On Wednesday, June 22, the Senate Finance Committee advanced the Enhancing American Retirement Now (EARN) Act, including an amendment containing retiring Sen. Pat Toomey’s Long-Term Care Affordability Act. The Amendment would allow people to use up to $2,000 per year in 401(k) assets to pay for their LTCi premiums. The Amendment aims to promote a more viable LTCi marketplace by increasing participation, as the use of 401(k) funds would expand the asset pool available to pay premiums. The bill would apply to “eligible retirement plans,” defined as a qualified retirement plan that is a defined contribution plan, a section 403(a) annuity plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA. The qualifying coverage may be for the individual or the individual’s spouse or dependent. Distributions for the purpose of LTCi premiums would be exempt from the additional 10% tax on the amount of the distribution.
The prospect of using 401(k) assets to pay for LTCi premiums was initially generated by the NAIC Long Term Care Innovations (B) Subgroup in 2017. Further, an August 2020 Federal Interagency Task Force report found that individuals who have limited funds available to purchase LTCi, but who contribute to their 401(k)s, may be more likely to purchase LTCi if they had the option of receiving early distributions from their retirement assets without the additional 10% withdrawal tax. According to the task force, this change could make it easier for those with retirement savings, but limited disposable income, to pay for LTCi premiums. It would also likely benefit most individuals in their mid- to late-50s, who face increasingly expensive LTCi premiums but cannot yet take 401(k) distributions without being subject to the additional 10% tax.
As it stands, both the House and Senate have passed similar bills, but only the Senate version of the EARN Act contains Sen. Toomey’s Long-Term Care Affordability Amendment. Those bills will be reconciled, and some version seems likely to pass this year, though it is not yet clear whether the final bill will contain the LTCi provision. We will provide further updates and analysis on the bill as it proceeds through Congress.
Read more about the Long-Term Care Affordability Act here.