26 U.S.C. § 7702B — Treatment of qualified long-term care

Page 4034 TITLE 26—INTERNAL REVENUE CODE § 7702B added by this section) shall apply in determining whether such contract is issued on or after June 21, 1988. The preceding sentence shall not apply in the case of a contract which, as of June 21, 1988, required at least 7 level annual premium payments and under which the policyholder makes at least 7 level annual premium payments. ‘‘(3) CERTAIN OTHER MATERIAL CHANGES TAKEN INTO AC- COUNT.—A contract entered into before June 21, 1988, shall be treated as entered into after such date if— ‘‘(A) on or after June 21, 1988, the death benefit under the contract is increased (or a qualified addi- tional benefit is increased or added) and before June 21, 1988, the owner of the contract did not have a uni- lateral right under the contract to obtain such in- crease or addition without providing additional evi- dence of insurability, or ‘‘(B) the contract is converted after June 20, 1988, from a term life insurance contract to a life insur- ance contract providing coverage other than term life insurance coverage without regard to any right of the owner of the contract to such conversion. ‘‘(4) CERTAIN EXCHANGES PERMITTED.—In the case of a modified endowment contract which— ‘‘(A) required at least 7 annual level premium pay- ments, ‘‘(B) is entered into after June 20, 1988, and before the date of the enactment of this Act [Nov. 10, 1988], and ‘‘(C) is exchanged within 3 months after such date of enactment for a life insurance contract which meets the requirements of section 7702A(b), the contract which is received in exchange for such contract shall not be treated as a modified endowment contract if the taxpayer elects, notwithstanding sec- tion 1035 of the 1986 Code, to recognize gain on such ex- change. ‘‘(5) SPECIAL RULE FOR ANNUITY CONTRACTS.—In the case of annuity contracts, the amendments made by subsection (d) [amending section 72 of this title] shall apply to contracts entered into after October 21, 1988.’’ CONSTRUCTION OF 2002 AMENDMENT Pub. L. 107–147, title IV, § 416(f), Mar. 9, 2002, 116 Stat. 55, provided that: ‘‘Paragraph (2) of section 318(a) of the Community Renewal Tax Relief Act of 2000 [H.R. 5662, as enacted by section 1(a)(7) of Pub. L. 106–554](114 Stat. 2763A–645) [amending this section] is repealed, and clause (ii) of section 7702A(c)(3)(A) shall read and be ap- plied as if the amendment made by such paragraph had not been enacted.’’ § 7702B. Treatment of qualified long-term care insurance (a) In general For purposes of this title— (1) a qualified long-term care insurance con- tract shall be treated as an accident and health insurance contract, (2) amounts (other than policyholder divi- dends, 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 reimburse- ment for expenses actually incurred for med- ical care (as defined in section 213(d)), (3) any plan of an employer providing cov- erage under a qualified long-term care insur- ance 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 in- surance contract providing the benefits de- scribed 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 con- tract shall be treated as a guaranteed renew- able 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 insur- ance 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 reim- burse expenses incurred for services or items to the extent that such expenses are reim- bursable under title XVIII of the Social Se- curity Act or would be so reimbursable but for the application of a deductible or coin- surance 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 collat- eral for a loan, or (ii) borrowed, other than as provided in subparagraph (E) or paragraph (2)(C), (E) all refunds of premiums, and all policy- holder dividends or similar amounts, under such contract are to be applied as a reduc- tion in future premiums or to increase fu- ture 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 ex- penses 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 re- fund 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 re- fund 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— Page 4035 TITLE 26—INTERNAL REVENUE CODE § 7702B (1) In general The term ‘‘qualified long-term care serv- ices’’ 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 indi- vidual, and (B) are provided pursuant to a plan of care prescribed by a licensed health care practi- tioner. (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 sub- stantial assistance from another indi- vidual) 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 pre- scribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability de- scribed 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 pre- ceding 12-month period a licensed health care practitioner has certified that such in- dividual 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 sub- paragraph (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 indi- vidual (including the protection from threats to health and safety due to severe cognitive impairment). (4) Licensed health care practitioner The term ‘‘licensed health care practi- tioner’’ 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 in- surance 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 pe- riod, such excess shall be includible in gross income without regard to section 72. A pay- ment 