What You Need to Know About Washington State’s New Long Term Care Tax
From January 1, 2022 Washington State will have a new 0.58% tax on employee wages. This is the first of its kind in the nation and will be used to fund long term care benefits of up to $36,500 (adjusted for inflation) over the course of an eligible person’s lifetime. Medicare does not cover most long-term care costs and around 7 out of 10 people require such care at some point in their lifetime.
Eligibility for Washington’s Program
Washington residents over 18 years old who have vested in the program are eligible if they meet the assistance requirements.
Vesting: to temporarily vest in the program an employee must have worked at least 500 hours per year for at least 3 of the last 6 years (from date of application for benefits). To permanently vest in the program an employee must have worked at least 500 hours per year for at least 10 years – at least 5 of those years must have been consecutive.
Assistance Requirements: Washington’s Department of Social and Health Services will determine whether an individual qualifies based on needing assistance with three activities of daily living. The WA Cares fund website includes the following on its list of such activities: medication management, personal hygiene, eating, toileting, cognitive functioning, transfer assistance, body care, bathing, ambulation/mobility, and dressing.
Benefits of the Program – Not That Great
Given the eligibility requirements the earliest that a person can benefit is January 2025. Eligible people will have access to benefits up to $36,500. This will be up to $100 per day for 365 days, which need not be consecutive. The amount will be adjusted for inflation.
In our home turf of Vancouver, WA nursing home care costs range from $285 to $345 per day. That’s an average of nearly $110,000 per year. A benefit that only covers a third of the actual costs of long term care will not be useful to everyone.
And… if you need care costing more than $36,500, you’ll have to find a different way to pay for it.
And… you must remain a Washington resident. If you retire out of state, you will have paid into a program which will provide no benefit.
And… you must meet the other eligibility requirements. If you are close to the end of your career you could end up paying in for up to 10 years but not becoming permanently vested in the program!
Cost of the Program – It depends on your earnings now and in the future – and whether the tax rate changes
The tax will be 0.58% when it goes into effect. However, the legislation requires the program to remain solvent. This means that, if the costs of providing the program run ahead of revenue from the tax the State would either have to lower the benefits or increase the tax.
The costs of assisted living facilities, nursing homes and home health aides have all outpaced inflation in recent years. We would not assume that the proposed tax rate will be sufficient to keep the program solvent or that the tax rate will remain at 0.58%.
However, the program is relatively cheap for a minimum wage part time worker. For someone earning $13.50 an hour working exactly 500 hours a year, the cost of the tax would be $39.15 – that’s $391.50 over ten years for a potential $36,500 benefit. At this extreme, the tax looks like a good deal.
While we don’t know exactly where the break point is, the analysis for someone earning over $200,000 is different. The coverage would cost $1,160 per year. If they are on an upward career trajectory, they’ll be paying more each year for a level, and inadequate benefit. For high earners, the tax might not yield good returns.
What we do know is that the more you earn now or in the future, the more expensive the tax will be. We know that the cost of the tax in future is uncertain.
The Opt Out – There is a Very Limited Window
The legislation does provide for an opt out for people who have qualifying private long term care insurance in place before November 1, 2021. Such people will be able to apply for an exemption from the tax between October 1, 2021 and December 31, 2022.
Insurance companies have limited capacity and some have already reacted to this new program by changing what is available to Washington residents. For example, Lincoln Financial – an industry leader in this marketplace – has suspended sales of its long term care riders in the state of Washington.
We would therefore recommend that anyone who wants to apply for the exemption and does not already have qualifying long term care insurance start the process immediately.
What Are My Options?
There are three basic options for employees:
1. Pay the tax or
2. Buy into a Group long term care policy or
3. Buy a qualifying policy that provides long term care. There are different types of qualifying policy with pros and cons that will depend on individual circumstances.
Evaluating these options is complex and what works for you will depend on your individual circumstances and plans. We would therefore recommend discussing the issue with your financial advisor or CERTIFIED FINANCIAL PLANNER™ professional.
If you are an employee with W-2 earnings of over $200,000 or if you are on track to do so and plan to stay in Washington please contact us with your questions.
Sources
https://app.leg.wa.gov/billsummary?BillNumber=1087&Year=2021&Initiative=false
https://www.thenewstribune.com/news/business/biz-columns-blogs/article251844763.html
https://www.wsha.org/articles/new-state-employee-payroll-tax-law-for-long-term-care-benefits/
https://app.leg.wa.gov/rCW/default.aspx?cite=18.20.310
http://lawfilesext.leg.wa.gov/biennium/2019-20/Pdf/Bill%20Reports/House/1087%20HBR%20APP%2019.pdf