§ 7702B. — Treatment of qualified longterm care insurance.
[Laws in effect as of January 7, 2003]
[Document not affected by Public Laws enacted between
January 7, 2003 and December 19, 2003]
[CITE: 26USC7702B]
TITLE 26--INTERNAL REVENUE CODE
Subtitle F--Procedure and Administration
CHAPTER 79--DEFINITIONS
Sec. 7702B. Treatment of qualified long-term care insurance
(a) In general
For purposes of this title--
(1) a qualified long-term care insurance contract shall be
treated as an accident and health insurance contract,
(2) amounts (other than policyholder dividends, as defined in
section 808, or premium refunds) received under a qualified long-
term care insurance contract shall be treated as amounts received
for personal injuries and sickness and shall be treated as
reimbursement for expenses actually incurred for medical care (as
defined in section 213(d)),
(3) any plan of an employer providing coverage under a qualified
long-term care insurance contract shall be treated as an accident
and health plan with respect to such coverage,
(4) except as provided in subsection (e)(3), amounts paid for a
qualified long-term care insurance contract providing the benefits
described in subsection (b)(2)(A) shall be treated as payments made
for insurance for purposes of section 213(d)(1)(D), and
(5) a qualified long-term care insurance contract shall be
treated as a guaranteed renewable contract subject to the rules of
section 816(e).
(b) Qualified long-term care insurance contract
For purposes of this title--
(1) In general
The term ``qualified long-term care insurance contract'' means
any insurance contract if--
(A) the only insurance protection provided under such
contract is coverage of qualified long-term care services,
(B) such contract does not pay or reimburse expenses
incurred for services or items to the extent that such expenses
are reimbursable under title XVIII of the Social Security Act or
would be so reimbursable but for the application of a deductible
or coinsurance amount,
(C) such contract is guaranteed renewable,
(D) such contract does not provide for a cash surrender
value or other money that can be--
(i) paid, assigned, or pledged as collateral for a loan,
or
(ii) borrowed,
other than as provided in subparagraph (E) or paragraph (2)(C),
(E) all refunds of premiums, and all policyholder dividends
or similar amounts, under such contract are to be applied as a
reduction in future premiums or to increase future benefits, and
(F) such contract meets the requirements of subsection (g).
(2) Special rules
(A) Per diem, etc. payments permitted
A contract shall not fail to be described in subparagraph
(A) or (B) of paragraph (1) by reason of payments being made on
a per diem or other periodic basis without regard to the
expenses incurred during the period to which the payments
relate.
(B) Special rules relating to medicare
(i) Paragraph (1)(B) shall not apply to expenses which are
reimbursable under title XVIII of the Social Security Act only
as a secondary payor.
(ii) No provision of law shall be construed or applied so as
to prohibit the offering of a qualified long-term care insurance
contract on the basis that the contract coordinates its benefits
with those provided under such title.
(C) Refunds of premiums
Paragraph (1)(E) shall not apply to any refund on the death
of the insured, or on a complete surrender or cancellation of
the contract, which cannot exceed the aggregate premiums paid
under the contract. Any refund on a complete surrender or
cancellation of the contract shall be includible in gross income
to the extent that any deduction or exclusion was allowable with
respect to the premiums.
(c) Qualified long-term care services
For purposes of this section--
(1) In general
The term ``qualified long-term care services'' means necessary
diagnostic, preventive, therapeutic, curing, treating, mitigating,
and rehabilitative services, and maintenance or personal care
services, which--
(A) are required by a chronically ill individual, and
(B) are provided pursuant to a plan of care prescribed by a
licensed health care practitioner.
(2) Chronically ill individual
(A) In general
The term ``chronically ill individual'' means any individual
who has been certified by a licensed health care practitioner
as--
(i) being unable to perform (without substantial
assistance from another individual) at least 2 activities of
daily living for a period of at least 90 days due to a loss
of functional capacity,
(ii) having a level of disability similar (as determined
under regulations prescribed by the Secretary in
consultation with the Secretary of Health and Human
Services) to the level of disability described in clause
(i), or
(iii) requiring substantial supervision to protect such
individual from threats to health and safety due to severe
cognitive impairment.
Such term shall not include any individual otherwise meeting the
requirements of the preceding sentence unless within the
preceding 12-month period a licensed health care practitioner
has certified that such individual meets such requirements.
(B) Activities of daily living
For purposes of subparagraph (A), each of the following is
an activity of daily living:
(i) Eating.
(ii) Toileting.
(iii) Transferring.
(iv) Bathing.
(v) Dressing.
(vi) Continence.
A contract shall not be treated as a qualified long-term care
insurance contract unless the determination of whether an
individual is a chronically ill individual described in
subparagraph (A)(i) takes into account at least 5 of such
activities.
