New Payroll Tax to fund The Washington Cares Fund
As a first-of-its-kind program in the nation, Governor Inslee signed the Washington Long Term Care Trust Act (renamed The Washington Cares Fund) mandating public long-term care (LTC) benefits for Washington State residents. The Act was created to reduce pressure on the Medicaid system as our population ages and will be funded by a mandatory 0.58% payroll tax on employee wages.
While this program may be appropriate for many Washington State residents, it may not be advantageous for your personal situation. Below is a summary of the future fund benefit, the on-going cost of the benefit, and the very narrow window to opt out of this mandatory payroll tax.
What is the Washington Cares Fund?
- The Washington Cares fund is a public long-term care benefit for Washington State residents. Once an individual is vested, it provides benefits of up to $100 a day, and a maximum lifetime benefit of $36,500 (adjusted for inflation) to cover expenses for those unable to perform 3 of the 10 activities of daily living (ADLs). ADLs are eating, dressing, bathing, toileting, body care, personal hygiene, transfer assistance, ambulation/mobility, medication management, and cognitive impairment.
- The benefit is vested by individuals who work a minimum of 500 hours a year and pay premiums (payroll tax) for at least 10 years without an interruption of 5 or more consecutive years. Those who pay the tax for 10+ years are permanently vested.
OR
Work at least 500 hours a year for 3 of the 6 most recent years when applying for benefits.
It is notable that an individual who pays for 9 years or less and then retires will not have access to benefits unless their ADL impairment occurs within 3 years of retirement and meets the 3 of 6-year requirement.
- Benefits are not payable until January 2025 and are not portable or payable if you reside outside the state of Washington when you need benefits.
What is the tax?
- A 0.58% payroll tax on all wages, withheld quarterly by employers starting Jan. 1, 2022. There is no guarantee that this current tax amount will remain fixed.
- The tax is mandatory for all W-2 employees working in Washington (regardless of where your employer is located).
- Self-employed individuals and statutory employees (an independent contractor that is treated as an employee for tax withholding purposes) must opt in if they want it.
- Those who are currently retired do not pay premiums and will not qualify for the benefits.
- There is no cap on wages, and the tax will be applied to stock-based compensation, bonuses, paid time off, and severance pay.
- There is no cap on the tax, and there will be no refunds on taxes paid.
The table below reflects the estimated annual LTC tax at various compensation levels:
|
Annual Compensation |
Estimated LTC Tax |
|
$100,000 |
$580 Per Year |
|
$250,000 |
$1,450 Per Year |
|
$500,000 |
$2,900 Per Year |
|
$1,000,000 |
$5,800 Per Year |
Under the current law, you have one opportunity to opt out of this tax by having an eligible long-term care insurance policy in place by November 1, 2021 and applying for an exemption.
Who might want to consider opting out by purchasing an individual policy?
- Higher income employees who could purchase a more robust policy for less premium than the ongoing payroll tax.
- Employees who are newer to the workforce and will pay into the fund for decades, ultimately paying more in tax than they would receive in benefits.
- Employees who plan on retiring before the benefits are available.
- Employees who plan on retiring outside the state of Washington or want flexibility to do so.
- Self-employed individuals who are considering returning to work for another company where they would be a W-2 employee.
Which ‘comparable’ long-term care policies may qualify for an exemption?
- An Individual Long-Term Care Policy
- Employer Group Long-Term Care Policy
- A Hybrid Life Insurance / LTC policy
- A Whole Life Insurance with a Long-Term Care Rider
What would an individual long-term care policy cost?
The benefits of an individual policy can be substantially greater and more comprehensive than those offered by the state’s program. Premiums for LTC policies depend on the benefits selected, your age, and your health. There is a risk that premiums for individual policies will increase over time. Typically, individuals younger than 30 are not eligible to purchase traditional long-term care policies.
The table below reflects sample annual premiums for individual policies that most closely align with the state offering.
|
Individuals (assuming good health, non-smoker) |
Plan A $100/day, $73,000 benefit pool, 3% compound inflation, 90 day waiting period |
Plan B $3,000/month, $73,000 benefit pool, 3% compound inflation, 90 day waiting period |
|
Male age 40 |
$728.00 |
$940.00 |
|
Male age 50 |
$865.00 |
$1,100.00 |
|
Male age 55 |
$981.00 |
$1,221.00 |
|
Female age 40 |
$1,142.00 |
$1,364.00 |
|
Female age 50 |
$1,426.00 |
$1,676.00 |
|
Female age 55 |
$1,620.00 |
$1,884.00 |
LTC coverage generally costs more for women than for men. Women file two-thirds of all LTC claims, and they typically live longer than men. Many women also provide care for their partners, reducing claims from men. Long-term care policy discounts may be available for those who are married and apply for joint coverage with their spouse.
How do you opt out of the new LTC payroll tax?
Between October 1, 2021 and December 31, 2022, you will need to complete and file a waiver application with the state attesting that you have a comparable long-term care insurance policy. The Employment Security Department (ESD) is currently developing the process that will be used to file the waiver.
Approved exemptions will take effect on the first day of the quarter immediately after the approval. Employees receiving an exemption will not receive any refund of previous payroll taxes paid. You must provide a copy of the waiver certification to your current and all future employers, and employers must maintain a copy of this letter.
It is important to note that once you opt out, the status is permanent. You will not be able to use the state-run benefit in the future. In contrast, self-employed individuals who opt in may not withdraw from the Trust program and taxes must continue to be paid until retirement.
What is your next step?
If you are employed and are considering opting out, it is important to work with a long-term care specialist as soon as possible to ensure your policy can be put in place before the November 1st deadline. Due to the extremely high volume of LTC quote and consultation requests that this new tax has generated, the timeframe to secure an individual policy may take months. In addition, many Washington long-term care providers have either suspended accepting new applications through November or have instituted a new premium minimum to increase the likelihood that applicants are purchasing long-term care insurance for the long term.
Sources:
https://www.nationalmssociety.org/NationalMSSociety/media/Greater-Northwest/Advocacy/Files/Washingtonians-for-a-Responsible-Future.pdf
THIS ARTICLE HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED AS INVESTMENT ADVICE OR AS A RECOMMENDATION. THIS MATERIAL PROVIDES GENERAL INFORMATION ONLY.