Washingtonians Prepare for the Long-Term Care Payroll Tax

May 25, 2021

“Washington Cares Fund” Payroll Tax

photo of cutting taxes

The passage of the Long-Term Care Trust Act – effective January 1st, 2022 – makes Washington the first state in the nation to create a publicly funded insurance program, providing working residents of Washington an opportunity to vest into a basic level of LTC benefits. Originally advertised as The Washington Long-Term Trust Act, it will now be known as the “WA Cares Fund”.

Payroll Taxes

The program will be financed by Washington State W-2 workers through mandatory payroll deductions – $0.58 for each $100 earned.  Starting January 1, 2022, all W-2 employees will be subject to this new payroll tax (unless you opt-out in time).

Self-employed individuals, such as independent contractors, sole proprietors, and partners are not subject to this tax. They can, however, choose to opt-in to the program.

All employee compensation will be taxed without limitation or a capped amount. This means that it includes salary, bonuses, and company stock (such as restricted stock units [RSUs]) and with no income cap.

For example: An employee with an annual compensation of $450,000 ($160,000 salary plus $290,000 vesting RSUs) would pay an additional $2,610 in payroll taxes. Another example, an employee making only $75,000 per year will have another $435 deducted over the year from their payroll to pay for the tax.

Vesting

The benefit is vested by individuals who work a minimum of 500-hrs/yr and who pay premiums for at least 10 years (without a break of 5 consecutive years) or for 3 within the last 6 years (from the date of application for benefits)

To permanently vest, an individual must pay taxes for 10 years. Those who’ve paid for only 3 within the “last 6 years [from the date of application for benefits]” will vest on a temporary basis, and can un-vest. This is why there will be a surge of claims on 1/1/25 (exactly three years into the program), which will then taper off.

Employees who pay WA Cares Fund taxes for fewer than 10 years (i.e. because they are within 9 years of retirement) run the risk of never permanently vesting for benefits (though they may be able to qualify under the temporary rules for the first few years of retirement)

Considerations:

  • The tax amount is not fixed and can be increased in the future by the state.
  • Even after becoming fully vested if you continue to work you will continue to be taxed.

Benefits

Vested individuals can receive up to $100 per day to cover long-term care costs, with a maximum lifetime benefit of $36,500(adjusted annually). This equates to a year’s worth of coverage for long-term care expenses at $100 per day.

Other considerations:

  • Benefits are not available outside of Washington State. Meaning it will not pay for care provided outside of Washington state and cannot be transferred to other states. This means if you pay into the program and plan on retiring to another state, the benefits will not be portable nor will premiums be refunded.
  • Benefits only cover the employee who is contributing through payroll, not their spouse or dependents.
  • Providers are reimbursed directly at Medicaid-comparable rates.
  • Benefits may be constrained: “a service or supply may be limited by dollar amount, duration, or number of visits”.

Opting Out

An Employee can opt-out permanently if  they their own long-term care insurance policy in place before November 1st.

SHB 1323, as amended on April 10th 2021, specifies employees who apply to opt-out of the Long-term Services and Supports Trust Program, also known as the “WA Cares Fund”, must submit an attestation to having long-term care insurance that provides equal or better benefits and that is purchased for October 1, 2021 through December 31, 2022 to the Washington State Employment Security Department. The exemption may only be applied for from October 1st 2021 through December 31st 2022 AND it must be approved by the state. Note that once the individual employee has opted out and is determined to be exempt, they may not later apply to become a qualified individual or eligible beneficiary . They will be deemed permanently ineligible for coverage under the program.

Note: It’s possible that individuals can also be exempt from this program if they have a qualified life insurance policy or annuity that includes supplemental coverage for long-term care expenses. However, keep in mind Washington is not accepting all life policies that carry these riders (must be approved).

Who Should Consider Opting Out?

We recommend exploring alternatives for any of the following reasons:

  • The benefits provided by an individual policy can be substantially better than those offered by the state’s program. One common difference is that individual LTC insurance policies provide coverage for two or more years. Many also provide the option of purchasing a shared policy with your spouse where you get a joint benefit and receive discounts on the premium.
  • High income earners:  Many will be able to find a much better LTC alternative for less. This is especially the case for households with two high incomes that can purchase a shared policy to receive discounts on their insurance premiums.
  • Plan to move outside of Washington State in retirement: You can only collect these benefits if you receive care in Washington State. Those who plan to move away will not receive any benefits and would receive far greater value by buying their own policy that can be used for LTC expenses in any state they choose to live in retirement.
  • Plan to retire in the next few years: To be eligible, you must have paid into the system either (1) for 3 years within the past 6 years, or (2) for a total of 10 years, with at least 5 of those years paid without interruption. If you do not meet these requirements before leaving employment then you do not qualify for benefits.
  • Someone young who could purchase a low cost life policy with a long term care rider or long term care policy at a low fixed rate versus paying a tax that will likely continue to increase over time for the entire length of the time they are employed.

Optional Coverage

If you or anyone you know is interested in long term care coverage or has questions about how to opt out of this tax by procuring coverage before the November 1, 2021 deadline, please contact us at A & M Insurance. We’ve been carefully following this tax act as it comes closer to taking affect and are prepared to help find solutions for your needs.

We are here to help!

Contact A & M Insurance
(425)-228-7406 or email insured@aminsurance.com