The below is a discussion of the new Washington Long-Term Care Program. This law passed in 2019 and flew under most people’s radar throughout 2020 because, well, we had a few other things going on in 2020… a pandemic with massive business closures and unemployment, social unrest, a presidential campaign, more social unrest, etc. But let’s bring this back into focus and individuals can hopefully make some decisions based on their own personal situations.
What Is the Washington Long-Term Care Program?
The Washington Long-Term Care Program is the nation’s first public state-operated long term care insurance program. The Program, which is codified at RCW chapter 50B.04, will be funded by a 0.58 percent payroll tax on all employee wages, beginning January 1, 2022. The Program would provide qualifying participants with long-term care subsidies.
Is There a Cap on the Amount of Wages That Are Taxed?
Of significance, and unlike other state insurance programs, there is no cap on wages. All wages including stock-based compensation, bonuses, paid time off, and severance pay, are subject to the tax. For example, an employee with wages of $65,000 will pay $377 toward the Program each year, while an employee with wages of $250,000 will pay $1,450 toward the Program each year.
Which Employees Are Subject to Tax/Premium Collections?
All employees employed in Washington will be required to pay taxes into the Program. The exceptions are self-employed individuals, employees of a federally recognized tribe, certain collectively bargained employees, and employees who qualify for an exemption (discussed below). Also to note, workers living in Oregon or Idaho but who earn part of their wages in Washington would have to pay a pro rata amount of tax, yet probably never collect benefits.
Who Is Eligible to Receive Benefits?
Benefits are limited to Washington residents who have paid premiums under the Program for either (1) a total of 10 years without interruption of five or more consecutive years; or (2) three years within the last six years from the date the application for benefits is made. In addition, to qualify, an employee must have worked at least 500 hours during each of the 10 years or each of three years, as applicable.
From a practical standpoint, this means that employees who plan to retire in the next 10 years will be required to pay premiums, but may never qualify for the benefits. It also means that retirees who move out of state will not qualify for the benefits.
What Are the Benefits Under the Program?
Benefits under the Program will first become available January 1, 2025. If eligible, and if the Department of Social and Health Services determines that an individual requires assistance with at least three activities of daily living, the Program provides benefits of up to $100 day, up to a maximum lifetime limit of $36,500. So, one year’s worth of days at $100 per day.
Can Employees Opt Out of the Program?
Yes, an employee may opt out of the Program and all associated taxes and benefits if (1) the employee is 18 years old or older on the date he or she applies for the exemption, and (2) the employee attests that he or she has other long-term care insurance as defined in RCW 48.83.020.
To opt out, a qualifying employee must provide identification to verify his or her age and must apply for exemption with Employment Security Department (ESD) using a format that will be approved by ESD between October 1, 2021, and December 31, 2022. If approved, an employee’s exemption will be effective for the quarter immediately following approval. Once an employee opts out, the employee cannot opt back into the Program; i.e., the opt-out is permanent. If you opt out, say, June of 2022 you will have paid in tax to the Program and will not get that back.
There is nothing in the Program that prevents employees from dropping their other coverage following approval, but once opted out the employee will never become eligible for benefits under the Program.
When Must the Employee Have Long-Term Care Insurance in Place to Opt Out?
If the Program remains in its current form, an employee must purchase qualifying long-term care insurance before November 1, 2021 to be eligible for the exemption.
This is a very short window to purchase long-term care insurance.
After an employee’s application for exemption is processed and approved, he or she will receive an approval letter from ESD. The employee must provide this approval letter to his or her employer. Employers must maintain copies of any approval letters received.
If an exempt employee fails to provide the approval letter to his or her employer, the employer must collect and remit premiums beginning January 1, 2022. An employee will not be entitled to a refund of any premiums collected before the employee’s exemption took effect or before the employee provided the approval letter to his or her employer.
This could impact decisions regarding compensation timing—for example, if an employer knows that a large number of employees have filed for exemption, the employer may want to consider that those employees may appreciate delayed bonuses and stock awards so that such wages will not be subject to the payroll tax.
What Happens If an Employee Moves Out of State?
Because benefits are limited to Washington residents, employees who move out of state will not be eligible to receive benefits under the Program. Employees who maintain a second home may, therefore, wish to consider which location will be their permanent residence.
Are Self-Employed Individuals Exempt?
Yes, self-employed individuals are exempt from the Program but may choose to opt in. Under the Program, self-employed individuals must elect coverage by January 1, 2025, or within three years of becoming self-employed for the first time.
Is this Program as good/better than a private insurance policy?
Here is a short list of benefits and options that many private long-term care policies might provide and that this state Program does not:
Also, a survey was done recently that showed most individuals could get 2 to 3 times as much coverage for the same money as they will pay in this tax to the State.
Interesting to note, many clients of Washington Trust Bank’s Wealth Management are either retired (or very near retiring), are self-employed, or have private long-term care insurance and therefore will not be paying this tax. Also, many clients of a certain level of wealth may have previously decided that they could self-fund a long-term care event but that is not an opt-out option.
There is a lot to think about this new law and will surely cause a lot of stress and analysis going forward. Also, this is still changing as there are proposed changes in the State house being considered. Please consult with your financial, tax and legal advisors before making decisions around this new payroll tax.
The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
As Vice President and Senior Wealth Advisor, Greg provides financial analysis to high net worth individuals. He is the author of several articles for various publications and nonprofit organizations on estate and financial planning subjects.