Long-Term Care Insurance and Section 125: Why It Cannot Be Pre-Tax

Most employers assume that if a benefit reduces taxes for health insurance, it reduces taxes for long-term care insurance the same way. It does not. Congress carved long-term care insurance out of the cafeteria plan rules entirely when it created the modern tax framework for LTC coverage in 1996, and that carve-out is still the law in 2026. Any employer thinking about adding LTC coverage to its benefits menu needs to understand this exclusion before assuming a Section 125 plan can handle it the way it handles a health premium or a Flexible Spending Account.

The rule itself is short. The tax consequences of ignoring it are not. Getting the structure wrong can turn a benefit meant to be tax-free into taxable income for the employee, the opposite of what most employers are trying to accomplish.

Can Long-Term Care Insurance Be Offered Through a Section 125 Plan?

No. IRC Section 125(f)(2) explicitly states that a "qualified benefit" under a cafeteria plan does not include any product advertised, marketed, or offered as long-term care insurance. This means an employee cannot use pre-tax salary reduction through a Section 125 plan to pay for LTC coverage, no matter how the plan document is written.

This exclusion applies uniformly. It does not matter whether the employer is large or small, whether the LTC policy is a standalone product or a hybrid life/LTC combination policy, or whether the coverage is offered to executives only or the whole workforce. If the product is marketed as long-term care insurance, Section 125 cannot touch it. For the broader mechanics of what a cafeteria plan can and cannot include, see our <a href="/blog/section-125-cafeteria-plan-2026-guide">Section 125 cafeteria plan guide</a>.

Why Doesn't the Tax Code Allow Pre-Tax LTC Insurance Through a Cafeteria Plan?

Congress addressed long-term care insurance in the Health Insurance Portability and Accountability Act of 1996, creating a separate, dedicated tax framework for it under IRC Section 7702B rather than folding it into the existing cafeteria plan rules. That separate framework comes with its own deduction limits, keyed to the insured person's age, instead of the elective pre-tax structure Section 125 uses for health premiums and FSAs.

Lawmakers built LTC insurance's tax treatment around itemized medical expense deductions specifically because long-term care premiums often rise steeply with age and because the product functions differently from health insurance, more like a long-horizon financial protection product than a recurring medical expense. Treating it like a standard Section 125 benefit would have let employees fully shelter premiums that can run into thousands of dollars a year with no cap, which is exactly what the age-based limits under Section 213(d)(10) are designed to prevent.

Can an Employer Still Pay for Long-Term Care Insurance Tax-Free?

Yes, but only if the employer pays for it outside the cafeteria plan. IRC Section 106(a), combined with Section 7702B(a)(3), excludes employer-paid premiums for qualified long-term care insurance from an employee's taxable income the same way it excludes employer-paid health insurance premiums, as long as the coverage is not run through a cafeteria plan structure.

That last condition matters more than it looks. If an employer offers LTC coverage as a line item inside its cafeteria plan menu, even one the employer pays for entirely with no employee salary reduction involved, the coverage loses its tax-free status under Section 106 the moment it sits inside the cafeteria plan. The fix is structural, not financial: the employer pays the same premium, for the same coverage, through a standalone employer-paid benefit arrangement kept entirely separate from the Section 125 plan document.

How Are Employee-Paid Long-Term Care Premiums Taxed?

Employee-paid LTC premiums are not pre-tax, but they can qualify as a deductible medical expense on Schedule A, subject to two limits. First, total unreimbursed medical expenses, including the LTC premium, must exceed 7.5% of the employee's adjusted gross income under IRC Section 213(a) before any of it is deductible. Second, the deductible portion of the LTC premium itself is capped by the insured person's age at the end of the tax year, under IRC Section 213(d)(10).

For 2026, the IRS set these age-based caps in Revenue Procedure 2025-32, a 3% increase from the 2025 limits. Each spouse in a married couple applies the cap separately using their own age.

A 55-year-old employee paying $2,400 a year for a qualified LTC policy can only count $1,860 of that toward the itemized medical expense deduction, and only the portion of total medical expenses, LTC premium included, that exceeds 7.5% of that employee's AGI is actually deductible. Most employees paying LTC premiums through regular payroll deduction never clear that threshold and get no federal tax benefit from the premium at all.

Does the LTC Exclusion Apply to Hybrid Life Insurance and LTC Combination Policies?

Yes. IRC Section 125(f)(2) excludes any product marketed as long-term care insurance from a cafeteria plan, and that language covers hybrid life/LTC combination policies the same way it covers a standalone LTC policy. These combination products have grown more common since a 2010 IRS ruling clarified their tax treatment, but growth in the product category does not change the underlying Section 125 exclusion. An employer evaluating a hybrid policy for its benefits menu should assume the same rule applies as it would for traditional standalone LTC coverage.

What Should an Employer Do Instead of Running LTC Through Section 125?

An employer that wants to offer long-term care insurance has two structurally sound paths, and both keep the coverage outside the Section 125 plan document entirely. The employer can pay LTC premiums directly as a standalone, employer-funded benefit, which keeps the cost tax-free to the employee under Section 106. Alternatively, the employer can facilitate access to an LTC policy that employees pay for themselves through regular after-tax payroll deduction, letting employees who itemize claim whatever portion of the premium the Section 213(d)(10) age caps and the 7.5% AGI floor allow.

Neither path uses the cafeteria plan's pre-tax salary reduction mechanism, and that is by design. A business that already runs a Section 125 plan for health premiums and an FSA does not need to unwind that plan to also offer LTC insurance. The two benefits simply run on separate tracks, one governed by Section 125's pre-tax election rules, the other governed by Section 106 and Section 213(d)(10)'s different, age-based framework. For the broader FICA savings mechanics that still apply to every other benefit in a properly structured cafeteria plan, see our <a href="/blog/maximizing-fica-tax-savings">FICA tax savings breakdown</a>.

<!-- SECTION125_CONTACT -->

Frequently Asked Questions

Sources

This article cites the Internal Revenue Code Sections 106, 125(f)(2), 213(a), 213(d)(10), and 7702B, along with IRS Revenue Procedure 2025-32, which set the 2026 age-based long-term care insurance premium deduction limits.