(3) Maintenance or personal care services
The term ``maintenance or personal care services'' means any
care the primary purpose of which is the provision of needed
assistance with any of the disabilities as a result of which the
individual is a chronically ill individual (including the protection
from threats to health and safety due to severe cognitive
impairment).
(4) Licensed health care practitioner
The term ``licensed health care practitioner'' means any
physician (as defined in section 1861(r)(1) 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.
(d) Aggregate payments in excess of limits
(1) In general
If the aggregate of--
(A) the periodic payments received for any period under all
qualified long-term care insurance contracts which are treated
as made for qualified long-term care services for an insured,
and
(B) the periodic payments received for such period which are
treated under section 101(g) as paid by reason of the death of
such insured,
exceeds the per diem limitation for such period, such excess shall
be includible in gross income without regard to section 72. A
payment shall not be taken into account under subparagraph (B) if
the insured is a terminally ill individual (as defined in section
101(g)) at the time the payment is received.
(2) Per diem limitation
For purposes of paragraph (1), the per diem limitation for any
period is an amount equal to the excess (if any) of--
(A) the greater of--
(i) the dollar amount in effect for such period under
paragraph (4), or
(ii) the costs incurred for qualified long-term care
services provided for the insured for such period, over
(B) the aggregate payments received as reimbursements
(through insurance or otherwise) for qualified long-term care
services provided for the insured during such period.
(3) Aggregation rules
For purposes of this subsection--
(A) all persons receiving periodic payments described in
paragraph (1) with respect to the same insured shall be treated
as 1 person, and
(B) the per diem limitation determined under paragraph (2)
shall be allocated first to the insured and any remaining
limitation shall be allocated among the other such persons in
such manner as the Secretary shall prescribe.
(4) Dollar amount
The dollar amount in effect under this subsection shall be $175
per day (or the equivalent amount in the case of payments on another
periodic basis).
(5) Inflation adjustment
In the case of a calendar year after 1997, the dollar amount
contained in paragraph (4) shall be increased at the same time and
in the same manner as amounts are increased pursuant to section
213(d)(10).
(6) Periodic payments
For purposes of this subsection, the term ``periodic payment''
means any payment (whether on a periodic basis or otherwise) made
without regard to the extent of the costs incurred by the payee for
qualified long-term care services.
(e) Treatment of coverage provided as part of a life insurance contract
Except as otherwise provided in regulations prescribed by the
Secretary, in the case of any long-term care insurance coverage (whether
or not qualified) provided by a rider on or as part of a life insurance
contract--
(1) In general
This section shall apply as if the portion of the contract
providing such coverage is a separate contract.
(2) Application of section 7702
Section 7702(c)(2) (relating to the guideline premium
limitation) shall be applied by increasing the guideline premium
limitation with respect to a life insurance contract, as of any
date--
(A) by the sum of any charges (but not premium payments)
against the life insurance contract's cash surrender value
(within the meaning of section 7702(f)(2)(A)) for such coverage
made to that date under the contract, less
(B) any such charges the imposition of which reduces the
premiums paid for the contract (within the meaning of section
7702(f)(1)).
(3) Application of section 213
No deduction shall be allowed under section 213(a) for charges
against the life insurance contract's cash surrender value described
in paragraph (2), unless such charges are includible in income as a
result of the application of section 72(e)(10) and the rider is a
qualified long-term care insurance contract under subsection (b).
(4) Portion defined
For purposes of this subsection, the term ``portion'' means only
the terms and benefits under a life insurance contract that are in
addition to the terms and benefits under the contract without regard
to long-term care insurance coverage.
(f) Treatment of certain State-maintained plans
(1) In general
If--
(A) an individual receives coverage for qualified long-term
care services under a State long-term care plan, and
(B) the terms of such plan would satisfy the requirements of
subsection (b) were such plan an insurance contract,
such plan shall be treated as a qualified long-term care insurance
contract for purposes of this title.
(2) State long-term care plan
For purposes of paragraph (1), the term ``State long-term care
plan'' means any plan--
(A) which is established and maintained by a State or an
instrumentality of a State,
(B) which provides coverage only for qualified long-term
care services, and
(C) under which such coverage is provided only to--
(i) employees and former employees of a State (or any
political subdivision or instrumentality of a State),
(ii) the spouses of such employees, and
(iii) individuals bearing a relationship to such
employees or spouses which is described in any of paragraphs
(1) through (8) of section 152(a).
(g) Consumer protection provisions
(1) In general
The requirements of this subsection are met with respect to any
contract if the contract meets--
(A) the requirements of the model regulation and model Act
described in paragraph (2),
(B) the disclosure requirement of paragraph (3), and
(C) the requirements relating to nonforfeitability under
paragraph (4).
