§321. TREATMENT OF LONG-TERM CARE INSURANCE.

Health Insurance Portability and Accountability Act of 1996

TITLE III—TAX-RELATED HEALTH PROVISIONS

(a) General Rule.—Chapter 79 (relating to definitions) is amended by inserting after section 7702A the following new section:

‘‘§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 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 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).’’.

(b) Reserve Method.—Clause (iii) of section 807(d)(3)(A) is amended by inserting ‘‘(other than a qualified long-term care insurance contract, as defined in section 7702B(b))’’ after ‘‘insurance contract’’.

(c) Long-Term Care Insurance Not Permitted Under Cafeteria Plans or Flexible Spending Arrangements.—

(c)(1) Cafeteria plans.—Section 125(f) is amended by adding at the end the following new sentence: ‘‘Such term shall not include any product which is advertised, marketed, or offered as long-term care insurance.’’.

(2) Flexible spending arrangements.—Section 106 (relating to contributions by employer to accident and health plans), as amended by section 301(c), is amended by adding at the end the following new subsection:

‘‘(c) Inclusion of Long-Term Care Benefits Provided Through Flexible Spending Arrangements.—

‘‘(1) In general.—Effective on and after January 1, 1997, gross income of an employee shall include employer-provided coverage for qualified long-term care services (as defined in section 7702B(c)) to the extent that such coverage is provided through a flexible spending or similar arrangement.

‘‘(2) Flexible spending arrangement.—For purposes of this subsection, a flexible spending arrangement is a benefit program which provides employees with coverage under which—

‘‘(A) specified incurred expenses may be reimbursed (subject to reimbursement maximums and other reasonable conditions), and

‘‘(B) the maximum amount of reimbursement which is reasonably available to a participant for such coverage is less than 500 percent of the value of such coverage. In the case of an insured plan, the maximum amount reasonably available shall be determined on the basis of the underlying coverage.’’

(d) Continuation Coverage Rules Not To Apply.— (29 usc 1167)

(d)(1) Paragraph (2) of section 4980B(g) is amended by adding at the end the following new sentence: ‘‘Such term shall not include any plan substantially all of the coverage under which is for qualified long-term care services (as defined in section 7702B(c)).’’

(d)(2) Paragraph (1) of section 607 of the Employee Retirement 29 USC 1167.Income Security Act of 1974 is amended by adding at the end the following new sentence: ‘‘Such term shall not include any plan substantially all of the coverage under which is for qualified long-term care services (as defined in section 7702B(c) of such Code).’’

(d)(3) (42 usc 300bb-8 Paragraph (1) of section 2208 of the Public Health Service Act is amended by adding at the end the following new sentence: ‘‘Such term shall not include any plan substantially all of the coverage under which is for qualified long-term care services (as defined in section 7702B(c) of such Code).’’

(e) Clerical Amendment.—The table of sections for chapter 79 is amended by inserting after the item relating to section 7702A the following new item:

‘‘§7702B. Treatment of qualified long-term care insurance.’’.

(f) Effective Dates.— (26 usc 1702B)

(f)(1) General effective date.—

(f)(1)(A) In general.—Except as provided in subparagraph (B), the amendments made by this section shall apply to contracts issued after December 31, 1996.

(f)(1)(B) Reserve method.—The amendment made by subsection (b) shall apply to contracts issued after December 31, 1997.

(f)(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 at the time the contract was issued—

(f)(2)(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

(f)(2)(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.

(f)(3) Exchanges of existing policies.—If, after the date of enactment of this Act 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.

(f)(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—

(f)(4)(A) the issuance of a rider which is treated as a qualified long-term care insurance contract under section 7702B, and

(f)(4)(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.

(F)(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.

(g) Long-Term Care Study Request. (26 usc 7702B)—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.