.R. 3103.  This act separates Long-Term Care polices into two types… 'qualified' and 'non-qualified'.  A 'qualified' policy has a portion of its premium that is tax-deductible (in accordance with the act), and a 'non-qualified' policy does not. All policies purchased prior to December 31, 1996, are grandfathered as 'qualified'.  Here is the way HIPA '96 was written originally.  The increases, as allowed for in this law, have not been shown.If a policy is 'qualified', it means that it meets the benefit criteria set forth by HIPA.  It does not necessarily mean it is the best deal for you. For instance, if a policy is 'qualified', you can treat a portion of the premiums as medical expenses, and they will be tax-deductible according to the following schedule, if total non-reimbursed medical expenses exceed 7 1/2% of your adjusted gross income:Age during Tax Year Being Figured:  Amount of Premium that is Deductible *:Age 40 or less $200Age 41-50 $375Age 51-60 $750Age 61-70 $2000Age 70+ $2500*  The above amounts will increase each year to the nearest multiple of $10 for calendar years after 1997, based upon the medical component of the Consumer Price Index.  It may change, however, if inflation growth for Long-Term Care services is greater.  The legislation makes all benefits received under 'reimbursement' policies, or 'non-indemnity' policies (which will be covered in greater detail in the next issue), tax-free, and all benefits under 'indemnity' policies up to $175 per day, tax-free.  Amounts paid to the Insured over $175 per day will be taxable, unless the actual costs of care for Long-Term Care services exceed $175 per day.  This $175 maximum will increase each year for calendar years after 1997, again based upon the medical component of the Consumer Price Index, and can change even more if the cost for Long-Term Care services out pace this component. The act goes on to address issues such as: • Penalty free withdrawals to purchase Long-Term Care insurance are not available from 'qualified' plans such as 401(K), 403(b), IRAs, 457s (government programs).  • Long-Term Care insurance cannot be included in a cafeteria plan under Section 125; nor can Long-Term Care services be reimbursed by a Flexible Spending Account.• Long-Term Care insurance premiums are, however, an acceptable expenditure for the new medical savings accounts that this law makes available to the self-employed people and small businesses under 50 employees.• Integration features of the act if more than one policy is owned, and how they would be figured together for tax- deductibility purposes, and more... But what does it all mean?In most cases, the 7 1/2% of adjusted gross income cap is going to be the biggest barrier in making this a relevant issue.  Most people do not itemize.  If they do, most do not have non-reimbursed medical expenses over the 7 1/2% cap.  If you already have medical expenses at that point or beyond, qualifying for a Long-Term Care policy may be somewhat difficult (as mentioned earlier, all policies are medically underwritten).  The act, upon first glance, seemingly tends to favor non-indemnity policies.  It does not.  As you have been told all of your life, "it is better to make more income and pay the taxes, than to make less and pay less in taxes".  An indemnity policy indemnifies you in benefits against the premium you paid.  You deserve to get what you paid for.  The act goes on to say that all the benefits up to $175 per day are tax-free, and in subsequent years following 1997, this amount will increase as detailed earlier.  An indemnity policy is still your best policy and will be discussed in more detail in a future article, as will the 'return of premium' rider, which makes a Long-Term Care policy non-qualified, but still what I recommend.  A 'qualified' plan (one that is tax-deductible up to the limits stated above, which are now higher due to automatic adjustments, and after the 7 1/2% of adjusted gross income threshold is reached through non-reimbursed medical expenses), can only stay a 'qualified' plan if the following conditions are met:Medical Necessity cannot be a trigger for benefits under a 'qualified' policy.  Medical necessity means your doctor has decided that due to whatever reason or reasons (may or may not be medically related), you are in need of long-term care.  Not having this as a 'trigger' for benefits is not in the best interest of the insured, as the way most people qualify for benefits under a Long-Term Care policy is due to medical necessity.The second way most people qualify for benefits under a Long-Term Care policy is meeting the ADL test.  ADLs (activities of daily living) are different for each policy; but, in the case of 'qualified' plans, the ADLs are more stringent.  The insured must need assistance from another person, walker or wheelchair, to perform at least 2 of the following: eating, toileting, transferring to or from bed or chair, dressing and continence.  Furthermore, a licensed health care practitioner must certify that the insured will be unable to perform these ADLs for at least 90 continuous days.  This again, is not in the best interest of the Insured, as the Insured may have purchased a 'qualified' plan, but when he/she is in need of care, it is very possible the care may not be needed for 90 days.  An example of this would be hip or knee replacement surgery where, following surgery, the insured needs some assistance at home or in a nursing home for a few days or weeks, but not necessarily for 90 days.  Even if the Insured purchased a zero-day elimination policy (to be discussed in more detail in a future article), no benefits would be payable under the policy, unless 90 days of care are needed and certified by the practitioner.  The third way most people qualify for benefits under a policy is through a  diagnosed cognitive impairment.  A 'non-qualified' plan allows for the doctor to prescribe long-term care based upon his or her findings.  This 'trigger' under a 'qualified' plan is much more severe, in that the cognitive impairment must be measured by clinical evidence and standardized tests... again, potentially making it much more difficult to qualify for benefits.A 'qualified' policy cannot include a 'return of premium' rider.  As has been explained earlier, this is a very important feature of the better policies, as well as a feature rarely found in other insurance products.  The 'return of premium' rider, combined with the 'waiver of premium' provision after 90 days, allows the Insured to be paid well and in accordance with its provisions if the policy is needed, and after 90 days, no longer have to pay the premium on either spouse.  On the best 'return of premium' rider, if the policy is not used to the extent of the premiums, the Insured will receive 80% of all premiums paid in, less the aggregate total of all benefits paid out, at the end of each 10 year period.    As you can see, this is a most important feature for the insured, and now it can only be available in a 'non-qualified' policy.So you ask... do I want a 'qualified' policy or a 'non-qualified' policy?  The bottom line is, what you're getting (a tax break) may not be all that much (if any at all), but what you give up are some features that make a Long- Term Care policy so attractive, as well as the ease at which benefits are payable.Many people… once they understand the differences… will want a 'non-qualified' plan, particularly when the government has yet to rule on whether or not benefits from a 'non-qualified' plan will be taxable… and most all companies provide the insured with an 'anytime exchange certificate' from a 'non-qualified' plan to a 'qualified' plan until they do.  Others may believe the requirements are not too stringent for a 'qualified' plan, and are more interested in the deductibility of the premiums.  Next month, we will begin to talk about the differences between all policies, their definitions and restrictions.