(2) Requirements of model regulation and Act
(A) In general
The requirements of this paragraph are met with respect to
any contract if such contract meets--
(i) Model regulation
The following requirements of the model regulation:
(I) Section 7A (relating to guaranteed renewal or
noncancellability), and the requirements of section 6B
of the model Act relating to such section 7A.
(II) Section 7B (relating to prohibitions on
limitations and exclusions).
(III) Section 7C (relating to extension of
benefits).
(IV) Section 7D (relating to continuation or
conversion of coverage).
(V) Section 7E (relating to discontinuance and
replacement of policies).
(VI) Section 8 (relating to unintentional lapse).
(VII) Section 9 (relating to disclosure), other than
section 9F thereof.
(VIII) Section 10 (relating to prohibitions against
post-claims underwriting).
(IX) Section 11 (relating to minimum standards).
(X) Section 12 (relating to requirement to offer
inflation protection), except that any requirement for a
signature on a rejection of inflation protection shall
permit the signature to be on an application or on a
separate form.
(XI) Section 23 (relating to prohibition against
preexisting conditions and probationary periods in
replacement policies or certificates).
(ii) Model Act
The following requirements of the model Act:
(I) Section 6C (relating to preexisting conditions).
(II) Section 6D (relating to prior hospitalization).
(B) Definitions
For purposes of this paragraph--
(i) Model provisions
The terms ``model regulation'' and ``model Act'' mean
the long-term care insurance model regulation, and the long-
term care insurance model Act, respectively, promulgated by
the National Association of Insurance Commissioners (as
adopted as of January 1993).
(ii) Coordination
Any provision of the model regulation or model Act
listed under clause (i) or (ii) of subparagraph (A) shall be
treated as including any other provision of such regulation
or Act necessary to implement the provision.
(iii) Determination
For purposes of this section and section 4980C, the
determination of whether any requirement of a model
regulation or the model Act has been met shall be made by
the Secretary.
(3) Disclosure requirement
The requirement of this paragraph is met with respect to any
contract if such contract meets the requirements of section
4980C(d).
(4) Nonforfeiture requirements
(A) In general
The requirements of this paragraph are met with respect to
any level premium contract, if the issuer of such contract
offers to the policyholder, including any group policyholder, a
nonforfeiture provision meeting the requirements of subparagraph
(B).
(B) Requirements of provision
The nonforfeiture provision required under subparagraph (A)
shall meet the following requirements:
(i) The nonforfeiture provision shall be appropriately
captioned.
(ii) The nonforfeiture provision shall provide for a
benefit available in the event of a default in the payment
of any premiums and the amount of the benefit may be
adjusted subsequent to being initially granted only as
necessary to reflect changes in claims, persistency, and
interest as reflected in changes in rates for premium paying
contracts approved by the appropriate State regulatory
agency for the same contract form.
(iii) The nonforfeiture provision shall provide at least
one of the following:
(I) Reduced paid-up insurance.
(II) Extended term insurance.
(III) Shortened benefit period.
(IV) Other similar offerings approved by the
appropriate State regulatory agency.
(5) Cross reference
For coordination of the requirements of this subsection with
State requirements, see section 4980C(f).
(Added and amended Pub. L. 104-191, title III, Secs. 321(a), 325, Aug.
21, 1996, 110 Stat. 2054, 2063; Pub. L. 105-34, title XVI, Sec. 1602(b),
(e), Aug. 5, 1997, 111 Stat. 1094; Pub. L. 105-206, title VI,
Sec. 6023(28), July 22, 1998, 112 Stat. 826.)
Adjustment of Dollar Amount of Per Diem Limitation Regarding Periodic
Payments for Calendar Year 2004
For adjustment of dollar amount of per diem limitation on
periodic payments received under qualified long-term care or certain
life insurance contracts under subsection (d)(4) of this section for
calendar year 2004, see section 3.34 of Revenue Procedure 2003-85,
set out as a note under section 1 of this title.
References in Text
The Social Security Act, referred to in subsec. (b)(1)(B),
(2)(B)(i), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended.
Title XVIII of the Act is classified generally to subchapter XVIII
(Sec. 1395 et seq.) of chapter 7 of Title 42, The Public Health and
Welfare. Section 1861(r)(1) of the Act is classified to section
1395x(r)(1) of Title 42. For complete classification of this Act to the
Code, see section 1305 of Title 42 and Tables.
Amendments
1998--Subsec. (e)(2). Pub. L. 105-206 inserted ``section'' after
``Application of'' in heading.
1997--Subsec. (c)(2)(B). Pub. L. 105-34, Sec. 1602(b), inserted
``described in subparagraph (A)(i)'' after ``chronically ill
individual'' in concluding provisions.