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 re- imbursements (through insurance or other- wise) 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 pay- ments described in paragraph (1) with re- spect 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 per- sons in such manner as the Secretary shall prescribe. (4) Dollar amount The dollar amount in effect under this sub- section 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. Page 4036 TITLE 26—INTERNAL REVENUE CODE § 7702B (e) Treatment of coverage provided as part of a life insurance or annuity 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 or an annuity con- tract— (1) In general This title shall apply as if the portion of the contract providing such coverage is a separate contract. (2) Denial of deduction under section 213 No deduction shall be allowed under section 213(a) for any payment made for coverage under a qualified long-term care insurance contract if such payment is made as a charge against the cash surrender value of a life in- surance contract or the cash value of an annu- ity contract. (3) Portion defined For purposes of this subsection, the term ‘‘portion’’ means only the terms and benefits under a life insurance contract or annuity contract that are in addition to the terms and benefits under the contract without regard to long-term care insurance coverage. (4) Annuity contracts to which paragraph (1) does not apply For purposes of this subsection, none of the following shall be treated as an annuity con- tract: (A) A trust described in section 401(a) which is exempt from tax under section 501(a). (B) A contract— (i) purchased by a trust described in sub- paragraph (A), (ii) purchased as part of a plan described in section 403(a), (iii) described in section 403(b), (iv) provided for employees of a life in- surance company under a plan described in section 818(a)(3), or (v) from an individual retirement ac- count or an individual retirement annuity. (C) A contract purchased by an employer for the benefit of the employee (or the em- ployee’s spouse). Any dividend described in section 404(k) which is received by a participant or beneficiary shall, for purposes of this paragraph, be treat- ed as paid under a separate contract to which subparagraph (B)(i) applies. (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 quali- fied 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 in- strumentality of a State), (ii) the spouses of such employees, and (iii) individuals bearing a relationship to such employees or spouses which is de- scribed in any of subparagraphs (A) through (G) of section 152(d)(2). (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 regula- tion and model Act described in paragraph (2), (B) the disclosure requirement of para- graph (3), and (C) the requirements relating to non- forfeitability 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 prohibi- tions on limitations and exclusions). (III) Section 7C (relating to extension of benefits). (IV) Section 7D (relating to continu- ation or conversion of coverage). (V) Section 7E (relating to discontinu- ance and replacement of policies). (VI) Section 8 (relating to uninten- tional lapse). (VII) Section 9 (relating to disclosure), other than section 9F thereof. (VIII) Section 10 (relating to prohibi- tions 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 re- jection of inflation protection shall per- mit the signature to be on an application or on a separate form. (XI) Section 23 (relating to prohibition against preexisting conditions and pro- bationary periods in replacement poli- cies or certificates). (ii) Model Act The following requirements of the model Act: Page 4037 TITLE 26—INTERNAL REVENUE CODE § 7702B (I) Section 6C (relating to preexisting conditions). (II) Section 6D (relating to prior hos- pitalization). (B) Definitions For purposes of this paragraph— (i) Model provisions The terms ‘‘model regulation’’ and ‘‘model Act’’ mean the long-term care in- surance model regulation, and the long- term care insurance model Act, respec- tively, promulgated by the National Asso- ciation 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 in- cluding any other provision of such regula- tion 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 con- tract, if the issuer of such contract offers to the policyholder, including any group pol- icyholder, 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 pre- miums and the amount of the benefit may be adjusted subsequent to being initially granted only as necessary to reflect changes in claims, persistency, and inter- est as reflected in changes in rates for pre- mium 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 sub- section with State requirements, see section 4980C(f). (Added and amended Pub. L. 104–191, title III, §§ 321(a), 325, Aug. 21, 1996, 110 Stat. 2054, 2063; Pub. L. 105–34, title XVI, § 1602(b), (e), Aug. 5, 1997, 111 Stat. 1094; Pub. L. 105–206, title VI, § 6023(28), July 22, 1998, 112 Stat. 826; Pub. L. 108–311, title II, § 207(25), Oct. 4, 2004, 118 Stat. 1178; Pub. L. 109–280, title VIII, § 844(c), (f), Aug. 17, 2006, 120 Stat. 1011, 1013.) INFLATION ADJUSTED ITEMS FOR CERTAIN YEARS For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under section 1 of this title. Editorial Notes 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. Title XVIII of the Act is classified generally to sub- chapter XVIII (§ 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 sec- tion 1305 of Title 42 and Tables. AMENDMENTS 2006—Subsec. (e). Pub. L. 109–280, § 844(c), amended subsec. (e) generally. Prior to amendment, subsec. (e) related to treatment of coverage provided as part of a life insurance contract. Subsec. (e)(1). Pub. L. 109–280, § 844(f), substituted ‘‘title’’ for ‘‘section’’. 