Senate Committee Advances Long-Term Care Bill Making Qualified Funds Available Without Penalty

The Senate Finance Committee has advanced legislation that would allow individuals to pay up to $2,500 each year for Long-Term Care Insurance with their 401(k), 403(b), and IRAs without a tax penalty.

Early withdrawals from these accounts are generally treated as income and taxed accordingly and are also subject to an additional 10 percent tax on early distributions. As most people who purchase Long-Term Care Insurance are in their 50s, this legislation, the Long-Term Care Affordability Act, if it becomes law, would make it easier for many people to purchase LTC Insurance.

Traditional health insurance and Medicare, including supplements, pay a limited number of days for skilled long-term health care services. Most long-term health care is defined as 'custodial' - meaning help with daily living activities or supervision due to dementia. 

Long-Term Health Care Affects Families and Finances

Without Long-Term Care Insurance, families must use their income or drain savings to pay for care. Long-term health care is getting more expensive, and the costs are rising sharply due to inflation, rising labor costs, and increasing demand for services. 

The LTC NEWS Cost of Care Calculator shows that these skyrocketing costs can significantly affect the lifestyle and legacy of most American families - Cost of Care Calculator - Choose Your State | LTC News.

As a result, many families must either seek an adult child to become a caregiver or enter the Medicaid program once their assets are drained. Medicaid will pay for long-term health care only when the care recipient has little or no income or assets.

States Overwhelmed with Medicaid Costs - Some May Tax Those Without LTC Insurance

Medicaid has become the largest payer of long-term care services in the United States. These costs are adversely affecting state and federal budgets. As a result, the State of Washington has instituted a tax, effective in 2023, on those individuals who do not own a qualified Long-Term Care Insurance policy. Multiple states are now in the process of following Washington's considering their own long-term care tax. California and New York are close to implementing a plan. 

Senator Pat Toomey (R-PA), the sponsor of the legislation, said it is a commonsense change to enhance financial security in retirement.  

The onset of a chronic illness requiring nursing home or in-home care too often has the potential to financially devastate older Americans.

Senator Pat Toomey

In the House, Congresswoman Ann Wagner (R-MO), the Chair of the House Suburban Caucus, introduced the House version of the Long-Term Care Affordability Act.

Rep. Wagner says that the cost of long-term health care is often insurmountable. She says the legislation would enable seniors to cover the cost of long-term health care by providing better access to their retirement savings.

Retirement can be expensive enough for seniors, and we should be using every tool we have to make their lives easier and more affordable. This legislation would do just that by providing for favorable treatment of long-term care through retirement accounts, allowing greater access to the necessary care they deserve.

Rep. Ann Wagner

Long-Term Care is a Considerable Risk

Sen. Toomey says that about half of individuals who reach age 65 will need some long-term health care. The senator says that more than half of American households contribute to retirement accounts. If the legislation were to become law, all of them would be eligible to pay for Long-Term Care Insurance with retirement savings under this legislation.

Individuals who have Health Savings Accounts can already use some of the pre-tax money in their HSA to reimburse themselves for the cost of LTC Insurance. The Toomey/Wagner legislation would offer another source of funds that can be used to purchase LTC Insurance.

Some asset-based products are currently available that allow the use of qualified funds to purchase qualified hybrid Long-Term Care Insurance policies. Hybrid policies combine life insurance along with a qualified rider for long-term care. Money is transferred directly from an eligible retirement account to this product. However, taxes are still, but the product adds a bonus offering larger benefits to cover the tax implication.

LTC Insurance Offers Guarantees 

Long-Term Care Insurance provides guaranteed tax-free benefits that can give the policyholder the ability to access their choice of quality care options, including in-home care. 

Premiums are affordable for many people if purchased younger when they still enjoy good health - How Much Does Long-Term Care Insurance Cost? | LTC News.

Most states also have available Partnership Long-Term Care Insurance. These specially qualified policies provide additional dollar-for-dollar asset protection.