NEW YORK (MainStreet) — If long-term care insurers have their way, 401(k) withdrawals would maintain their tax-free status when money is used to pay the monthly cost of long-term care insurance or to purchase single premium annuities.
“Congress wanted the Affordable Care Act to cover long term care for all Americans and that would have been a good thing but it was left to the Department of Health and Human Services and the Centers for Medicare & Medicaid Services (CMS) to do the work because the government couldn’t fund it,” said Tom McInerney, president and CEO with Genworth, a long-term care insurer. “It was dropped out of the ACA.”

Long-term care experts say such a provision would be helpful but listing long-term care costs as a hardship under IRS rules governing 401(k) plans won’t solve the overall problem that many Americans are in denial about their eventual need for long-term care.

“Allowing people to pay their long term care insurance premiums from their 401(k) plans regardless of hardship interpretation might have a significant impact, though less than full tax deductibility,” said Stephen A. Moses, president of the Center for Long-Term Care Reform in Seattle. Moses is skeptical that the IRS would even consider long-term care costs as a hardship withdrawal, because the government agency has not historically looked favorably upon long-term care insurance.

“Long-term care insurers are struggling,” Moses said. “They have had to raise premiums, and they’ve gotten criticized for that but private industry insurance companies are doing what they can to pay an increasing number of claims.”

American Association for Long-Term Care Insurance (AALTCI) Executive Director Jesse Slome notes that any incentives to support long-term care planning would come by way of addressing the looming Medicare/Medicaid shortfall. "Adding any tax incentives will generate heightened interest in long-term care insurance, but because of the need to offset lost tax revenues, they are hard to come by in today's environment," Slome said.

Under current 401(k) plan hardship withdrawal rules, significant medical expenses are covered, but unlike loans, hardship distributions are not repaid to the plan. Instead, a hardship distribution permanently reduces the employee's account balance under the plan.

“It doesn’t surprise me that the conversation between healthcare spends and retirement spends are intersecting,” said Harry Dalessio, senior vice president of sales and strategic relationships with Prudential. “Regulators and legislators will ultimately determine what 401(k) accounts will be used for, but it’s important for people to save regardless if it’s used for retirement, education expenses, long-term care costs or medical expenses.”

A full retirement snapshot created by most financial advisors includes health care expenses and increasingly long-term care costs, but plan sponsors compartmentalize long-term care expenses and retirement planning separately.

“Long-term care planning is an important piece of retirement, but I wouldn’t tie the two together as a plan sponsor,” said Jamie Greenleaf, principal with Cafaro Greenleaf in Red Bank, N.J. “Both are expensive. Retirement can be a bit easier to budget for and long term care is a variable.”

Insurers are also increasingly concerned about paying more long-term care claims to women policy holders than men. “We have to worry more about the women than the men because women outlive men,” said Kelley Greene, head of retirement content strategy with BlackRock. Women accounted for two-thirds of the $6.6 billion in long-term claims paid by insurers in 2013, according to AALTCI data, and more than 60% of adults have a negative emotion associated with discussing their long-term care plans and aging needs.

—Written for MainStreet by Juliette Fairley