2004—Subsec. (f)(2)(C)(iii). Pub. L. 108–311 substituted ‘‘subparagraphs (A) through (G) of section 152(d)(2)’’ for ‘‘paragraphs (1) through (8) of section 152(a)’’. 1998—Subsec. (e)(2). Pub. L. 105–206 inserted ‘‘section’’ after ‘‘Application of’’ in heading. 1997—Subsec. (c)(2)(B). Pub. L. 105–34, § 1602(b), in- serted ‘‘described in subparagraph (A)(i)’’ after ‘‘chron- ically ill individual’’ in concluding provisions. Subsec. (g)(4)(B)(ii), (iii)(IV). Pub. L. 105–34, § 1602(e), substituted ‘‘appropriate State regulatory agency’’ for ‘‘Secretary’’. 1996—Subsec. (g). Pub. L. 104–191, § 325, added subsec. (g). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2006 AMENDMENT Amendment by Pub. L. 109–280 applicable to contracts issued after Dec. 31, 1996, but only with respect to tax- able years beginning after Dec. 31, 2009, except as other- wise provided, see section 844(g)(1) of Pub. L. 109–280, set out as a note under section 72 of this title. Amendment by section 844(f) of Pub. L. 109–280 effec- tive as if included in section 321(a) of Pub. L. 104–191, see section 844(g)(5) of Pub. L. 109–280, set out as a note under section 72 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–311 applicable to taxable years beginning after Dec. 31, 2004, see section 208 of Pub. L. 108–311, set out as a note under section 2 of this title. 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 applica- ble to contracts issued after Dec. 31, 1996, with provi- Page 4038 TITLE 26—INTERNAL REVENUE CODE § 7703 sions 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 Pub. L. 104–191, title III, § 321(f), Aug. 21, 1996, 110 Stat. 2059, provided that: ‘‘(1) GENERAL EFFECTIVE DATE.— ‘‘(A) IN GENERAL.—Except as provided in subpara- graph (B), the amendments made by this section [en- acting 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 sec- tion 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 sec- tion 7702B(b) of such Code), no gain or loss shall be rec- ognized 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 cancella- tion of a contract providing for long-term care insur- ance coverage and reinvestment of the cancellation proceeds in a qualified long-term care insurance con- tract 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 con- form 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 Rev- enue 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 reimburse- ments.’’ LONG-TERM CARE STUDY REQUEST Pub. L. 104–191, title III, § 321(g), Aug. 21, 1996, 110 Stat. 2060, related to a study of the marketing and other effects of per diem limits on certain types of long-term care policies, and provided that if the Na- tional Association of Insurance Commissioners agreed to the study request by Congress, the Association would report the results of the study not later than 2 years after accepting the request. § 7703. Determination of marital status (a) General rule For purposes of part V of subchapter B of chapter 1 and those provisions of this title which refer to this subsection— (1) the determination of whether an indi- vidual is married shall be made as of the close of his taxable year; except that if his spouse dies during his taxable year such determina- tion shall be made as of the time of such death; and (2) an individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as mar- ried. (b) Certain married individuals living apart For purposes of those provisions of this title which refer to this subsection, if— (1) an individual who is married (within the meaning of subsection (a)) and who files a sep- arate return maintains as his home a house- hold which constitutes for more than one-half of the taxable year the principal place of abode of a child (within the meaning of section 152(f)(1)) with respect to whom such individual is entitled to a deduction for the taxable year under section 151 (or would be so entitled but for section 152(e)), (2) such individual furnishes over one-half of the cost of maintaining such household during the taxable year, and (3) during the last 6 months of the taxable year, such individual’s spouse is not a member of such household, such individual shall not be considered as mar- ried. (Added Pub. L. 99–514, title XIII, § 1301(j)(2)(A), Oct. 22, 1986, 100 Stat. 2657; amended Pub. L. 100–647, title I, § 1018(u)(41), Nov. 10, 1988, 102 Stat. 3592; Pub. L. 108–311, title II, § 207(26), Oct. 4, 2004, 118 Stat. 1178.) Editorial Notes PRIOR PROVISIONS Provisions relating to determination of marital sta- tus were formerly contained in section 143 of this title, prior to enactment of this section by Pub. L. 99–514. AMENDMENTS 2004—Subsec. (b)(1). Pub. L. 108–311 substituted ‘‘152(f)(1)’’ for ‘‘151(c)(3)’’ and struck out ‘‘paragraph (2) or (4) of’’ before ‘‘section 152(e)),’’. 1988—Subsec. (b)(1). Pub. L. 100–647 substituted ‘‘sec- tion 151(c)(3)’’ for ‘‘section 151(e)(3)’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–311 applicable to taxable years beginning after Dec. 31, 2004, see section 208 of