Paychecks across Washington State will be a little lighter beginning January 1, 2022. In April, Washington became the first state in the nation to pass a law funding a state-run long-term care insurance program. Under the Long-Term Care Trust Act, employers will be required to withhold a 0.58% state payroll tax from workers’ paychecks.
This compulsory tax will fund a program that will provide limited long-term care benefits to participants. While lifetime benefits will be the same for all participants ($36,500), the cost of those benefits will vary wildly.
Unquestionably, Washington’s workers would be wise to evaluate their options carefully.
What is the cost?
Funds from the 0.58% payroll tax (which is not locked at 0.58%) will go to the Employment Security Department, where it will remain in trust. This tax will be withheld from each dollar of wages and any other remuneration, including bonuses, paid time off, and stock-based compensation, without a cap. So, a part-time employee at a record store earning $10,000 per year will contribute $58 per year. An executive earning salary and equity compensation of $500,000 per year will contribute $2,900 per year.
Despite varying levels of contributions, everyone who qualifies will be entitled to the same benefit, regardless of the amount of their own contribution. This means, if a long-time record store employee and an executive both retired at the end of 2031, they would each be entitled to the same lifetime benefit, despite the executive paying $29,000 in premiums on their $5 million in cumulative total comp, while the record store employee earning $100,000 over their lifetime would have paid only $580.
Who must pay the tax?
This permanent payroll tax applies to all workers with W-2 income earned in Washington State, unless specifically exempted. Those exempt from the tax include self-employed individuals, employees of federally recognized tribes, employees who are part of certain collective bargaining agreements and workers who own comparable insurance and choose to opt-out.
What is the benefit?
In exchange for this permanent payroll tax, vested participants will be entitled to a maximum lifetime benefit of $36,500, regardless of how much they contribute over time. (This amount will be adjusted for inflation at a pace not to exceed the Washington State Consumer Price Index.) These dollars may be used to cover assisted living or nursing expenses when the covered individual is determined to require assistance with three of 10 activities of daily living (also known as ADLs). Services may be provided in a person’s home or care facility in accordance with specific rules.
Who is eligible and who is not?
It’s important to note that not all workers who pay into the fund will be eligible to receive benefits.
To qualify for benefits, participants must work 500 hours or more per year and either pay premiums for 10 years without a break of five years or pay premiums for three of the last six years (at the time they apply for benefits). Because the early participants in the plan will need to work and contribute for at least three years, the first benefits under this program will not be available until January of 2025.
Additionally, those who move out of state will not be eligible for benefits.
How far will $36,500 go in Washington?
Practically speaking, just how far will $36,500 go when paying for long-term care in Washington? According to Genworth’s Cost of Care Survey, these were the average yearly costs for various levels of care in Washington State in 2020.
Home health aide: $72,369
Adult day health care: $26,000
Assisted living facility: $69,000
Private room in a nursing home facility: $131,400
As these numbers illustrate, the benefits offered under this program will be inadequate for those requiring more than the most minimum levels of care.
Can you opt-out?
There are ways to opt-out of the program. If you can demonstrate you own a comparable private long-term care insurance policy (or an alternative life insurance policy with a long-term care rider), you are not required to participate. You may also opt out if you belong to a group that is exempt (employees who are self-employed, members of federally recognized tribes, or part of certain collective bargaining agreements).
Are there benefits to buying your own insurance?
- People are typically able to purchase private long-term care insurance policies that may offer superior benefits for longer periods of time, compared to what is offered under the Long-Term Trust Act. For high wage earners especially, superior benefits are frequently acquired for less than the cost of the payroll tax.
- Under the Trust Act, benefits will only be paid to participants living in Washington State at the time they wish to draw those benefits. In contrast, private long-term care policies are typically “portable,” which means they will pay benefits regardless of where participants live.
- Non-working partners will not be enrolled in the Trust Act program if they do not have income. Private policies are their only options for long-term care insurance. Note that insurance companies often give meaningful discounts to couples who apply for insurance together.
Are there drawbacks to buying your own?
- The primary drawback to purchasing your own long-term care insurance is that premiums can be costly and may increase over time. Health concerns will also increase premiums.
Who should consider opting-out?
- Taxpayers earning approximately $200,000 or more per year, or who anticipate meaningful wage growth in the foreseeable future. People in this group should consider obtaining private insurance quotes. $200,000 of income would result in $1,160 of payroll tax withheld annually, which is close to the annual premium for a single-applicant, female, nonsmoker (long-term care insurance premiums are lower for males, due to their expected shorter lifespans).
- Members of exempt groups for whom there is a reasonable expectation of making a change in employment where they would receive wages that would be subject to the payroll tax.
- Workers who are very early in their careers, despite having somewhat low wages currently. While traditional long-term care policies are typically not issued to young people, alternative insurance products (e.g., life insurance policies with long-term care coverage riders) will likely prove useful for employees loathe to pay the state payroll tax for decades in exchange for a relatively small benefit.
To opt-out, when must another policy be in force?
Those choosing to opt-out must have long-term care insurance policies in force by November 1, 2021. Documentation must be submitted to the Employment Security Department between October 1, 2021, and December 31, 2022.
If opting-out, when should you begin the process?
With the November 1st “in force” deadline just months away, people are encouraged to act swiftly. Given the increased volume of activity surrounding this insurance and the fact that it can take about two to three months to qualify for and ultimately obtain this kind of coverage, the window for obtaining a policy is relatively brief. Insurance professionals recommend submitting applications no later than July 1st.
We don’t sell insurance, but are happy to help you identify whether it might be advisable for you to take the necessary steps to “opt-out,” or otherwise go with the state program. We also know top pros in the life and long-term care insurance business, if you would like a referral.
Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.