Coverage of Dementia Services Bodes Well for Employer LTC Insurance

Why should a recent tax court decision that caretaker services provided to a dementia patient are qualified long-term care (LTC) expenses be of interest to employers? Well, if you see employee benefits as a way to attract and retain good employees, and don’t yet offer LTC insurance, the ruling —  which means those services could be covered by LTC insurance policies — could make such insurance a more attractive benefit to you, and your employees.

The Facts

Lillian Baral suffered from dementia and needed 24 hours-a-day care for medical and safety reasons. David H. Baral, her brother and attorney, hired caregivers to provide her with this assistance. In 2007, Lillian made the following payments, totaling $55,906:

• $760 to her physicians and New York University Hospital Center for medical care;
• $5,566 to her caregivers for supplies; and
• $49,580 to her caregivers for services.

Lillian died on Aug. 28, 2008. David argued that the estate did not owe federal income tax for 2007 and did not even have to file an income tax return because Lillian suffered from severe dementia. However, the IRS said that Lillian owed more than $22,500 in taxes and penalties, and sued her estate.

At issue was whether Lillian could deduct as medical care, under Internal Revenue Code Section 213(a), the $55,906 in payments if the services rendered were qualified LTC services under Code Section 7702B(c).

The Court’s Ruling

The Tax Court granted partial summary judgment, ruling that Lillian’s dementia did not excuse her from the obligation to file an income tax return and pay income tax.

The court concluded that based on the assessments of her primary care physician, Lillian was a chronically ill individual under Section 7702B(c)(2)(A). Regarding the services rendered her, the court concluded:

The services provided to decedent by her caregivers were necessary maintenance and personal care services she required because of her diminished capacity and they were provided pursuant to a plan of care prescribed by a licensed health care practitioner. Therefore, they are qualified long-term care services as defined in Section 7702B(c).

The court held that the $49,580 paid to Lillian’s caregivers, as well as the $760 paid to her physicians and the hospital, were medical care under Section 213(d)(1)(C). Based upon her gross income in 2007, and a deduction of 7.5 percent of medical costs that exceed $7,067, the estate could deduct $43,273 for medical care for 2007.

However, the estate was not allowed to deduct the amounts paid to her caregivers for supplies, because it was not established that they were medical expenses under Section 213(a).

What This Means

The Tax Court’s ruling, which provided more clarity on what LTC policies may cover, may help employers encourage employees to take advantage of opportunities they provide their employees to open LTC insurance policies. This could enhance the positive effects an employer may experience from offering LTC insurance as a benefit. In addition, it could heighten an employer’s ability to suggest to employees that it is trying to better help them meet their needs as the population ages and average lifespan increases.

To see the Tax Court ruling in Estate of Baral v. Commissioner (137 T.C. No. 1 (July 5, 2011)), click on the link below.