Subsec. (g)(4)(B)(ii), (iii)(IV). Pub. L. 105-34, Sec. 1602(e),
substituted ``appropriate State regulatory agency'' for ``Secretary''.
1996--Subsec. (g). Pub. L. 104-191, Sec. 325, added subsec. (g).
Effective Date of 1997 Amendment
Amendment by Pub. L. 105-34 effective as if included in the
provisions of the Health Insurance Portability and Accountability Act of
1996, Pub. L. 104-191, to which such amendment relates, see section
1602(i) of Pub. L. 105-34, set out as a note under section 26 of this
title.
Effective Date of 1996 Amendment
Amendment by section 325 of Pub. L. 104-191 applicable to contracts
issued after Dec. 31, 1996, with provisions of section 321(f) of Pub. L.
104-191, set out as an Effective Date note below, applicable to such
contracts, see section 327 of Pub. L. 104-191, set out as an Effective
Date note under section 4980C of this title.
Effective Date
Section 321(f) of Pub. L. 104-191 provided that:
``(1) General effective date.--
``(A) In general.--Except as provided in subparagraph (B), the
amendments made by this section [enacting this section and amending
sections 106, 125, 807, and 4980B of this title, section 1167 of
Title 29, Labor, and section 300bb-8 of Title 42, The Public Health
and Welfare] shall apply to contracts issued after December 31,
1996.
``(B) Reserve method.--The amendment made by subsection (b)
[amending section 807 of this title] shall apply to contracts issued
after December 31, 1997.
``(2) Continuation of existing policies.--In the case of any
contract issued before January 1, 1997, which met the long-term care
insurance requirements of the State in which the contract was sitused
[sic] at the time the contract was issued--
``(A) such contract shall be treated for purposes of the
Internal Revenue Code of 1986 as a qualified long-term care
insurance contract (as defined in section 7702B(b) of such Code),
and
``(B) services provided under, or reimbursed by, such contract
shall be treated for such purposes as qualified long-term care
services (as defined in section 7702B(c) of such Code).
In the case of an individual who is covered on December 31, 1996, under
a State long-term care plan (as defined in section 7702B(f)(2) of such
Code), the terms of such plan on such date shall be treated for purposes
of the preceding sentence as a contract issued on such date which met
the long-term care insurance requirements of such State.
``(3) Exchanges of existing policies.--If, after the date of
enactment of this Act [Aug. 21, 1996] and before January 1, 1998, a
contract providing for long-term care insurance coverage is exchanged
solely for a qualified long-term care insurance contract (as defined in
section 7702B(b) of such Code), no gain or loss shall be recognized on
the exchange. If, in addition to a qualified long-term care insurance
contract, money or other property is received in the exchange, then any
gain shall be recognized to the extent of the sum of the money and the
fair market value of the other property received. For purposes of this
paragraph, the cancellation of a contract providing for long-term care
insurance coverage and reinvestment of the cancellation proceeds in a
qualified long-term care insurance contract within 60 days thereafter
shall be treated as an exchange.
``(4) Issuance of certain riders permitted.--For purposes of
applying sections 101(f), 7702, and 7702A of the Internal Revenue Code
of 1986 to any contract--
``(A) the issuance of a rider which is treated as a qualified
long-term care insurance contract under section 7702B, and
``(B) the addition of any provision required to conform any
other long-term care rider to be so treated,
shall not be treated as a modification or material change of such
contract.
``(5) Application of per diem limitation to existing contracts.--The
amount of per diem payments made under a contract issued on or before
July 31, 1996, with respect to an insured which are excludable from
gross income by reason of section 7702B of the Internal Revenue Code of
1986 (as added by this section) shall not be reduced under subsection
(d)(2)(B) thereof by reason of reimbursements received under a contract
issued on or before such date. The preceding sentence shall cease to
apply as of the date (after July 31, 1996) such contract is exchanged or
there is any contract modification which results in an increase in the
amount of such per diem payments or the amount of such reimbursements.''
Long-Term Care Study Request
Section 321(g) of Pub. L. 104-191 provided that: ``The Chairman of
the Committee on Ways and Means of the House of Representatives and the
Chairman of the Committee on Finance of the Senate shall jointly request
the National Association of Insurance Commissioners, in consultation
with representatives of the insurance industry and consumer
organizations, to formulate, develop, and conduct a study to determine
the marketing and other effects of per diem limits on certain types of
long-term care policies. If the National Association of Insurance
Commissioners agrees to the study request, the National Association of
Insurance Commissioners shall report the results of its study to such
committees not later than 2 years after accepting the request.''
Section Referred to in Other Sections
This section is referred to in sections 101, 106, 162, 213, 220,
223, 807, 818, 4980B, 4980C of this title; title 5 sections 9001, 9002;
title 12 section 1715z-20; title 29 section 1167; title 42 section
300bb-8.
